SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended March 31, 2004
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the Transition Period from to .
Commission file number: 1-15831
MCF CORPORATION
(Exact Name of Registrant as Specified in its Charter)
| Delaware | 11-2936371 | |
| (State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) | |
| 601 Montgomery Street, 18th Floor San Francisco, CA |
94111 | |
| (Address of Principal Executive Offices) | (Zip Code) | |
(415) 248-5697
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No ¨
The number of shares of Registrant’s common stock outstanding as of May 5, 2004 was 58,970,792.
For the Three Months Ended March 31, 2004
| Page No. | ||
| PART I FINANCIAL INFORMATION |
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| ITEM 1. Financial Statements (unaudited) |
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| Condensed Consolidated Statements of Operations For the Three Months Ended March 31, 2004 and 2003 |
2 | |
| Condensed Consolidated Statements of Financial Condition as of March 31, 2004 and December 31, 2003 |
3 | |
| Condensed Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2004 and 2003 |
4 | |
| 5 | ||
| ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
9 | |
| ITEM 3. Quantitative and Qualitative Disclosures About Market Risk |
21 | |
| 22 | ||
| PART II OTHER INFORMATION |
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| 23 | ||
| 23 | ||
| 24 | ||
| Certifications |
25 | |
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
MCF CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| Three Months Ended March 31, |
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| 2004 |
2003 |
|||||||
| Revenue: |
||||||||
| Commissions |
$ | 5,906,064 | $ | 1,279,841 | ||||
| Principal transactions |
624,478 | 215,340 | ||||||
| Investment banking |
4,687,694 | 371,875 | ||||||
| Other |
4,040 | — | ||||||
| Total revenue |
11,222,276 | 1,867,056 | ||||||
| Operating expenses: |
||||||||
| Compensation and benefits |
7,601,180 | 1,387,936 | ||||||
| Brokerage and clearing fees |
717,549 | 302,520 | ||||||
| Professional services |
254,498 | 84,089 | ||||||
| Occupancy and equipment |
152,271 | 74,172 | ||||||
| Communications and technology |
265,280 | 184,821 | ||||||
| Depreciation and amortization |
23,940 | 15,230 | ||||||
| Other |
518,035 | 436,813 | ||||||
| Total operating expenses |
9,532,753 | 2,485,581 | ||||||
| Operating income (loss) |
1,689,523 | (618,525 | ) | |||||
| Interest income |
10,022 | 4,101 | ||||||
| Interest expense |
(58,676 | ) | (212,071 | ) | ||||
| Income (loss) before income taxes |
1,640,869 | (826,495 | ) | |||||
| Income tax expense |
(396,448 | ) | — | |||||
| Net income (loss) |
$ | 1,244,421 | $ | (826,495 | ) | |||
| Earnings (loss) per share: |
||||||||
| Basic |
$ | 0.02 | $ | (0.04 | ) | |||
| Diluted |
$ | 0.02 | $ | (0.04 | ) | |||
| Weighted average common shares outstanding: |
||||||||
| Basic |
54,758,184 | 23,521,580 | ||||||
| Diluted |
79,879,489 | 23,521,580 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
MCF CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(unaudited)
| March 31, 2004 |
December 31, 2003 |
|||||||
| ASSETS | ||||||||
| Cash and cash equivalents |
$ | 9,315,884 | $ | 6,142,958 | ||||
| Securities owned: |
||||||||
| Marketable, at fair value |
1,235,106 | 608,665 | ||||||
| Not readily marketable, at estimated fair value |
1,117,971 | 637,533 | ||||||
| Restricted cash |
500,000 | 500,000 | ||||||
| Due from clearing broker |
1,261,155 | 775,697 | ||||||
| Accounts receivable, net |
727,278 | 498,236 | ||||||
| Equipment and fixtures, net |
272,481 | 192,421 | ||||||
| Debt issuance costs |
— | 23,340 | ||||||
| Prepaid expenses and other assets |
273,352 | 325,096 | ||||||
| Total assets |
$ | 14,703,227 | $ | 9,703,946 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Accounts payable |
$ | 305,819 | $ | 179,620 | ||||
| Commissions payable |
2,374,104 | 1,006,192 | ||||||
| Accrued liabilities |
2,013,928 | 1,149,321 | ||||||
| Due to clearing and other brokers |
146,529 | 154,995 | ||||||
| Securities sold, not yet purchased |
56,395 | 225 | ||||||
| Capital lease obligation |
113,449 | 24,401 | ||||||
| Convertible notes payable, net |
396,628 | 520,612 | ||||||
| Notes payable |
1,386,180 | 1,407,370 | ||||||
| Total liabilities |
6,793,032 | 4,442,736 | ||||||
| Commitments and contingencies |
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| Stockholders’ equity: |
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| Preferred stock, Series A—$0.0001 par value; 2,000,000 shares authorized; 169,364 and 657,201 shares issued and outstanding as of March 31, 2004 and December 31, 2003, respectively; aggregate liquidation preference of $467,162 |
