**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington, DC 20549**

 

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**FORM 10-Q**

 

| **ý**                                                                                                                                                                            | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                  |                                                                                          |
| **For the quarterly period ended September 30, 2003**                                                                                                                                 |
|                                                                                                                                                                                  |                                                                                          |
| **o**                                                                                                                                                                                 | **TRANSITION REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                  |                                                                                          |
| **For the Transition Period  from            to            ** |
|                                                                                                                                                                                  |                                                                                          |
| **Commission File Number 1-15831**                                                                                                                                                    |

 

**MCF CORPORATION**

(ExactName of Registrant as Specified in its Charter)

 
| **Delaware**                                                            |   | **11-2936371**                        |
|-------------------------------------------------------------------------|--------|---------------------------------------|
| (State  or Other Jurisdiction of  Incorporation or Organization)        |   | (I.R.S.  Employer Identification No.) |
|                                                                    |   |                                  |
| **601 Montgomery Street, 18****th****Floor  San Francisco, California** |   | **94111**                             |
| (Address  of Principal Executive Offices)                               |   | (Zip  Code)                           |
|                                                                    |   |                                  |
| **(415) 248-5600**                                                      |
| (Registrant’s  Telephone Number, Including Area Code)              |

 

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Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90days.   Yes  ý   No  o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Exchange Act Rule 12b-2).   Yes  o   No  ý

 

As of November 5, 2003, 54,887,342 shares of the registrant’scommon stock, $0.0001 par value, were outstanding.

 

 

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**MCFCorporation**

**Form 10-Q**

**For the Nine Months Ended September 30, 2003**

 
| PART I | FINANCIAL INFORMATION | 2                                                                                                                        |
|-------------|-----------------------|--------------------------------------------------------------------------------------------------------------------------|
|        |                  |                                                                                                                     |
|        | ITEM 1.          | Financial Statements (unaudited)                                                                                         | 2 |
|        |                  |                                                                                                                     |   |
|        |                  | Condensed Consolidated  Statements of Operations for the three months and nine months ended September  30, 2003 and 2002 | 2 |
|        |                  |                                                                                                                     |   |
|        |                  | Condensed  Consolidated Statements of Financial Condition as of September 30, 2003 and  December 31, 2002                | 3 |
|        |                  |                                                                                                                     |   |
|        |                  | Condensed  Consolidated Statements of Cash Flows for the nine months ended September 30,  2003 and 2002                  | 4 |
|        |                  |                                                                                                                     |   |
|        |                  | Notes to Condensed Consolidated Financial  Statements                                                                    | 5 |
|        |                  |                                                                                                                     |   |
|        | ITEM 2.               | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                              | 10 |
|        |                  |                                                                                                                     |   |
|        | ITEM 3.               | Quantitative and Qualitative Disclosures About  Market Risk                                                              | 25 |
|        |                  |                                                                                                                     |   |
|        | ITEM 4.               | Controls and Procedures                                                                                                  | 25 |
|        |                  |                                                                                                                     |   |
| PART II     | OTHER INFORMATION     | 26                                                                                                                       |
|        |                  |                                                                                                                     |
|        | ITEM 1.               | Legal Proceedings                                                                                                        | 26 |
|        |                  |                                                                                                                     |   |
|        | ITEM 6.               | Exhibits and Reports on Form 8-K                                                                                         | 26 |
|        |                  |                                                                                                                     |   |
|        | Signatures            | 27                                                                                                                       |
|        |                  |                                                                                                                     |
|        | Certifications        |                                                                                                                     |
|             |                       |                                                                                                                          |  |  |

 

1

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**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,  2003** |      | **September 30,  2002** |   | **September 30,  2003** |   | **September 30,  2002** |   |
| Revenue:                                                     |   |                    |      |                    |   |   |   |   |   |
| Commissions                                                  |   | $                       | 2,757,379 |                    | $      | 2,332,664 |   | $ | 5,759,313 |   | $ | 4,533,765 |   |
| Principal transactions                                       |   | 261,132                 |      | 79,176                  |   | 992,655 |   | 203,952 |   |
| Investment banking                                           |   | 4,752,164               |      | 15,833                  |   | 5,464,904 |   | 262,249 |   |
| Other                                                        |   | 1,646                   |      | —                  |   | 2,311 |   | 28,827 |   |
| Total revenue                                                |   | 7,772,321               |      | 2,427,673               |   | 12,219,183 |   | 5,028,793 |   |
| Operating expenses:                                          |   |                    |      |                    |   |   |   |   |   |
| Compensation and benefits                                    |   | 4,824,660               |      | 1,725,501               |   | 7,991,480 |   | 4,112,835 |   |
| Brokerage and clearing fees                                  |   | 375,849                 |      | 346,609                 |   | 941,903 |   | 742,181 |   |
| Professional services                                        |   | 288,019                 |      | 145,479                 |   | 516,994 |   | 415,515 |   |
| Occupancy and equipment                                      |   | 100,585                 |      | 48,003                  |   | 260,566 |   | 173,223 |   |
| Communications and technology                                |   | 227,193                 |      | 114,129                 |   | 612,135 |   | 202,421 |   |
| Depreciation and amortization                                |   | 24,823                  |      | 101,356                 |   | 57,102 |   | 300,731 |   |
| Other                                                        |   | 429,554                 |      | (228,093                | )      | 1,209,615 |   | 309,872 |   |
| Total operating expenses                                     |   | 6,270,683               |      | 2,252,984               |   | 11,589,795 |   | 6,256,778 |   |
| Operating income (loss)                                      |   | 1,501,638               |      | 174,689                 |   | 629,388 |   | (1,227,985 | ) |
| Interest income                                              |   | 7,300                   |      | 9,563                   |   | 19,034 |   | 37,280 |   |
| Interest expense                                             |   | (122,057                | )         | (363,878                | )      | (1,418,118 | ) | (1,091,498 | ) |
| Gain on retirement of convertible note payable               |   | —                  |      | —                  |   | 3,088,230 |   | — |   |
| Income (loss) from continuing operations                     |   | 1,386,881               |      | (179,626                | )      | 2,318,534 |   | (2,282,203 | ) |
| Loss from discontinued operations                            |   | —                  |      | —                  |   | — |   | (262,843 | ) |
| Net income (loss)                                            |   | $                       | 1,386,881 |                    | $      | (179,626 | ) | $ | 2,318,534 |   | $ | (2,545,046 | ) |
| Net income (loss) available to common stockholders  (Note 2) |   | $                       | 1,323,422 |                    | $      | (211,514 | ) | $ | 1,632,863 |   | $ | (2,712,716 | ) |
| Basic net income (loss) per share:                           |   |                    |      |                    |   |   |   |   |   |
| Income (loss) from continuing operations                     |   | $                       | 0.05      |                    | $      | (0.01 | ) | $ | 0.06 |   | $ | (0.14 | ) |
| Income (loss) from discontinued operations                   |   | $                       | —    |                    | $      | — |   | $ | — |   | $ | — |   |
| Net income (loss)                                            |   | $                       | 0.05      |                    | $      | (0.01 | ) | $ | 0.06 |   | $ | (0.14 | ) |
| Diluted net income (loss) per share:                         |   |                    |      |                    |   |   |   |   |   |
| Income (loss) from continuing operations                     |   | $                       | 0.02      |                    | $      | (0.01 | ) | $ | 0.05 |   | $ | (0.14 | ) |
| Income (loss) from discontinued operations                   |   | $                       | —    |                    | $      | — |   | $ | — |   | $ | — |   |
| Net income (loss)                                            |   | $                       | 0.02      |                    | $      | (0.01 | ) | $ | 0.05 |   | $ | (0.14 | ) |
| Weighted average common shares outstanding:                  |   |                    |      |                    |   |   |   |   |   |
| Basic                                                        |   | 27,629,195              |      | 20,908,856              |   | 25,771,978 |   | 19,865,495 |   |
| Diluted                                                      |   | 66,384,215              |      | 20,908,856              |   | 37,546,365 |   | 19,865,495 |   |

 

The accompanying notes are an integral part ofthese condensed consolidated financial statements

 

2

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**MCF CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OFFINANCIAL CONDITION**

**(unaudited)**

 
|                                                                                                                                                                                                                                                                   |   | **September 30,  2003** |      | **December 31,  2002** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|-----------|------------------------|--------|
|                                                                                                                                                                                                                                                                   |   |                    |      |                   |   |
| ASSETS                                                                                                                                                                                                                                                                 |   |                    |      |                   |   |
| Cash and cash equivalents                                                                                                                                                                                                                                              |   | $                       | 5,769,857 |                   | $      | 1,402,627 |   |
| Securities owned:                                                                                                                                                                                                                                                      |   |                    |      |                   |   |
| Marketable, at fair value                                                                                                                                                                                                                                              |   | 616,398                 |      | 764,421                |   |
| Not readily marketable, at estimated fair value                                                                                                                                                                                                                        |   | 214,698                 |      | 16,067                 |   |
| Restricted cash                                                                                                                                                                                                                                                        |   | 500,000                 |      | 610,240                |   |
| Due from clearing broker                                                                                                                                                                                                                                               |   | 424,906                 |      | 124,053                |   |
| Accounts receivable, net                                                                                                                                                                                                                                               |   | 52,800                  |      | 27,661                 |   |
| Equipment and fixtures, net                                                                                                                                                                                                                                            |   | 162,967                 |      | 49,216                 |   |
| Debt issuance costs                                                                                                                                                                                                                                                    |   | 24,069                  |      | 612,673                |   |
| Prepaid expenses and other assets                                                                                                                                                                                                                                      |   | 350,948                 |      | 162,169                |   |
| Total assets                                                                                                                                                                                                                                                           |   | $                       | 8,116,643 |                   | $      | 3,769,127 |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIT)                                                                                                                                                                                                                   |   |                    |      |                   |   |
|                                                                                                                                                                                                                                                                   |   |                    |      |                   |   |
| Accounts payable                                                                                                                                                                                                                                                       |   | $                       | 233,008   |                   | $      | 112,041 |   |
| Commissions payable                                                                                                                                                                                                                                                    |   | 928,339                 |      | 325,351                |   |
| Accrued liabilities                                                                                                                                                                                                                                                    |   | 1,207,081               |      | 342,454                |   |
| Due to clearing and other brokers                                                                                                                                                                                                                                      |   | 107,557                 |      | 63,550                 |   |
| Securities sold, not yet purchased                                                                                                                                                                                                                                     |   | 10                      |      | —                 |   |
| Capital lease obligation                                                                                                                                                                                                                                               |   | 4,160                   |      | —                 |   |
| Convertible notes payable, net                                                                                                                                                                                                                                         |   | 897,247                 |      | 8,055,085              |   |
| Notes payable                                                                                                                                                                                                                                                          |   | 1,428,350               |      | 400,000                |   |
| Total liabilities                                                                                                                                                                                                                                                      |   | 4,805,752               |      | 9,298,481              |   |
| Commitments and contingencies                                                                                                                                                                                                                                          |   |                    |      |                   |   |
|                                                                                                                                                                                                                                                                   |   |                    |      |                   |   |
| Stockholders’ equity (deficit):                                                                                                                                                                                                                                   |   |                    |      |                   |   |
| Preferred stock, Series A - $0.0001 par value; 2,000,000 shares  authorized; 619,999 and 499,999 shares issued and outstanding as of September  30, 2003 and December 31, 2002, respectively; aggregate liquidation  preference of $1,927,000 as of September 30, 2003 |   | 62                      |      | 50                     |   |
| Preferred stock, Series B - $0.0001 par value; 12,500,000 shares  authorized; 8,750,000 shares issued and outstanding as of September 30, 2003;  aggregate liquidation preference of $4,000 as of September 30, 2003                                                   |   | 875                     |      | —                 |   |
| Preferred stock, Series C - $0.0001 par value; 14,200,000 shares  authorized; 11,800,000 shares issued and outstanding as of September 30,  2003; aggregate liquidation preference of $7,000 as of September 30, 2003                                                  |   | 1,180                   |      | —                 |   |
| Common stock, $0.0001 par value; 300,000,000 shares authorized;  30,513,592 and 23,601,580 shares issued and 30,433,592 and 23,521,580  outstanding as of September 30, 2003 and December 31, 2002, respectively                                                       |   | 3,043                   |      | 2,352                  |   |
| Additional paid-in capital                                                                                                                                                                                                                                             |   | 94,493,723              |      | 86,156,666             |   |
| Deferred compensation                                                                                                                                                                                                                                                  |   | (1,132,433              | )         | —                 |   |
| Accumulated deficit                                                                                                                                                                                                                                                    |   | (89,691,906             | )         | (91,324,769            | )      |
| Treasury stock                                                                                                                                                                                                                                                         |   | (363,653                | )         | (363,653               | )      |
| Total stockholders’ equity (deficit)                                                                                                                                                                                                                              |   | 3,310,891               |      | (5,529,354             | )      |
| Total liabilities and stockholders’ equity (deficit)                                                                                                                                                                                                              |   | $                       | 8,116,643 |                   | $      | 3,769,127 |   |

 

The accompanying notes are an integral part ofthese condensed consolidated financial statements.

 

3

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**MCF CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(unaudited)**

 
|                                                                                                |   | **Nine Months Ended September 30,** |      |
|-----------------------------------------------------------------------------------------------------|--------|-------------------------------------|-----------|
|                                                                                                |   | **2003**                            |      | **2002** |   |
| Cash flows from operating activities:                                                               |   |                                |      |   |   |
| Net income (loss)                                                                                   |   | $                                   | 2,318,534 |   | $ | (2,545,046 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by  (used in) operating activities: |   |                                |      |   |   |
| Gain on retirement of convertible note payable                                                      |   | (3,088,230                          | )         | — |   |
| Depreciation and amortization                                                                       |   | 57,102                              |      | 300,731 |   |
| Common stock issued for services                                                                    |   | 121,449                             |      | 83,337 |   |
| Stock options and warrants granted or modified                                                      |   | 233,198                             |      | 430,772 |   |
| Amortization of discounts on convertible notes payable                                              |   | 579,047                             |      | 302,951 |   |
| Amortization of debt issuance costs                                                                 |   | 588,604                             |      | 51,088 |   |
| Unrealized (gain) loss on securities owned                                                          |   | (64,825                             | )         | 34,357 |   |
| Gain on settlement of vendor obligations                                                            |   | —                              |      | (367,614 | ) |
| Gain on sale of equipment                                                                           |   | —                              |      | (200,000 | ) |
| Common stock received for advisory services                                                         |   | (1,250                              | )         | (11,000 | ) |
| Changes in operating assets and liabilities:                                                        |   |                                |      |   |   |
| Assets and liabilities of discontinued operations                                                   |   | —                              |      | 63,149 |   |
| Marketable securities owned                                                                         |   | 15,477                              |      | (556,699 | ) |
| Restricted cash                                                                                     |   | 110,240                             |      | (364,570 | ) |
| Due from clearing broker                                                                            |   | (300,853                            | )         | (233,823 | ) |
| Accounts receivable                                                                                 |   | (25,139                             | )         | (40,686 | ) |
| Prepaid expenses and other assets                                                                   |   | (224,004                            | )         | 80,785 |   |
| Accounts payable                                                                                    |   | 120,967                             |      | 267,897 |   |
| Commissions payable                                                                                 |   | 602,988                             |      | 411,413 |   |
| Accrued liabilities                                                                                 |   | 815,627                             |      | (71,218 | ) |
| Due to clearing and other brokers                                                                   |   | 44,007                              |      | 92,543 |   |
| Deferred revenue                                                                                    |   | —                              |      | 15,000 |   |
| Net cash provided by (used in) operating activities                                                 |   | 1,902,939                           |      | (2,256,633 | ) |
| Cash flows from investing activities:                                                               |   |                                |      |   |   |
| Purchase of equipment and fixtures                                                                  |   | (166,302                            | )         | (6,654 | ) |
| Proceeds from sale of equipment                                                                     |   | —                              |      | 200,000 |   |
| Proceeds from sale of discontinued operations                                                       |   | —                              |      | 300,000 |   |
| Net cash provided by (used in) investing activities                                                 |   | (166,302                            | )         | 493,346 |   |
| Cash flows from financing activities:                                                               |   |                                |      |   |   |
| Proceeds from the issuance of Series B preferred stock                                              |   | 1,750,000                           |      | — |   |
| Proceeds from the issuance of Series C preferred stock                                              |   | 250,000                             |      | — |   |
| Proceeds from the issuance of convertible notes payable                                             |   | 1,000,000                           |      | — |   |
| Proceeds from the exercise of stock options and warrants                                            |   | 208,884                             |      | — |   |
| Cash used to retire convertible notes payable                                                       |   | (500,000                            | )         | — |   |
| Debt service payments                                                                               |   | (28,041                             | )         | — |   |
| Preferred stock dividends                                                                           |   | (50,250                             | )         | — |   |
| Debt issuance costs                                                                                 |   | —                              |      | (22,500 | ) |
| Net cash provided by (used in) financing activities                                                 |   | 2,630,593                           |      | (22,500 | ) |
| Increase (decrease) in cash and cash equivalents                                                    |   | 4,367,230                           |      | (1,785,787 | ) |
| Cash and cash equivalents at beginning of period                                                    |   | 1,402,627                           |      | 4,358,091 |   |
| Cash and cash equivalents at end of period                                                          |   | $                                   | 5,769,857 |   | $ | 2,572,304 |   |
| Non-cash investing and financing activities:                                                        |   |                                |      |   |   |
| Conversion of notes payable to Series C preferred stock                                             |   | $                                   | 2,700,000 |   | $ | — |   |
| Conversion of notes payable to common stock                                                         |   | $                                   | 650,000   |   | $ | — |   |
| Common stock issued to retire note payable                                                          |   | $                                   | 400,000   |   | $ | — |   |
| Common stock issued to settle accrued liabilities                                                   |   | $                                   | —    |   | $ | 37,000 |   |
| Stock warrants issued to note payable investor                                                      |   | $                                   | 129,215   |   | $ | — |   |
| Stock warrants issued to preferred stock investors                                                  |   | $                                   | 231,801   |   | $ | — |   |
| Maturity of note payable                                                                            |   | $                                   | 400,000   |   | $ | — |   |
| Issuance of note payable                                                                            |   | $                                   | 456,000   |   | $ | — |   |
| Issuance of restricted stock                                                                        |   | $                                   | 1,090,000 |   | $ | — |   |
| Issuance of stock options with intrinsic value                                                      |   | $                                   | 168,000   |   | $ | — |   |
| Purchase of equipment and fixtures with capital lease                                               |   | $                                   | 4,551     |   | $ | — |   |
| Preferred stock dividends                                                                           |   | $                                   | 97,820    |   | $ | 167,670 |   |

 

The accompanying notes are an integral part ofthese condensed consolidated financial statements.

 

4

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**MCF CORPORATION**

**NOTES****TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(unaudited)**

 

**1.Significant Accounting Policies**

 

*Basis ofPresentation*

 

On July 22, 2003, Ratexchange Corporationchanged its name to MCF Corporation. The interim financial statements includedherein for MCF Corporation, or the Company, have been prepared, without audit,pursuant to the rules and regulations of the Securities and ExchangeCommission. In the opinion of management, the financial statements included inthis report reflect all normal recurring adjustments that the Company considersnecessary for the fair presentation of the results of operations for theinterim periods covered and the financial position of the Company at the dateof the interim statement of financial condition. Certain information andfootnote disclosures normally included in annual financial statements preparedin accordance with accounting principles generally accepted in the UnitedStates have been condensed or omitted pursuant to such rules and regulations.However, the Company believes that the disclosures are adequate to understandthe information presented. The operating results for interim periods are notnecessarily indicative of the operating results for the entire year. Thesefinancial statements should be read in conjunction with the Company’s 2002audited consolidated financial statements and notes thereto included in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2002.

 

*Commissionsand Principal Transactions Revenue*

 

Our institutional brokerage activities deriverevenue from agency commissions and principal transactions. Agency commissionrevenue includes revenue resulting from executing stock exchange-listedsecurities, over-the counter securities and other transactions as agent. Principaltransactions consist of a portion of dealer spreads attributed to the Company’ssecurities trading activities as principal in NASDAQ-listed and othersecurities, and include transactions derived from activities as a market-maker.Additionally, principal transactions include gains and losses resulting frommarket price fluctuations that occur while holding positions in tradingsecurity inventory. Revenue generated from brokerage transactions and relatedexpenses are recorded on a trade date basis.

 

*InvestmentBanking Revenue*

 

Investment banking revenue represents feesearned from private placement offerings, mergers and acquisitions, financialrestructuring and other advisory services provided to clients. Investmentbanking fees are recorded as revenue when the related service has beenrendered, the client is contractually obligated to pay, and its collection isprobable. Certain fees received in advance of services rendered are recognizedas revenue over the service period.

 

*Stock-BasedCompensation*

 

The Company uses the intrinsic value-basedmethod 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, compensationcost is recorded on the date of grant to the extent the fair value of theunderlying share of common stock exceeds the exercise price for a stock optionor the purchase price for a share of common stock. Such compensation cost isamortized on a straight-line basis over the vesting period of the individualaward. 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 ofaccounting for employee stock-based compensation. Stock-based awards granted tononemployees 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 associatedexpense is measured and recognized by the Company over the period the servicesare performed by the nonemployee.

 

In December 2002, the Financial AccountingStandards Board, or FASB, issued SFAS No. 148,*Accounting for Stock-Based Compensation-Transition and Disclosure*.SFAS 148 amends SFAS 123 to provide alternative methods of transition for avoluntary change to the fair value based method of accounting for stock-basedemployee compensation. In addition, SFAS 148 amends the disclosure requirementsof SFAS 123 to require prominent disclosures in both annual and interimfinancial statements about the method of accounting for stock-based employeecompensation and the effect of the method used on reported results. SFAS 148 iseffective for financial statements for fiscal years ending after December 15,2002.

 

5

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The Company has elected to continue to accountfor its stock-based compensation in accordance with the provisions of APB 25and present the pro forma disclosures required by SFAS 123 as amended by SFAS 148.Stock-based employee compensation for the three months and nine months endedSeptember 30, 2003 and 2002 was accounted for under the intrinsic value methodand, therefore, no compensation expense was recognized for those stock optionsthat had no intrinsic value at the date of grant.