17 | 66 | ||||||
| Preferred stock, Series B—$0.0001 par value; 12,500,000 shares authorized; 8,750,000 shares issued and 0 shares outstanding as of March 31, 2004 and December 31, 2003; aggregate liquidation preference of $0 |
— | — | ||||||
| Preferred stock, Series C—$0.0001 par value; 14,200,000 shares authorized; 11,800,000 shares issued and 0 shares outstanding as of March 31, 2004 and December 31, 2003; aggregate liquidation preference of $0 |
— | — | ||||||
| Common stock, $0.0001 par value; 300,000,000 shares authorized; 58,928,243 and 55,951,675 shares issued; and 58,848,243 and 55,871,675 shares outstanding as of March 31, 2004 and December 31, 2003, respectively |
5,885 | 5,587 | ||||||
| Treasury stock |
(363,653 | ) | (363,653 | ) | ||||
| Additional paid-in capital |
97,564,520 | 95,870,008 | ||||||
| Deferred compensation |
(1,523,702 | ) | (1,244,490 | ) | ||||
| Accumulated deficit |
(87,772,872 | ) | (89,006,308 | ) | ||||
| Total stockholders’ equity |
7,910,195 | 5,261,210 | ||||||
| Total liabilities and stockholders’ equity |
$ | 14,703,227 | $ | 9,703,946 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
MCF CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| Three Months Ended March 31, |
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| 2004 |
2003 |
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| Cash flows from operating activities: |
||||||||
| Net income (loss) |
$ | 1,244,421 | $ | (826,495 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||
| Depreciation and amortization |
23,940 | 15,230 | ||||||
| Stock-based compensation |
159,166 | 31,250 | ||||||
| Stock warrants issued |
9,849 | — | ||||||
| Amortization of discounts on convertible notes payable |
26,016 | 74,302 | ||||||
| Amortization of debt issuance costs |
23,340 | 17,019 | ||||||
| Unrealized (gain) loss on securities |
(141,519 | ) | (28,299 | ) | ||||
| Common stock and stock warrants received for investment banking services |
(456,683 | ) | — | |||||
| Other |
4,371 | — | ||||||
| Changes in operating assets and liabilities: |
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| Marketable securities owned |
(452,507 | ) | 239,745 | |||||
| Due from clearing broker |
(485,458 | ) | (59,495 | ) | ||||
| Accounts receivable |
(229,042 | ) | 11,466 | |||||
| Prepaid expenses and other assets |
51,744 | 10,211 | ||||||
| Accounts payable |
126,199 | 168,671 | ||||||
| Commissions payable |
1,367,912 | 70,497 | ||||||
| Accrued liabilities |
864,607 | 121,900 | ||||||
| Due to clearing and other brokers |
(8,466 | ) | (13,448 | ) | ||||
| Net cash provided by (used in) operating activities |
2,127,890 | (167,446 | ) | |||||
| Cash flows from investing activities: |
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| Purchase of equipment and fixtures |
(17,481 | ) | (26,595 | ) | ||||
| Net cash used in investing activities |
(17,481 | ) | (26,595 | ) | ||||
| Cash flows from financing activities: |
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| Proceeds from the exercise of stock options and warrants |
629,760 | — | ||||||
| Proceeds from the issuance of common stock |
455,789 | — | ||||||
| Debt service payments |
(23,032 | ) | — | |||||
| Net cash provided by financing activities |
1,062,517 | — | ||||||
| Increase (decrease) in cash and cash equivalents |
3,172,926 | (194,041 | ) | |||||
| Cash and cash equivalents at beginning of period |
6,142,958 | 1,402,627 | ||||||
| Cash and cash equivalents at end of period |
$ | 9,315,884 | $ | 1,208,586 | ||||
| Supplementary disclosure of cash flow information: |
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| Cash paid during the period: |
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| Interest |
$ | 22,570 | $ | 105,000 | ||||
| Income taxes |
$ | 120,800 | $ | — | ||||
| Non-cash investing and financing activities: |
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| Preferred stock dividends |
$ | 10,985 | $ | 41,708 | ||||
| Issuance of restricted stock |
$ | 294,294 | $ | — | ||||
| Issuance of stock options accounted for at intrinsic value |
$ | 123,250 | $ | — | ||||
| Conversion of notes payable to common stock |
$ | 150,000 | $ | — | ||||
| Acquisition of equipment and fixtures on capital lease |
$ | 90,890 | $ | — | ||||
| Common stock issued to settle accrued liabilities |
$ | — | $ | 4,551 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
MCF CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Significant Accounting Policies
Basis of Presentation