 

If the Company were to recognize compensationexpense over the relevant service period under the fair value method withrespect to stock options granted for the three months and nine months endedSeptember 30, 2003 and all prior periods, net income (loss) would have changed,resulting in pro forma net income (loss) and pro forma net income (loss) pershare as presented below:

 
|                                                                                               |   | **Three Months Ended September 30,** |      | **Nine Months Ended September 30,** |   |
|----------------------------------------------------------------------------------------------------|--------|--------------------------------------|-----------|-------------------------------------|--------|
|                                                                                               |   | **2003**                             |      | **2002**                            |   | **2003** |   | **2002** |   |
| Net income (loss), as reported                                                                     |   | $                                    | 1,386,881 |                                | $      | (179,626 | ) | $ | 2,318,534 |   | $ | (2,545,046 | ) |
| Add: Stock-based employee compensation expense included in the  reported net income (loss)         |   | 170,698                              |      | 279,726                             |   | 233,198 |   | 430,772 |   |
| Less: Stock-based employee compensation expense determined under fair  value method for all awards |   | (1,374,951                           | )         | (629,597                            | )      | (3,273,536 | ) | (2,628,037 | ) |
| Pro forma net income (loss)                                                                        |   | $                                    | 182,628   |                                | $      | (529,497 | ) | $ | (721,804 | ) | $ | (4,742,311 | ) |
| Net income (loss) per share, as reported:                                                          |   |                                 |      |                                |   |   |   |   |   |
| Basic                                                                                              |   | $                                    | 0.05      |                                | $      | (0.01 | ) | $ | 0.06 |   | $ | (0.14 | ) |
| Diluted                                                                                            |   | $                                    | 0.02      |                                | $      | (0.01 | ) | $ | 0.05 |   | $ | (0.14 | ) |
| Net income (loss) per share, pro forma:                                                            |   |                                 |      |                                |   |   |   |   |   |
| Basic                                                                                              |   | $                                    | 0.00      |                                | $      | (0.03 | ) | $ | (0.05 | ) | $ | (0.25 | ) |
| Diluted                                                                                            |   | $                                    | 0.00      |                                | $      | (0.03 | ) | $ | (0.05 | ) | $ | (0.25 | ) |

 

*NewlyIssued Accounting Standards*

 

In April 2003, the FASB issued SFAS No. 149, *Amendment ofStatement 133 on Derivative Instruments and Hedging Activities*. SFASNo. 149 amends and clarifies accounting for derivative instruments, includingcertain derivative instruments embedded in other contracts, and for hedgingactivities under SFAS No. 133. The Statement requires that contracts withcomparable characteristics be accounted for similarly and clarifies when aderivative contains a financing component that warrants special reporting inthe statement of cash flows. SFAS No. 149 is effective for contracts enteredinto or modified after June 30, 2003, except in certain circumstances, and forhedging relationships designated after June 30, 2003. The adoption of thisstandard did not have a material effect on its financial position or results ofoperations.

 

In May 2003, the FASB issued SFAS No. 150, *Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity*. This Statement establishes standards for how an issuerclassifies and measures in its statements of financial position certainfinancial instruments with characteristics of both liabilities and equity. Itrequires that an issuer classify a financial instrument that is within its scopeas a liability (or an asset in some circumstances) because that financialinstrument embodies an obligation of the issuer. This Statement is effectivefor financial instruments entered into or modified after May 31, 2003, andotherwise is effective at the beginning of the first interim period beginningafter June 15, 2003, except for mandatorily redeemable financial instruments ofnonpublic entities. The adoption of this Standard did not have a materialeffect on the Company's financial position or results of operations.

 

In November 2002, the Emerging Issues TaskForce, or EITF, reached a consensus on Issue No. 00-21,*Revenue Arrangements with Multiple Deliverables*.EITF Issue No. 00-21 provides guidance on how to account for arrangements thatinvolve the delivery or performance of multiple products, services and/orrights to use assets. The provisions of EITF Issue No. 00-21 apply to revenuearrangements entered into in fiscal periods beginning after June 15, 2003. Theadoption of this Issue did not have a material effect on the Company’sfinancial position or results of operations.

 

In November 2002, the FASB issued FASBInterpretation, or FIN, No. 45,*Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others.* FIN No. 45 clarifies therequirements of SFAS No. 5,*Accounting forContingencies*, relating to the guarantor’s accounting for anddisclosures of certain guarantees issued. The initial recognition andmeasurement provisions of the Interpretation are applicable on a prospectivebasis to guarantees issued or modified after December 31, 2002, irrespective ofthe guarantor’s fiscal year-end. The adoption of this Interpretation did nothave a material effect on the Company’s financial position or results ofoperations.

 

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In January 2003, the FASB issued FIN 46, **Consolidation of Variable Interest Entities,an Interpretation of ARB No. 51**. FIN 46 provides guidance on how toidentify a variable interest entity, or VIE, and determine when the assets,liabilities, non-controlling interests, and results of operations of a VIE mustbe included in a company’s consolidated financial statements. A company thatholds variable interests in an entity is required to consolidate the entity ifthe company’s interest in the VIE is such that the company will absorb amajority of the VIEs expected losses and/or receive a majority of the entity’sexpected residual returns, if any. FIN 46 became effective upon its issuancefor interests in a VIE acquired after January 31, 2003.  For VIEs acquiredbefore February 1, 2003, the original effective date of July 1, 2003 has beendelayed to December 31, 2003.  FASB delayed the implementation due toadditional time needed for companies and their auditors to complete theevaluation of existing variable interest entities and to determine which ofthose entities are required to be consolidated.  The Company does notexpect that the adoption of this Interpretation will have a material effect onthe Company’s financial position or results of operations.

 

*Reclassification*

 

Certain prior year amounts have beenreclassified to conform to current year consolidated financial statementpresentation.

 

**2. Earnings(Loss) per Share**

 

The following is a reconciliation of the basicand diluted net income (loss) available to common stockholders and the numberof shares used in the basic and diluted net income (loss) per common sharecomputations for the periods presented:

 
|                                                                         |   | **Three Months Ended September 30,** |      | **Nine Months Ended September 30,** |   |
|------------------------------------------------------------------------------|--------|--------------------------------------|-----------|-------------------------------------|--------|
|                                                                         |   | **2003**                             |      | **2002**                            |   | **2003** |   | **2002** |   |
| Net income (loss)                                                            |   | $                                    | 1,386,881 |                                | $      | (179,626 | ) | $ | 2,318,534 |   | $ | (2,545,046 | ) |
| Deemed dividend for issuance of preferred stock                              |   | —                               |      | —                              |   | (537,602 | ) | — |   |
| Preferred stock dividends                                                    |   | (63,459                              | )         | (31,888                             | )      | (148,069 | ) | (167,670 | ) |
| Net income (loss) available to common stockholders – basic              |   | 1,323,422                            |      | (211,514                            | )      | 1,632,863 |   | (2,712,716 | ) |
| Interest and dividends on dilutive common shares                             |   | 89,721                               |      | —                              |   | 237,680 |   | — |   |
| Net income (loss) available to common stockholders – diluted            |   | $                                    | 1,413,143 |                                | $      | (211,514 | ) | $ | 1,870,543 |   | $ | (2,712,716 | ) |
| Weighted-average number of common shares – basic                        |   | 27,629,195                           |      | 20,908,856                          |   | 25,771,978 |   | 19,865,495 |   |
| Exercise or conversion of all potentially dilutive common shares outstanding |   | 38,755,020                           |      | —                              |   | 11,774,387 |   | — |   |
| Weighted-average number of common shares – diluted                      |   | 66,384,215                           |      | 20,908,856                          |   | 37,546,365 |   | 19,865,495 |   |
| Basic net income (loss) per share                                            |   | $                                    | 0.05      |                                | $      | (0.01 | ) | $ | 0.06 |   | $ | (0.14 | ) |
| Diluted net income (loss) per share                                          |   | $                                    | 0.02      |                                | $      | (0.01 | ) | $ | 0.05 |   | $ | (0.14 | ) |

 

The investors in the Company’s Series B andSeries C convertible preferred stock received detachable stock warrants. Deemeddividend for issuance of preferred stock represents the relative fair valueassigned to the stock warrants together with the relative fair value of thebeneficial conversion feature inherent with the convertible preferred stock.These amounts were charged to accumulated deficit during the nine months endedSeptember 30, 2003. All preferred stock dividends, including the deemeddividend described above, are added back to net income (loss) to arrive at netincome (loss) available to common stockholders.

 

Basic earnings (loss) per share is computed bydividing net income (loss), less dividends on preferred stock, by the weightedaverage number of common shares outstanding. Diluted earnings per share iscalculated for the three and nine months ended September 30, 2003 by dividingnet income, less dividends on preferred stock, by the weighted average numberof common shares used in the basic earnings per share calculation plus thenumber of common shares that would be issued assuming exercise or conversion ofall potentially dilutive common shares outstanding. Diluted loss per share isunchanged from basic loss per share for the three and nine month endedSeptember 30, 2002, because the addition of common shares that would be issuedassuming exercise or conversion would be anti-dilutive.

 

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Shares used in the diluted net income (loss)per share computation in the above table include the dilutive impact of theCompany’s stock options and warrants. The impact of the Company’s stock optionsand warrants on shares used for the diluted earnings per share computation iscalculated based on the average share price of the Company’s common stock foreach period using the treasury stock method. Under the treasury stock method,the tax-effected proceeds that would be hypothetically received from theexercise of all stock options and warrants with exercise prices below theaverage share price of the Company’s common stock are assumed to be used torepurchase shares of the Company’s common stock. The dilutive impact of theCompany’s stock options was calculated using an average price of the Company’scommon stock of $0.66 and $0.43 per share for the three and nine months endedSeptember 30, 2003, respectively. Because the Company reported a net lossduring the three and nine months ended September 30, 2002, the Company excludedthe impact of all stock options and warrants in the computation of dilutiveearnings per share, as their effect would be anti-dilutive.

 

The Company excludes all potentially dilutivesecurities from its diluted net income (loss) per share computation when theireffect would be anti-dilutive. The following common stock equivalents wereexcluded from the earnings per share computation, as their inclusion would havebeen anti-dilutive:

 
|                                                                                                                                                                    |   | **Three Months Ended September 30,** |   | **Nine Months Ended September 30,** |       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------|--------|---------------------------------------------------------|------------|
|                                                                                                                                                                    |   | **2003**                                                 |   | **2002**                                                |       | **2003** |   | **2002** |   |
| Stock options and warrants excluded due to the exercise price  exceeding the average fair value of the Company’s common stock during the  period                   |   | 7,628,661                                                |   | 20,428,726                                              |       | 13,331,517 |   | 18,034,296 |   |
| Weighted average stock options and warrants, calculated using the  treasury stock method, that were excluded due to the Company reporting a net  loss during the period |   | **—**                                               |   | 71,542                                                  | ** ** | **—** |   | 177,485 |   |
| Weighted average shares issuable upon conversion of the convertible  notes payable                                                                                      |   | 354,923                                                  |   | 9,459,459                                               |       | 5,935,368 |   | 9,459,459 |   |
| Weighted average shares issuable upon conversion of the convertible  preferred stock                                                                                    |   | **—**                                               |   | 895,931                                                 |       | 6,421,281 |   | 1,440,182 |   |
| Total common stock equivalents excluded from diluted net income (loss)  per share                                                                                       |   | 7,983,584                                                |   | 30,855,658                                              |       | 25,688,166 |   | 29,111,422 |   |

 

**3. CapitalTransactions**

 

*Issuance of Convertible Preferred Stock and Notes Payable*

 

In April 2003, the Company completed a privateplacement financing with gross proceeds of $2,750,000. The Company issued 8,750,000shares of Series B convertible preferred stock at a purchase price of $0.20 pershare and convertible promissory notes with aggregate principal of $1,000,000.The preferred stock can be converted by the holders at a ratio of 1:1 into theCompany’s common stock. The promissory notes can be converted to common stockat a rate of $0.20 per share. In connection with the private placement, theCompany also issued warrants to purchase 3,437,500 shares of common stock. Thewarrants issued to the holders of Series B preferred stock have an exerciseprice of $0.30 per share and a three-year term. The warrants issued to theholders of the convertible promissory notes have an exercise price of $0.30 pershare and a five-year term. The transaction included officers of MCFCorporation, institutions and accredited investors. The convertible notes wererecorded in the statements of financial condition during the second quarter of2003 net of discounts resulting from the relative fair value of the stockwarrants and beneficial conversion feature totaling $258,000. The discount willbe amortized over the five-year term.

 

In April 2003, the Company completed a privateplacement financing with gross proceeds of $250,000. The Company issued1,000,000 shares of Series C convertible preferred stock at a purchase price of$0.25 per share. The preferred stock can be converted by the holders at a ratioof 1:1 into the Company’s common stock. In connection with the privateplacement, the Company also issued warrants to purchase 250,000 shares ofcommon stock. The warrants issued to the holders of Series C preferred stockhave an exercise price of $0.30 per share and a three-year term. Thetransaction included institutions and accredited investors.

 

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*Retirement of Convertible Note Payable held by Forsythe*

 

In April 2003, the Company exercised its rightto cancel the convertible promissory note held by Forsythe McArthur Associates,Inc., or Forsythe, dated September 1, 2001 with principal sum of $5,949,042 andaccruing interest at a rate equal to 9.0% per annum. Forsythe received thefollowing restructured consideration in full and complete satisfaction of allobligations owed to it by the Company:

 

a.               $500,000 in cash;

b.              2,000,000 shares of the Company’s commonstock, including demand registration rights; and

c.               a new promissory note of principal sum equalto $1,000,000 bearing interest at 3.5% per annum payable quarterly in cash,maturing on December 31, 2005.

 

The fair value of the 2,000,000 shares ofcommon stock issued was $400,000. The new promissory note was recorded at facevalue plus the sum of gross future contractual interest payments amounting to$105,000. The total value of the consideration provided to Forsythe to retire theconvertible note was $2,005,000. The carrying value of the convertible note atthe time of retirement, net of certain discounts, was $5,093,000. The Companyrecorded a gain in the amount of $3,088,000 as a result this transaction.

 

*Exchange of Convertible Notes Payable for Preferred Stock*

 

In 2001, the Company completed privateofferings of convertible notes, in an aggregate principal amount of $3.5million, due December 31, 2011. The notes bear interest at 12% per annum andmay be converted into shares of the Company’s common stock at the election ofthe holder anytime before their maturity or their redemption or repurchase bythe Company. The conversion rate is 2,703 shares of common stock per each$1,000 principal amount of notes.

 

In June 2003, the stockholders of the Companyapproved the offer to exchange the current convertible notes for Series Cconvertible preferred stock. On June 30, 2003, investors elected to exchangetheir notes with a principal amount of $2.7 million for 10,800,000 shares of SeriesC preferred stock. The Series C convertible preferred stock is convertible ondemand of the holder into common stock at a ratio of 1:1. The holders of theSeries C preferred stock will receive an annual dividend at the rate of 3.0%per annum, paid in cash and registration rights for the underlying commonstock. During 2003, certain investors with a principal amount of $650,000 thatdid not exchange their convertible notes for preferred stock converted theirnotes into common stock. As of September 30, 2003, the remaining convertiblenotes with an aggregate principal amount of $150,000 are outstanding.

 

**4.Regulatory Requirements**

 

Merriman Curhan Ford & Co., previouslyknown as RTX Securities Corporation, is a wholly-owned subsidiary of MCFCorporation. Merriman Curhan Ford & Co., or MCF & Co., is abroker-dealer subject to Rule 15c3-1 of the Securities Exchange Act of 1934,which specifies uniform minimum net capital requirements, as defined, for theirregistrants. As of September 30, 2003, MCF & Co. had regulatory netcapital, as defined, of $2,942,000, which exceeded the amount required by$2,741,000. MCF & Co. is exempt from Rules 15c3-3 and 17a-13 under theSecurities Act of 1934 because it does not carry customer accounts, nor does ithold customer securities or cash.

 

**5.Subsequent Events**

 

As of September 30, 2003, the Company had8,750,000 and 11,800,000 shares of Series B and Series C convertible preferredstock outstanding, respectively. The Series B convertible preferred stockincluded a term that allowed the Company to induce conversion into common stocksubsequent to the Company’s stock price closing at or above $0.60 for tenconsecutive days. The Series C convertible preferred stock included a term thatallowed the Company to induce conversion into common stock subsequent to theCompany’s stock price closing at or above $0.75 for ten consecutive days. Thesestock price milestones were achieved during the three months ended September30, 2003. Effective October 1, 2003, 8,750,000 and 11,800,000 shares of SeriesB and Series C preferred stock were converted into common stock, respectively.

 

As of September 30, 2003, the Company hadconvertible notes payable outstanding with a face amount of $1,000,000 thatwere issued in April 2003.  EffectiveOctober 1, 2003, notes payable with a face amount of $500,000 were convertedinto 2,500,000 shares of common stock.

 

In connection with the private financing inApril 2003, the Company issued stock warrants to the Series B and Series Cconvertible preferred stockholders. The Series B and Series C stock warrantsincluded a term requiring investors to exercise the stock warrants within 30days of the Company’s stock price closing at or above $0.90 for ten consecutivedays. Stock warrants that are not exercised within the 30 day term followingthe Company’s notice will expire. On September 30, 2003, the stock pricemilestone was achieved and notice was given on October 10, 2003. Therefore,stock warrants to purchase 1,812,500 shares of common stock with an exerciseprice of $0.30 must be exercised by November 10, 2003 or expire.

 

Had the inducement and warrant conversionreferred to above occurred at the beginning of the third quarter, or July 1,2003, pro forma basic and diluted net income per share for the three monthsended September 30, 2003 would have been $0.03 and $0.02, respectively, usingthe treasury stock method.

 

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**ITEM 2****. Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

This Quarterly Report on Form 10-Q, includingthis Management’s Discussion and Analysis of Financial Condition and Results ofOperations contains forward-looking statements regarding future events and ourfuture results that are based on current expectations, estimates, forecasts,and projections about the industries in which we operate and the beliefs andassumptions 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 suchwords, and similar expressions are intended to identify such forward-lookingstatements. In addition, any statements that refer to projections of our futurefinancial performance, our anticipated growth and trends in our businesses, andother characterizations of future events or circumstances, are forward-lookingstatements. Readers are cautioned that these forward-looking statements areonly predictions and are subject to risks, uncertainties, and assumptions thatare difficult to predict. Therefore, actual results may differ materially andadversely from those expressed in any forward-looking statements. Readers arereferred to risks and uncertainties identified under “Risk Factors” beginningon Page 17 and elsewhere herein. We undertake no obligation to revise or updatepublicly any forward-looking statements for any reason.

 

**Overview**

 

We are a securities broker-dealer andinvestment bank serving emerging growth companies and institutional investors.We provide sales and trading services primarily to institutions, as well asadvisory and investment banking services to our corporate clients. Our MerrimanCurhan Ford & Co. subsidiary is registered with the Securities and ExchangeCommission as a broker-dealer and is a member of the National Association ofSecurities Dealers, Inc.

 

Our aim is to fill the void in SanFrancisco-based investment banking services for emerging-growth companies byoffering research, brokerage, investment banking, advisory and corporateservices for our institutional and corporate clients. By the end of the 1990’s,many of the investment banking firms that previously served emerging-growthcompanies were acquired by large commercial banks and subsequently refocused toserve larger clients and larger transactions. We are filling this gap byoriginating differentiated research for our institutional investor clients andproviding specialized services for our emerging-growth corporate clients. The marketsectors for our research focus include technology, telecommunications, consumergrowth and life technology. Within these sectors, the industries coveredinclude branded consumer, communications and networking, data storage,enterprise software, entertainment and leisure, biotech, health enablingtechnology and service, restaurant and wireless telecommunication. Our missionis to become a leader in the researching, advising, financing and trading ofemerging growth companies.

 

**BusinessEnvironment**

 

The pace of economic growth improved in thethird quarter, supported by ongoing policy stimulus and continued strength inthe consumer sector. Consumer spending growth picked up, supported by moreexpansionary fiscal policy, while major manufacturing surveys reflectedimproved confidence. However, despite the improvement in growth, the labormarket remained weak. The major equity indices were all up for the quarterended September 30, 2003.

 

Our securities broker-dealer and investmentbanking activities are linked to the capital markets, which markets are, inturn, linked to broader economic conditions. In addition, our businessactivities are focused in the technology, telecommunications, consumer growthand life technology sectors. By their nature, our business activities arehighly competitive and are not only subject to general market conditions,volatile trading markets and fluctuations in the volume of market activity, butalso to the conditions affecting the companies and markets in our areas offocus.

 

Fluctuations in revenue also occur due to theoverall level of market activity, which, among other things, affects the flowof investment dollars and the size, number and timing of investment bankingtransactions. In addition, a downturn in the level of market activity can leadto a decrease in brokerage commissions. Therefore, revenue in any particularperiod may not be representative of full-year results and may varysignificantly from year to year and from quarter to quarter.

 

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The financial services industry continues tobe affected by an increasingly competitive environment. The relaxation ofbanks’ barriers to entry into the securities industry and expansion byinsurance companies into traditional brokerage products, coupled with therepeal of laws separating commercial and investment banking activities, hasincreased the number and size of companies competing for a similar customerbase. Many such competitors have greater capital resources and additionalassociated services with which to pursue these activities.

 

***Critical Accounting Policies and Estimates***

 

The condensed consolidated financialstatements are prepared in accordance with accounting principles generallyaccepted in the United States, which require us to make estimates and judgmentsthat affect the reported amounts of assets, liabilities, revenue and expenses,and related disclosure of contingent assets and liabilities. On an on-goingbasis, we evaluate our estimates, including those related to securities ownedand income taxes. We base our estimates on historical experience and on variousother assumptions that are believed to be reasonable under the circumstances,the results of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from other sources.Actual results could differ from those estimates. We believe the followingcritical accounting policies affect our more significant judgments andestimates used in the preparation of our condensed consolidated financialstatements.

 

Valuation of Securities Owned

 

Securities owned that are notreadily marketable are carried at fair value, with the accompanying gains andlosses reflected in our results of operations. The fair value of investments, for which a quoted market or dealer priceis not available, is based on management's estimates.  Among the factors considered by management in determining thefair value of investments are the cost of the investment, terms and liquidity,developments since the acquisition of the investment, the sales price ofrecently issued securities, the financial condition and operating results ofthe issuer, earnings trends and consistency of operating cash flows, thelong-term business potential of the issuer, the quoted market price ofsecurities with similar quality and yield that are publicly traded, and otherfactors generally pertinent to the valuation of investments.  The fair value of these investments issubject to a high degree of volatility and may be susceptible to significantfluctuation in the near term.