The interim financial statements included herein for MCF Corporation, or the Company, have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the financial statements included in this report reflect all normal recurring adjustments that the Company considers necessary for the fair presentation of the results of operations for the interim periods covered and the financial position of the Company at the date of the interim statement of financial condition. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to understand the information presented. The operating results for interim periods are not necessarily indicative of the operating results for the entire year. These financial statements should be read in conjunction with the Company’s 2003 audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
Institutional Brokerage Revenue
Agency commission revenue includes revenue resulting from executing stock exchange-listed securities, over-the counter securities and other transactions as agent. Principal transactions consist of a portion of dealer spreads attributed to the Company’s securities trading activities as principal in NASDAQ-listed and other securities, and include transactions derived from activities as a market-maker. Additionally, principal transactions include gains and losses resulting from market price fluctuations that occur while holding positions in trading security inventory. Revenue generated from institutional brokerage transactions and related expenses are recorded on a trade date basis.
Investment Banking Revenue
Investment banking revenue consists of fees earned from private placements, mergers and acquisitions, management fees for
underwritten offerings, financial restructurings and other advisory services provided to clients. Investment banking fees are recorded as revenue when the related service has been rendered, the client is contractually obligated to pay, and its collection is probable. Certain fees received in advance of services rendered are recognized as revenue over the service period.
Stock-Based Compensation
The Company uses the intrinsic value-based method in accordance with Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees, to account for employee stock-based compensation. Accordingly, compensation cost is recorded on the date of grant to the extent the fair value of the underlying share of common stock exceeds the exercise price for a stock option or the purchase price for a share of common stock. Such compensation cost is amortized on a straight-line basis over the vesting period of the individual award. Pursuant to Statement of Financial Accounting Standards, or SFAS, No. 123, Accounting for Stock-Based Compensation, the Company discloses the pro forma effect of using the fair value method of accounting for employee stock-based compensation. Stock-based awards granted to nonemployees are accounted for pursuant to the fair value method in SFAS No. 123 and Issue No. 96-18 of the Emerging Issues Task Force. The associated expense is measured and recognized by the Company over the period the services are performed by the nonemployee.
In December 2002, the Financial Accounting Standards 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 a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company adopted SFAS No. 148 during 2002.
The Company has elected to continue to account for its stock-based compensation in accordance with the provisions of APB 25 and present the pro forma disclosures required by SFAS 123 as amended by SFAS 148. Stock-based employee compensation for the three months ended March 31, 2004 and 2003 was accounted for under the intrinsic value method and, therefore, no compensation expense was recognized for those stock options that had no intrinsic value at the date of grant.
5
MCF CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED
(unaudited)
If the Company were to recognize compensation expense over the relevant service period under the fair value method with respect to stock options granted for the three months ended March 31, 2004 and all prior periods, net income (loss) would have changed, resulting in pro forma net income (loss) and pro forma net income (loss) per share as presented below:
| Three Months Ended March 31, |
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| 2004 |
2003 |
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| Net income (loss), as reported |
$ | 1,244,421 | $ | (826,495 | ) | |||
| Add: Stock-based employee compensation expense included in the reported net income (loss) |
36,849 | 31,250 | ||||||
| Less: Stock-based employee compensation expense determined under fair value method for all awards |
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