 

*DeferredTax Valuation Allowance*

 

We account for income taxes in accordance withthe provision of SFAS No. 109, *Accountingfor Income Taxes*, which requires the recognition of deferred taxassets and liabilities at tax rates expected to be in effect when thesebalances reverse.  Future tax benefitsattributable to temporary differences are recognized to the extent that therealization of such benefits is more likely than not.  We have concluded that it is more likely than not that ourdeferred tax assets as of September 30, 2003 and December 31, 2002 will not berealized based on the scheduling of deferred tax liabilities and projectedtaxable income.  The amount of thedeferred tax assets actually realized, however, could vary if there aredifferences in the timing or amount of future reversals of existing deferredtax liabilities or changes in the actual amounts of future taxable income.  Should we determine that we will be able torealize all or part of the deferred tax asset in the future, an adjustment tothe deferred tax asset will be recorded in the period such determination ismade.

 

**FinancialCondition**

 

*September30, 2003 Compared to December 31, 2002*

 

*Cash andcash equivalents*

 

Cash and cash equivalents increased by$4,367,000, or 311%, from $1,403,000 as of December 31, 2002 to $5,770,000 asof September 30, 2003. Cash and cash equivalents was higher primarily as theresult of net cash provided by our operating activities and proceeds from theissuance of Series B and Series C convertible preferred stock and convertiblenotes payable, partially offset by cash used to retire a convertible notepayable and the purchase of equipment and fixtures during the nine month periodended September 30, 2003.

 

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*DebtIssuance Costs*

 

Debt issuance costs decreased by $589,000, or96%, from $613,000 as of December 31, 2002 to $24,000 as of September 30, 2003.The decrease was primarily attributed to accelerated amortization related tothe convertible notes payable that were converted to common stock or exchangedfor Series C convertible preferred stock.

 

*CommissionsPayable*

 

Commissions payable increased by $603,000, or186%, from $325,000 as of December 31, 2002 to $928,000 as of September 30,2003. The increase was due to higher variable compensation during September2003 as compared to December 2002. Commissions are generally paid monthly, onemonth in arrears.

 

*AccruedLiabilities*

 

Accrued liabilities increased by $865,000, or253%, from $342,000 as of December 31, 2002 to $1,207,000 as of September 30,2003. The increase was the result of higher accruals for payroll taxes,discretionary bonuses, interest and dividends.

 

*ConvertibleNotes Payable*

 

Convertible notes payable decreased by$7,158,000, or 89%, from $8,055,000 as of December 31, 2002 to $897,000 as ofSeptember 30, 2003. The decrease was due to (i) the retirement of theconvertible note payable held by Forsythe, (ii) the exchange of convertiblenotes payable for Series C convertible preferred stock, (iii) the conversion ofnotes payable to common stock, partially offset by the issuance of a newconvertible note payable with a $1 million face, and the amortization oforiginal issue discounts related to stock warrants and the resulting beneficialconversion feature.

 

In April 2003, we exercised our right tocancel the convertible note payable held by Forsythe with a principal sum of$5,949,000. The convertible note was carried on the balance sheet at the timeof retirement net of discounts amounting to $820,000. During 2003, investorsexchanged convertible notes with a face amount of $2,700,000 into Series Cconvertible preferred stock. Also during 2003, investors converted notespayable with a principal sum of $650,000 into common stock. The notes payablethat were exchanged or converted into equity were carried on the balance sheetnet of discounts amounting to $474,000. In April 2003, we issued a $1,000,000convertible note that was recorded net of discounts amounting to $258,000.

 

*NotesPayable*

 

Notes payable increased by $1,028,000, or257%, from $400,000 as of December 31, 2002 to $1,428,000 as of September 30,2003. The increase was primarily the result of the issuance of a $1,000,000note payable to Forsythe in connection with the retirement of the convertiblenote payable.

 

*AdditionalPaid-In Capital*

 

Additional paid-in capital increased by$8,337,000, or 10%, from $86,157,000 as of December 31, 2002 to $94,494,000 asof September 30, 2003. The increase resulted from the following transactions(i) $5,236,000 for the issuance of Series B and Series C convertible preferredstock with detachable stock warrants, (ii) $1,090,000 for the issuance ofrestricted stock to employees, (iii) $400,000 for the issuance of common stockin connection with the retirement of the Forsythe convertible note payable,(iv) $650,000 for the conversion of notes payable to common stock, (v) $258,000for stock warrants and the beneficial conversion feature related to the$1,000,000 convertible note payable issued in April 2003, (vi) $262,000 forstock-based compensation, (vii) $191,000 for the exercise of stock options andwarrants, (viii) $120,000 for the issuance of common stock to non-employeeconsultants, and (ix) $98,000 for Series A preferred stock dividends.

 

**Results ofOperations**

 

*ThreeMonths ended September 30, 2003 Compared to Three Months ended September 30,2002*

 

*Revenue*

 

Revenue from continuing operations was$7,772,000 and $2,428,000 during the three months ended September 30, 2003 and2002, respectively. The increase in revenue of approximately $5,344,000, or220%, from 2002 to 2003 was attributed to the growth of our securitiesbroker-dealer and investment banking activities.

 

Agency commissions amounted to $2,757,000, or36%, of our revenue during the three months ended September 30, 2003. Thisrepresented an 18% increase over the $2,333,000 recognized during the threemonths ended September 30, 2002. The higher agency commissions were primarilyattributed to the hiring of additional sales and research professionals and anincrease in the number of active client accounts during 2003 as compared to thesimilar period in 2002. During the three months ended September 30, 2003, nosingle brokerage customer accounted for more than 10% of our revenue fromcontinuing operations, while one brokerage customer accounted for 49% of ourrevenue from continuing operations during the three months ended September 30,2002.

 

Principal transactions revenue, including marketmaking and proprietary trading for our own account, amounted to $261,000, or3%, of our revenue during the three months ended September 30, 2003. Thisrepresented a 230% increase compared to the $79,000 recognized during the threemonths ended September 30, 2002. We began our proprietary trading activitiesduring the third quarter of 2002 and our market making activities during thefourth quarter of 2002.

 

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Investment banking revenue amounted to $4,752,000,or 61%, of our revenue during the three months ended September 30, 2003. Thisrepresented a significant increase compared to the $16,000 recognized duringthe three months ended September 30, 2002. Investment banking revenue resultedprimarily from advisory service fees in connection with the closing of sevenprivate placement offerings during the three months ended September 30, 2003.During the three months ended September 30, 2003, three investment bankingcustomers each accounted for more than 10% of our revenue from continuingoperations and combined accounted for 51%, while no single investment bankingcustomer accounted for more than 10% of our revenue from continuing operationsduring the three months ended September 30, 2002.

 

During the three months ended September 30,2003, three sales professionals each accounted for more than 10% of our revenuefrom continuing operations and combined accounted for 39%. One salesprofessional accounted for 74% of our revenue from continuing operations duringthe three months ended September 30, 2002.

 

*Compensationand Benefits*

 

Compensation and benefits expense was$4,825,000 and $1,726,000 during the three months ended September 30, 2003 and2002, respectively. The increase of approximately $3,099,000, or 180%, from2002 to 2003 was due primarily to higher commissions and variable compensationrelated to the growth in revenue. Additionally, our headcount increased from 29in September 2002 to 67 in September 2003.

 

*Brokerageand Clearing Fees*

 

Brokerage and clearing fees were $376,000 and$347,000 during the three months ended September 30, 2003 and 2002,respectively. The increase of approximately $29,000, or 8%, from 2002 to 2003was due to greater volume of brokerage transactions during the third quarter of2003 as compared to the similar period in 2002. Merriman Curhan Ford & Co.,formerly RTX Securities, is a fully-disclosed broker-dealer, that has engaged athird party clearing broker to perform all of the clearance functions. Theclearing broker-dealer processes and settles the customer transactions for MCF& Co. and maintains the detailed customer records. Additionally, securitytrades are executed by third-party broker-dealers and electronic tradingsystems.

 

*ProfessionalServices*

 

Professional services expense was $288,000 and$145,000 during the three months ended September 30, 2003 and 2002,respectively. The increase of approximately $143,000, or 99%, from 2002 to 2003was primarily attributed to consulting costs incurred related to our compliancedepartment and the filing of registration statements with the Securities andExchange Commission.

 

*Occupancyand Equipment*

 

Occupancy and equipment expense was $101,000and $48,000 during the three months ended September 30, 2003 and 2002,respectively. The increase of approximately $53,000, or 110%, from 2002 to 2003resulted mostly from equipment purchases and the increase in office spacerental due to the continued hiring of institutional brokerage and investmentbanking professionals.

 

*Communicationsand Technology*

 

Communications and technology expense was$227,000 and $114,000 during the three months ended September 30, 2003 and2002, respectively. The increase of approximately $113,000, or 99%, from 2002to 2003 was due to higher telephone and data service fees incurred in ourbrokerage operations during 2003. The higher telephone and data service chargesare the result of increased headcount and the opening of offices in California,New York and Massachusetts.

 

*Depreciationand Amortization*

 

Depreciation and amortization expense was$25,000 and $101,000 during the three months ended September 30, 2003 and 2002,respectively. The decrease of approximately $76,000, or 75%, from 2002 to 2003was due primarily to the disposal of equipment and fixtures not utilized duringthe fourth quarter of 2002. We purchased $171,000 of equipment and fixtures anddid not dispose of any equipment or fixtures during the first nine months of2003.

 

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*OtherOperating (Income) Expense*

 

Other operating (income) expense was $430,000and ($228,000) during the three months ended September 30, 2003 and 2002,respectively. The increase of approximately $658,000, or 289%, from 2002 to2003 was attributed mostly to one-time gains recorded during the three monthsended September 30, 2002. The 2002 amount includes a gain on sale of networkingequipment of $200,000 and the reduction of expense due to the favorablesettlement of vendor obligations of $276,000. Excluding these one-time gains, otheroperating expense increased by $182,000, or 73%, from 2002 to 2003. Thisincrease was due mostly to higher travel costs incurred in 2003.

 

*InterestIncome*

 

Interest income was $7,000 and $10,000 duringthe three months ended September 30, 2003 and 2002, respectively. The decreaseof approximately $3,000, or 30%, from 2002 to 2003 was due to a lower averagebalance of interest earning assets, which decreased during the three monthsended September 30, 2003 as compared to the similar period in 2002.

 

*InterestExpense*

 

Interest expense was $122,000 and $364,000during the three months ended September 30, 2003 and 2002, respectively. The2003 amount included $17,000 for interest expense and $105,000 for amortizationof discounts and debt issuance costs, while the 2002 amount included $246,000for interest expense and $118,000 for amortization of discounts and debtissuance costs. The decline in interest expense resulted from the modifiedterms of the convertible note payable held by Forsythe, which became effectiveJanuary 1, 2003.

 

*IncomeTaxes*

 

Although we reported net income during thethree months ended September 30, 2003, we were able to offset our taxableincome against our net operating loss carryforwards. Accordingly, we have notprovided for income taxes in the current period. If we report net income forthe full year ending December 31, 2003, we believe that we have adequate netoperating loss and tax credit carryforwards available to offset all orsubstantially all of any future provision for income taxes related to ourresults of operations for this period.

 

*Nine Monthsended September 30, 2003 Compared to Nine Months ended September 30, 2002*

 

*Revenue*

 

Revenue from continuing operations was$12,219,000 and $5,029,000 during the nine months ended September 30, 2003 and2002, respectively. The increase in revenue of approximately $7,190,000, or143%, from 2002 to 2003 was attributed to the growth of our securitiesbroker-dealer and investment banking activities.

 

Agency commissions amounted to $5,759,000, or47%, of our revenue during the nine months ended September 30, 2003. Thisrepresented a 27% increase over the $4,534,000 recognized during the ninemonths ended September 30, 2002. The higher agency commissions were primarilyattributed to the hiring of additional sales and research professionals and anincrease in the number of active client accounts during 2003 as compared to thesimilar period in 2002. During the nine months ended September 30, 2003, nosingle brokerage customer accounted for more than 10% of our revenue fromcontinuing operations, while one brokerage customer accounted for 44% of ourrevenue from continuing operations during the nine months ended September 30,2002.

 

Principal transactions revenue, includingmarket making and proprietary trading for our own account, amounted to$993,000, or 8%, of our revenue during the nine months ended September 30,2003. This represented a 387% increase compared to the $204,000 recognizedduring the nine months ended September 30, 2002. We began our proprietarytrading activities during the third quarter of 2002 and our market makingactivities during the fourth quarter of 2002.

 

Investment banking revenue amounted to$5,465,000, or 45%, of our revenue during the nine months ended September 30, 2003.This represented a significant increase compared to the $262,000 recognizedduring the nine months ended September 30, 2002. Investment banking revenueduring 2003 resulted primarily from advisory service fees in connection withthe closing of ten private placement offerings. During the nine months endedSeptember 30, 2003, two investment banking customers each accounted for morethan 10% of our revenue from continuing operations and combined accounted for25%, while no single investment banking customer accounted more than 10% of ourrevenue from continuing operations during the nine months ended September 30,2002.

 

During the nine months ended September 30,2003, four sales professionals each accounted for more than 10% of our revenuefrom continuing operations and combined accounted for 46%. One salesprofessional accounted for 71% of our revenue from continuing operations duringthe nine months ended September 30, 2002.

 

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*Compensationand Benefits*

 

Compensation and benefits expense was$7,991,000 and $4,113,000 during the nine months ended September 30, 2003 and2002, respectively. The increase of approximately $3,878,000, or 94%, from 2002to 2003 was due primarily to higher commissions and variable compensation.Additionally, our headcount increased from 29 in September 2002 to 67 inSeptember 2003.

 

*Brokerageand Clearing Fees*

 

Brokerage and clearing fees were $942,000 and$742,000 during the nine months ended September 30, 2003 and 2002, respectively.The increase of approximately $200,000, or 27%, from 2002 to 2003 was due togreater volume of brokerage transactions during the first nine months of 2003as compared to the similar period in 2002. MCF & Co. is a fully-disclosedbroker-dealer, that has engaged a third party clearing broker to perform all ofthe clearance functions. The clearing broker-dealer processes and settles thecustomer transactions for MCF & Co. and maintains the detailed customerrecords. Additionally, security trades are executed by third-partybroker-dealers and electronic trading systems.

 

*ProfessionalServices*

 

Professional services expense was $517,000 and$416,000 during the nine months ended September 30, 2003 and 2002,respectively. The increase of approximately $101,000, or 24%, from 2002 to 2003was primarily attributed to consulting costs incurred related to our compliancedepartment and the filing of registration statements with the Securities andExchange Commission.

 

*Occupancyand Equipment*

 

Occupancy and equipment expense was $261,000and $173,000 during the nine months ended September 30, 2003 and 2002,respectively. The increase of approximately $88,000, or 51%, from 2002 to 2003resulted mostly from equipment purchases and increase in office space rentaldue to the continued hiring of institutional brokerage and investment bankingprofessionals.

 

*Communicationsand Technology*

 

Communications and technology expense was$612,000 and $202,000 during the nine months ended September 30, 2003 and 2002,respectively. The increase of approximately $410,000, or 203%, from 2002 to2003 was due to higher telephone and data service fees incurred in ourbrokerage operations during 2003. The higher telephone and data service chargesare the result of increased headcount and the opening of offices in California,New York and Massachusetts.

 

*Depreciationand Amortization*

 

Depreciation and amortization expense was$57,000 and $301,000 during the nine months ended September 30, 2003 and 2002,respectively. The decrease of approximately $244,000, or 81%, from 2002 to 2003was due primarily to the disposal of equipment and fixtures not utilized duringthe fourth quarter of 2002. We purchased $171,000 of equipment and fixtures anddid not dispose of any equipment or fixtures during the first nine months of2003.

 

*OtherOperating Expenses*

 

Other operating expense was $1,210,000 and$310,000 during the nine months ended September 30, 2003 and 2002,respectively. The increase of approximately $900,000, or 290%, from 2002 to2003 was attributed mostly to one-time gains recorded during the nine monthsended September 30, 2002. The 2002 amount includes a gain on sale of networkingequipment of $200,000 and the reduction of expense due to the favorablesettlement of vendor obligations of $368,000. Excluding these one-time gains,other operating expense increased by $332,000, or 38%, from 2002 to 2003. Thisincrease was due to higher travel costs incurred in 2003 and****aloss on a brokerage transaction with a contra broker-dealer. We are attemptingto recover the amount of the loss from the brokerage transaction. However,since the outcome of the transaction is being litigated in the Supreme Courtfor the State of New York, the timing of any recovery is uncertain and,accordingly, has not been recognized in the accompanying condensed consolidatedfinancial statements.

 

*InterestIncome*

 

Interest income was $19,000 and $37,000 duringthe nine months ended September 30, 2003 and 2002, respectively. The decreaseof approximately $18,000, or 49%, from 2002 to 2003 was due to a lower averagebalance of interest earning assets, which decreased during the nine monthsended September 30, 2003 as compared to the similar period in 2002.

 

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*InterestExpense*

 

Interest expense was $1,418,000 and $1,091,000during the nine months ended September 30, 2003 and 2002, respectively. The2003 amount included $250,000 for interest expense and $1,168,000 foramortization of discounts and debt issuance costs, while the 2002 amountincluded $737,000 for interest expense and $354,000 for amortization ofdiscounts and debt issuance costs. The decline in interest expense resultedfrom the modified terms of the convertible note payable held by Forsythe, whichbecame effective January 1, 2003.

 

*Gain onRetirement of Convertible Note Payable*

 

In April 2003, we exercised our right tocancel the convertible promissory note held by Forsythe with the principal sumof $5,949,042. The fair value of the consideration provided to Forsythe wasless than the carrying amount of the convertible note payable. The differencebetween the fair value of the consideration provided to Forsythe and thecarrying amount of the note payable was recorded as a gain in condensedconsolidated statements of operations.

 

*Loss fromDiscontinued Operations*

 

Loss from discontinued operations was $0 and$263,000 during the nine months ended September 30, 2003 and 2002,respectively. Loss from discontinued operations in 2002 was comprised ofrevenue and expenses in the amount of $730,000 and $993,000, respectively. Thediscontinued operations were sold in April 2002.

 

*IncomeTaxes*

 

Although we reported net income during thenine months ended September 30, 2003, we were able to offset our taxable incomeagainst our net operating loss carryforwards. Accordingly, we have not providedfor income taxes in the current period. If we report net income for the fullyear ending December 31, 2003, we believe that we have adequate netoperating loss and tax credit carryforwards available to offset all orsubstantially all of any future provision for income taxes related to ourresults of operations for this period.

 

**Liquidityand Capital Resources**

 

Historically, we have satisfied our liquidityand regulatory capital needs through the issuance of equity and debtsecurities. During the second quarter of 2003, we raised $3,000,000 by issuingpreferred stock and convertible notes payable. As of September 30, 2003, we hadlong-term notes payable of $2,326,000, net of certain discounts.

 

Our principal assets consist of cash and cashequivalents, marketable securities held for trading purposes, restricted cash,receivables and equipment and fixtures. As of September 30, 2003, liquid assetsconsisted primarily of cash and cash equivalents of $5,770,000 and marketablesecurities of $616,000, for a total of $6,386,000.

 

Merriman Curhan Ford & Co., as abroker-dealer, is subject to Rule 15c3-1 of the Securities Exchange Act of1934, which specifies uniform minimum net capital requirements, as defined, fortheir registrants. As of September 30, 2003, MCF & Co. had regulatory netcapital, as defined, of $2,942,000, which exceeded the amount required by$2,741,000.

 

Cash and cash equivalents increased by$4,367,000 during the nine months ended September 30, 2003. During 2003, cashprovided by financing activities was $2,631,000 and cash provided by operatingactivities was $1,903,000, primarily attributed to our net income adjusted forcertain non-cash expenses and gains, as well as increases and decreases inoperating assets and liabilities. The non-cash gain included the $3,088,000gain on the retirement of convertible note payable, while the non-cash expensesincluded depreciation and amortization, stock based compensation andamortization of discounts on convertible notes payable. Cash used in investingactivities was $166,000, reflecting the purchase of equipment and fixtures.

 

We believe that our existing cash balances andinvestments will be sufficient to meet our liquidity and capital spending requirementsfor at least the next twelve months. However, we have mostly incurred operatinglosses since inception and, to date, we have generated only limited revenue.Furthermore, we may require additional capital investment to fund our workingcapital if we incur future operating losses. We cannot be certain thatadditional debt or equity financing will be available when required or, ifavailable, that we can secure it on terms satisfactory to us.

 

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**Risk Factors**

 

Investing in our securities involves a highdegree of risk. In addition to the other information contained in thisquarterly report, including reports we incorporate by reference, you shouldconsider the following factors before investing in our securities.

 

*It is difficult to evaluate our business and prospectsbecause we have a limited operating history.*

 

We began actively engaging in providingsecurities brokerage and investment banking services in January 2002. This wasan entirely new business for us, and was a complete break with the businesspreviously engaged in by us, the bandwidth brokerage business. Accordingly, wehave a limited operating history on which to base an evaluation of our businessand prospects. Our prospects must be considered in light of the risks, expensesand difficulties frequently encountered by companies in their early stage ofdevelopment. We cannot assure you that we will be successful in addressingthese risks and our failure to do so could have a material adverse effect onour business and results of operations.

 

*We may not be able to maintain a positive cash flow andprofitability.*

 

Our ability to maintain a positive cash flowand profitability depends on our ability to generate and maintain greaterrevenue while incurring reasonable expenses. This, in turn, depends, amongother things, on the development of our securities brokerage and investmentbanking business, and we may be unable to maintain profitability if we fail todo any of the following:

 

•                  establish, maintain and increase our clientbase;

 

•                  manage the quality of our services;

 

•                  compete effectively with existing andpotential competitors;

 

•                  further develop our business activities;

 

•                  manage expanding operations; and

 

•                  attract and retain qualified personnel.

 

We cannot be certain that we will be able tosustain or increase a positive cash flow and profitability on a quarterly orannual basis in the future. Our inability to maintain profitability or positivecash flow could result in disappointing financial results, impedeimplementation of our growth strategy or cause the market price of our commonstock to decrease. Accordingly, we cannot assure you that we will be able togenerate the cash flow and profits necessary to sustain our businessexpectations, which makes our ability to successfully implement our businessplan uncertain.

 

Because we are a developing company, thefactors upon which we are able to base our estimates as to the gross revenueand the number of participating clients that will be required for us tomaintain a positive cash flow and any additional financing that may be neededfor this purpose are unpredictable. For these and other reasons, we cannotassure you that we will not require higher gross revenue, and an increasednumber of clients, securities brokerage and investment banking transactions,and/or more time in order for us to complete the development of our businessthat we believe we need to be able to cover our operating expenses, or obtainthe funds necessary to finance this development. It is more likely than notthat our estimates will prove to be inaccurate because actual events more oftenthan not differ from anticipated events. Furthermore, in the event thatfinancing is needed in addition to the amount that is required for thisdevelopment, we cannot assure you that such financing will be available onacceptable terms, if at all.

 

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*We have ahistory of operating losses and negative cash flow and we anticipate losses andnegative cash flow to continue for the foreseeable future. Unless we are ableto generate profits and positive cash flow we may not be able to continueoperations.*

 

We have mostly incurred net losses since ourinception and financed our operations primarily through sales of equity anddebt securities. We incurred net losses of $3,405,000, $30,072,000 and$44,729,000 for the years ended December 31, 2002, 2001 and 2000, respectively,and negative cash flow from operations of $3,434,000**,** $13,360,000 and $17,161,000 in 2002, 2001 and 2000,respectively. At September 30, 2003, our accumulated deficit since inceptionwas $89,692,000. We may not sustain or increase a positive cash flow andprofitability on a quarterly or annual basis in the future. If we are unable tosustain a positive cash flow and profitability, we may be unable to continueour operations.

 

*The marketsfor securities brokerage and investment banking services are highlycompetitive. If we are not able to compete successfully against current and futurecompetitors, our business and results of operations will be adversely affected.*

 

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

 

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

 

*We may experiencereduced revenue due to declining market volume, price and liquidity, which canalso cause counterparties to fail to perform.*

 

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

 

*We mayexperience significant losses if the value of our marketable security positionsdeteriorates.*

 

We conduct securities trading, market-makingand investment activities for our own account, which subjects our capital tosignificant risks. These risks include market, credit, counterparty andliquidity risks, which could result in losses for us. These activities ofteninvolve the purchase, sale or short sale of securities as principal in marketsthat may be characterized as relatively illiquid or that may be particularlysusceptible to rapid fluctuations in liquidity and price.

 

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*We mayexperience significant fluctuations in our quarterly operating results due tothe nature of our business and therefore may fail to meet profitabilityexpectations.*

 

Our revenue and operating results mayfluctuate from quarter to quarter and from year to year due to a combination offactors, including:

 

•                  the level of institutional brokeragetransactions and the level of commissions we receive from those transactions;

 

•                  the valuations of our principal investments;

 

•                  the number of capital markets transactionscompleted by our clients, and the level of fees we receive from thosetransactions; 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 marketsadvisory transaction only when we have rendered the services and the client iscontractually obligated to pay; generally, most of the fee is earned only afterthe transaction closes. Accordingly, the timing of our recognition of revenuefrom a significant transaction can materially affect our quarterly operatingresults.

 

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

 

Because we have registered Merriman CurhanFord & Co. with the Securities and Exchange Commission, or SEC, and theNational Association of Securities Dealers, Inc., or NASD, as a securitiesbroker-dealer, we are subject to extensive regulation under federal and statelaws. The principal purpose of regulation and discipline of broker-dealers isthe protection of customers and the securities markets rather than protectionof creditors and stockholders of broker-dealers. The Securities and ExchangeCommission is the federal agency charged with administration of the federalsecurities laws. Much of the regulation of broker-dealers, however, has beendelegated to self-regulatory organizations, such as the NASD and nationalsecurities exchanges. The NASD is our primary self-regulatory organization.These self-regulatory organizations adopt rules, which are subject to SECapproval, that govern the industry and conduct periodic examinations of memberbroker-dealers. Broker-dealers are also subject to regulation by statesecurities commissions in the states in which they are registered. The regulationsto which broker-dealers are subject cover all aspects of the securitiesbusiness, including net capital requirements, sales methods, trading practicesamong broker-dealers, capital structure of securities firms, record keeping andthe conduct of directors, officers and employees. The SEC and theself-regulatory bodies may conduct administrative proceedings, which can resultin censure, fine, suspension or expulsion of a broker-dealer, its officers oremployees. If we fail to comply with these rules and regulations, our businessmay be materially and adversely affected.

 

The regulatory environment in which we operateis also subject to change. Our business may be adversely affected as a resultof new or revised legislation or regulations imposed by the SEC, other UnitedStates or foreign governmental regulatory authorities or the NASD. We also maybe adversely affected by changes in the interpretation or enforcement ofexisting laws and rules by these governmental authorities and the NASD.

 

*Our businessmay suffer if we lose the services of our executive officers or operatingpersonnel.*

 

We depend on the continued services andperformance of D. Jonathan Merriman, our Chairman and Chief Executive Officer,for our future success. We had an employment agreement with Mr. Merriman, whichended on October 8, 2003 and we currently have no employment agreement with Mr.Merriman.

 

In addition to Mr. Merriman, we are currentlymanaged by a small number of key management and operating personnel. We do notmaintain “key man” insurance on any employee. Our future success depends, inpart, on the continued service of our key executive, management and technicalpersonnel, many of whom have only recently been hired, and our ability toattract highly skilled employees. Our business could be harmed if any keyofficer or employee were unable or unwilling to continue in his or her currentposition. From time to time we have experienced, and we expect to continue toexperience, difficulty in hiring and retaining highly skilled employees.Competition for employees in our industry is significant. If we are unable toretain our key employees or attract, integrate or retain other highly qualifiedemployees in the future, such failure may have a material adverse effect on ourbusiness and results of operations.

 

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*Ourbusiness is dependent on the services of skilled professionals, and may sufferif we can not recruit or retain such skilled professionals.*

 

During the nine months ended September 30,2003**,**foursales professionals combined accounted for 46% of our revenue from continuingoperations. We have a number of revenue producers employed by our securitiesbrokerage and investment banking subsidiary. We do not have employment contractswith these employees. The loss of one or more of these employees couldadversely affect our business and results of operations.

 

*Ourcompensation structure may negatively impact our financial condition if we arenot able to effectively manage our expenses and cash flows.*

 

We are able to recruit and retain investmentbanking, research and sales and trading professionals, in part because ourbusiness model provides that we pay our revenue producing employees apercentage of their earned revenue. Compensation and benefits is our largestexpenditure and this variable compensation component represents a significantproportion of this expense. Compensation for our employees is derived as apercentage of our revenue regardless of the profitability of the Company.Therefore, we may continue to pay individual revenue producers, includingofficers of the Company acting in a revenue producing capacity, a significantamount of cash compensation as the overall business experiences negative cashflows and/or net losses. We may not be able to recruit or retain revenueproducing employees if we modify or eliminate the variable compensationcomponent from our business model.

 

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

 

One customer accounted for 35% of our revenuefrom continuing operations in 2002. For the nine months ended September 30,2003, two customers accounted for more than 10% of our revenue from continuingoperations and combined accounted for 25%. We cannot assure you that we willnot become dependent on one customer, or on a small number of customers, for alarge percentage of our revenue in the future. If we do become dependent on asingle customer or small group of customers, the loss of one or more largecustomers could materially adversely affect our business and results ofoperations.

 

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

 

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

 

*We may beunable to effectively manage rapid growth that we may experience, which couldplace a continuous strain on our resources and, accordingly, adversely affectour 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 conditionsand improve existing systems or implement new systems for our financial andmanagement controls, reporting systems and procedures and expand, train andmanage a growing employee base in order to manage our future growth. We believethat future growth will require implementation of new and enhancedcommunications and information systems and training of our personnel to operatesuch systems. Furthermore, we may acquire existing companies or enter intostrategic alliances with third parties, in order to achieve rapid growth. Forus to succeed, we must make our existing business and systems work effectivelywith those of any strategic partners without undue expense, managementdistraction or other disruptions to our business. We may be unable to implementour business plan if we fail to manage any of the above growth challengessuccessfully. Our financial results may suffer and we could be materially andadversely affected if that occurs.

 

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

 

Our success, in particular our ability tosuccessfully facilitate securities brokerage transactions and provide high-qualitycustomer service, largely depends on the efficient and uninterrupted operationof our computer and communications systems. Our systems and operations arevulnerable to damage or interruption from fire, flood, power loss,telecommunication failures, break-ins, earthquake and similar events. Despitethe implementation of network security measures, our servers are vulnerable tocomputer viruses, physical or electronic break-ins and similar disruptions,which could lead to interruptions, delays, loss of data or the inability toaccept and fulfill customer orders. Additionally, computer viruses may causeour systems to incur delays or other service interruptions, which may cause usto incur additional operating expenses to correct problems we may experience.Any of the foregoing problems could materially adversely affect our business orfuture results of operations.

 

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*We arehighly dependent on proprietary and third-party systems; therefore, systemfailures could significantly disrupt our business.*

 

Our business is highly dependent oncommunications and information systems, including systems provided by ourclearing brokers. Any failure or interruption of our systems, the systems ofour clearing broker or third party trading systems could cause delays or otherproblems in our securities trading activities, which could have a materialadverse effect on our operating results.

 

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

 

*Our commonstock price may be volatile, which could adversely affect the value of yourshares.*

 

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

 

•                  variations in quarterly operating results;

 

•                  our announcements of significant contracts,milestones, acquisitions;

 

•                  our relationships with other companies;

 

•                  our ability to obtain needed capitalcommitments;

 

•                  additions or departures of key personnel;

 

•                  sales of common stock or termination of stocktransfer restrictions;

 

•                  general economic conditions, includingconditions in the securities brokerage and investment banking markets;

 

•                  changes in financial estimates by securitiesanalysts; 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 valueof our common stock.

 

In addition, the stock market in recent yearshas experienced significant price and volume fluctuations that haveparticularly affected the market prices of equity securities of many companiesand that often have been unrelated to the operating performance of suchcompanies. These market fluctuations have adversely impacted the price of ourcommon stock and may do so in the future.

 

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

 

In the past, following periods of volatilityin the market price of a company’s securities, securities class actionlitigation often has been instituted against that company. Such litigation isexpensive and diverts management’s attention and resources. We cannot assureyou that we will not be subject to such litigation. If we are subject to suchlitigation, even if we ultimately prevail, our business and financial conditionmay be affected.

 

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*Yourability to sell your shares may be restricted because there is a limitedtrading market for our common stock.*

 

Although our common stock is currently tradedon the American Stock Exchange, a trading market in our stock has beensporadic. Accordingly, you may not be able to sell your shares when you want orat the price you want.

 

*Yourability to sell your shares could be significantly adversely affected becauseour common stock could be delisted from trading on the American Stock Exchange.*

 

Although our common stock is listed fortrading on the American Stock Exchange, it could be delisted because we may beunable to satisfy certain American Stock Exchange listing guidelines includingmarket value, market price, financial condition and results of operationscriteria. In particular, beginning December 31, 2003, we will be required tomaintain net assets of at least $2,000,000 in order to comply with listingrequirements. As of September 30, 2003, we had net assets of approximately$3,311,000. We cannot assure you that we will be able to satisfy theseguidelines on a continuing basis and accordingly, we cannot assure you that ourcommon stock will continue to be listed. If the listing is not retained and ourcommon stock is thereafter quoted only on the OTC Electronic Bulletin Board, asignificantly less liquid market than the American Stock Exchange, astockholder may find it even more difficult to dispose of, or to obtainaccurate quotations as to the price of, the common stock. A delisting couldalso negatively affect our ability to raise additional capital in the future.

 

*Our stockcould become subject to the “penny stock” rules, which could impair theliquidity of your investment in our stock.*

 

Depending on several factors including, amongothers, the future market price of our common stock, these securities couldbecome subject to the so-called “penny stock” rules that impose additionalsales practice and market making requirements on broker-dealers who sell and/ormake a market in such securities. These factors could affect the ability orwillingness of broker-dealers to sell and/or make a market in our common stockand the ability of purchasers of our common stock to sell their shares in thesecondary market.

 

*Issuesrelated to Arthur Andersen LLP may impede our ability to access the capitalmarkets.*

 

If the SEC ceases accepting financialstatements audited by Arthur Andersen LLP, we would be unable to access thepublic capital markets unless Ernst & Young LLP, our current independentaccounting firm, or another independent accounting firm, is able to audit thefinancial statements originally audited by Arthur Andersen LLP. In addition,investors in any subsequent offerings for which we use Arthur Andersen LLP’saudit reports will not be entitled to recovery against Arthur Andersen LLPunder Section 11 of the Securities Act for any material misstatements oromissions in those financial statements. Furthermore, Arthur Andersen LLP willbe unable to participate in the “due diligence” process that would customarilybe performed by potential investors in our securities, which process includeshaving Arthur Andersen LLP perform procedures to assure the continued accuracyof its report on our audited financial statements and to confirm its review ofunaudited interim periods presented for comparative purposes. As a result, wemay not be able to bring to the market successfully an offering of oursecurities. Consequently, our financing costs may increase or we may missattractive market opportunities.

 

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

 

The Delaware General Corporation Law containsprovisions that may enable our management to retain control and resist ourtakeover. These provisions generally prevent us from engaging in a broad rangeof business combinations with an owner of 15% or more of our outstanding votingstock for a period of three years from the date that such person acquires hisor her stock. Accordingly, these provisions could discourage or make moredifficult a change in control or a merger or other type of corporatereorganization even if it could be favorable to the interests of ourstockholders.

 

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*Divestitureby a large stockholder, or group of stockholders, could result in a change ofcontrol.*

 

 As ofNovember 5, 2003, we had a total of 54,887,342shares of common stock outstanding. The possibility thus exists that thedivesture by a selling stockholder, or group of selling stockholders, couldresult in a change of control, a change in the management, or both, of theCompany. If such change in control or management were to occur, we cannotassure you that the current policies of the Company would be maintained, whichcould harm the Company’s business and results of operations and result in adecline in the price of our shares.

 

*We recently registered alarge number of shares, and their sale could depress our share price.*

 

Effective October 1, 2003, weregistered 42,047,254 shares of common stock pursuant to a registrationstatement on Form S-3.  We have no wayof knowing how many of these shares will be sold in the public market or whensales of all or any part of these shares might take place. To date, trading inour stock has been sporadic. If a large number or all of the shares registeredon the registration statement declared effective on October 1 were to be soldor offered for sale in the public market within a short time period, suchoffering or sale could severely adversely affect prevailing market prices forour common stock. Even if such shares were offered over a longer time period,their availability could adversely affect prevailing market prices for ourcommon stock or restrain increases in the market price of our common stock.

 

*Because ourBoard of Directors can issue common stock without stockholder approval, youcould experience substantial dilution.*

 

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

 

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

 

Our Articles of Incorporation authorize ourBoard of Directors to issue up to an additional 37,450,000 shares of preferredstock, without approval from our stockholders. If you purchase our commonstock, this means that our Board of Directors has the right, without yourapproval as a common stockholder, to fix the relative rights and preferences ofthe preferred stock. This would affect your rights as a common stockholderregarding, among other things, dividends and liquidation. We could also use thepreferred stock to deter or delay a change in control of our Company that maybe opposed by our management even if the transaction might be favorable to youas a common stockholder.

 

*Ourofficers and directors exercise significant control over our affairs, whichcould result in their taking actions of which other stockholders do notapprove.*

 

Our executive officers and directors, andentities affiliated with them, currently control approximately 5% of our outstanding common stockprior to any conversion of any outstanding notes and/or exercise of options andwarrants. These stockholders, if they act together, will be able to exercisesubstantial influence over all matters requiring approval by our stockholders,including the election of directors and approval of significant corporatetransactions. This concentration of ownership may also have the effect ofdelaying or preventing a change in control of us and might affect the marketprice of our common stock.

 

*Anyexercise of outstanding options and warrants will dilute then-existingstockholders’ percentage of ownership of our common stock.*

 

We have a significant number of outstandingoptions and warrants. Shares issuable upon the exercise of these options andwarrants, at prices ranging currently from approximately $0.18 to $14.40 pershare, represent approximately 48%of our total outstanding stock on a fully diluted basis. The exercise of theoutstanding options and warrants would dilute the then-existing stockholders’percentage ownership of our common stock. Any sales resulting from the exerciseof options and warrants in the public market could adversely affect prevailingmarket prices for our common stock. Moreover, our ability to obtain additional equitycapital could be adversely affected since the holders of outstanding optionsand warrants may exercise them at a time when we would also wish to enter themarket to obtain capital on terms more favorable than those provided by suchoptions and warrants. We lack control over the timing of any exercise or thenumber of shares issued or sold if exercises occur.

 

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**Item 3****. Quantitative and Qualitative Disclosures About MarketRisk**

 

The following discussion about market riskdisclosures involves forward-looking statements. Actual results could differmaterially from those projected in the forward-looking statements. We may beexposed to market risks related to changes in equity prices, interest rates andforeign currency exchange rates. We do not use derivative financial instrumentsfor speculative, trading or any other purpose.

 

*EquityPrice Risk*

 

The potential for changes in the market valueof our trading positions is referred to as “market risk.” Our trading positionsresult from proprietary trading activities. Equity price risks result fromexposures to changes in prices and volatilities of individual equities andequity indices. We seek to manage this risk exposure through diversificationand limiting the size of individual positions within the portfolio. The effecton earnings and cash flows of an immediate 10% increase or decrease in equityprices generally is not ascertainable and could be positive or negative,depending on the positions we hold at the time. We do not establish hedges inrelated securities or derivatives.

 

*InterestRate Risk*

 

Our exposure to market risk resulting fromchanges in interest rates relates primarily to our investment portfolio andlong term debt obligations. Our interest income and cash flows may be impactedby changes in the general level of U.S. interest rates. We do not hedge thisexposure because we believe that we are not subject to any material market riskexposure due to the short-term nature of our investments. We would not expectan immediate 10% increase or decrease in current interest rates to have amaterial effect on the fair market value of our investment portfolio.

 

Our long term debt obligations bear interestat a fixed rate. Accordingly, an immediate 10% increase or decrease in currentinterest 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 tointerest rate risk. Generally, the fair market value of fixed interest ratedebt will increase as interest rates fall and decrease as interest rates rise.We would not expect an immediate 10% increase or decrease in current interestrates to have a material impact on the fair market value of our long term debtobligations.

 

*ForeignCurrency Risk*

 

We do not have any foreign currencydenominated assets or liabilities or purchase commitments and have not enteredinto any foreign currency contracts. Accordingly, we are not exposed tofluctuations in foreign currency exchange rates.

 

**Item 4****. Controls and Procedures**

 

**a.****                 **Evaluation of disclosure controls andprocedures. The Company’sprincipal executive officer and principal financial officer have concluded thatthe Company’s disclosure controls and procedures (as defined in Rules 13a-14(c)and 15d-14(c) under the Securities Exchange Act of 1934 (the “Exchange Act”))are effective to ensure that information required to be disclosed by theCompany in reports that it files or submits under the Exchange Act is recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms.

**b.****                 **Changes in internal controls. There were no changes in the Company’sinternal controls or in other factors that have materially affected, or are reasonablylikely to materially affect these controls subsequent to the date of theirevaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

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**PART II****. OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

In July 2003, our Merriman Curhan Ford &Co. subsidiary answered a complaint filed in the Supreme Court of New York,New York County by CRT Capital Group, LLC, or CRT (Index No. 600712/03).Our subsidiary is named as a defendant in an action seeking declaratory relieffrom the court. Plaintiff CRT seeks the Court’s declaration regarding themethod for settling an equity trade involving the common stock of NTL, Inc. Oursubsidiary filed a counterclaim against CRT seeking monetary damages in theapproximate amount of $135,000 for losses as a result of our having to purchaseNTL, Inc. stock to complete a trade on behalf of one of our Merriman CurhanFord & Co. trading clients.

 

In January 2003, NTL, Inc. emerged frombankruptcy. As part of its reorganization plan, NTL, Inc. was to issue 200million new shares of common stock. A when-issued trading market had developedand one our subsidiary’s trading clients had participated in that market. Justprior to emergence from bankruptcy, the reorganization plan was amended toprovide for only 50 million new shares of NTL, Inc. to be issued. Thisamendment created chaos in the trading market once the when-issued trades wereto be settled.

 

The court has set a briefing schedule onmotions for summary judgment, with the motions to be heard in early November2003. We do not anticipate any financial loss as a result of this lawsuit.

 

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

 

(a) Exhibits

 

31.1               Certification of Principal Executive OfficerPursuant To Section 302 of The Sarbanes-Oxley Act of 2002.

31.2               Certification of Principal Financial OfficerPursuant To Section 302 of The Sarbanes-Oxley Act of 2002.

32.1               Certification of Principal Executive Officerand Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.

 

(b) Reports on Form 8-K

 

•                       Form 8-K (Item 5 reported) filed on July 3,2003.

•                       Form 8-K (Item 5 reported) filed on July 22,2003.

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|             | MCF CORPORATION |
|------------------|-----------------|
|             |            |   |
| November 6, 2003 | By:             | /s/ D. JONATHAN MERRIMAN |
|             |            | D. Jonathan Merriman,Chairman of the Board and  Chief Executive Officer  (Principal Executive Officer) |
|             |            |   |
| November 6, 2003 | By:             | /s/ GREGORY S. CURHAN |
|             |            | Gregory S. CurhanExecutive Vice President and  Chief Financial Officer  (Principal Financial Officer) |

 

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**EXHIBIT INDEX**

 
| **Exhibit  No.** |   | **Description**                                                                                                    |
|------------------|--------|--------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                               |
| 31.1             |   | Certification of Principal  Executive Officer Pursuant To Section 302 of The Sarbanes-Oxley Act of 2002.           |
|             |   |                                                                                                               |
| 31.2             |   | Certification of Principal  Financial Officer Pursuant To Section 302 of The Sarbanes-Oxley Act of 2002.           |
|             |   |                                                                                                               |
| 32.1             |   | Certification of Principal  Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C.  Section 1350. |

 

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