UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
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For the quarterly period ended: June 30, 2010
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission file number:
0-22945
HELIOS & MATHESON NORTH AMERICA INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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13-3169913
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.)
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200 Park Avenue South
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(212) 979-8228
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New York, New York 10003
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(Registrants Telephone Number,
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(Address of Principal Executive Offices)
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Including Area Code)
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N/A
(Former name, former address and former fiscal year, if changed since last report)
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 past 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
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
þ
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act) Yes
o
No
þ
As of August 12, 2010, there were 5,826,088 shares of common stock, with $.01 par value per share,
outstanding.
HELIOS & MATHESON NORTH AMERICA INC.
INDEX
2
Part I. Financial Information
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Item 1.
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Financial Statements
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HELIOS & MATHESON NORTH AMERICA INC.
CONSOLIDATED BALANCE SHEETS
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June 30,
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December 31,
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2010
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2009
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(unaudited)
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ASSETS
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Current Assets:
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Cash and cash equivalents
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$
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1,051,244
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$
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1,354,989
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Accounts receivable- less allowance for doubtful accounts of $321,347
at June 30, 2010, and $220,879 at December 31, 2009
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2,182,803
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2,471,705
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Unbilled receivables
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84,993
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184,229
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Prepaid expenses and other current assets
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145,656
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178,879
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Total current assets
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3,464,696
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4,189,802
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Property and equipment, net
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48,883
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79,952
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Deposits and other assets
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147,203
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154,703
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Total assets
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$
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3,660,782
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$
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4,424,457
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LIABILITIES AND SHAREHOLDERS EQUITY
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Current Liabilities:
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Accounts payable and accrued expenses
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$
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1,789,306
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$
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1,630,054
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Deferred revenue
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46,234
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184,904
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Total current liabilities
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1,835,540
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1,814,958
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Shareholders equity:
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Preferred stock, $.01 par value; 2,000,000 shares authorized; no
shares issued and outstanding as of June 30, 2010, and December 31,
2009
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Common stock, $.01 par value; 30,000,000 shares authorized; 3,086,362
issued and outstanding as of June 30, 2010, and December 31, 2009
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30,864
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30,864
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Paid-in capital
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35,848,180
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35,840,669
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Accumulated other comprehensive income foreign currency translation
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111
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2,084
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Accumulated deficit
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(34,053,913
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)
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(33,264,118
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)
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Total shareholders equity
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1,825,242
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2,609,499
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Total liabilities and shareholders equity
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$
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3,660,782
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$
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4,424,457
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See accompanying notes to consolidated financial statements.
3
HELIOS & MATHESON NORTH AMERICA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
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Six Months Ended
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Three Months Ended
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June 30,
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June 30,
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2010
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2009
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2010
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2009
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(unaudited)
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(unaudited)
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(unaudited)
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(unaudited)
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Revenues
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$
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6,405,385
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$
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7,365,275
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$
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2,960,793
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$
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3,568,778
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Cost of revenues
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4,951,184
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5,500,170
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2,307,240
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2,656,703
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Gross profit
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1,454,201
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1,865,105
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653,553
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912,075
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Operating expenses:
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Selling, general & administrative
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2,208,019
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2,984,387
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1,062,570
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1,329,025
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Depreciation & amortization
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31,047
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69,790
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14,201
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34,969
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2,239,066
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3,054,177
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1,076,771
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1,363,994
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Loss from operations
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(784,865
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(1,189,072
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(423,218
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(451,919
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Other income(expense):
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Interest income-net
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4,070
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2,603
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996
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1,187
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4,070
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2,603
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996
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1,187
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Loss before income taxes
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(780,795
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(1,186,469
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(422,222
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(450,732
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Provision for income taxes
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9,000
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11,334
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4,500
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3,910
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Net loss
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(789,795
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)
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(1,197,803
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(426,722
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(454,642
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Other comprehensive loss
foreign currency adjustment
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(1,973
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(4,577
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(1,359
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(2,430
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Comprehensive loss
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$
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(791,768
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$
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(1,202,380
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$
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(428,081
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$
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(457,072
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Basic and diluted loss per share
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$
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(0.26
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$
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(0.50
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$
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(0.14
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$
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(0.19
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See accompanying notes to consolidated financial statements.
4
HELIOS & MATHESON NORTH AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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Six Months Ended June 30,
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2010
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2009
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(unaudited)
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(unaudited)
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Cash flows from operating activities:
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Net loss
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$
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(789,795
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$
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(1,197,803
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)
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Adjustments to reconcile net loss to net cash used in operating activities, net of acquired assets:
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Depreciation and amortization
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31,047
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69,790
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Provision for doubtful accounts
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54,321
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30,000
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Stock based compensation
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7,512
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12,316
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Amortization of deferred financing cost
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7,500
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3,882
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Changes in operating assets and liabilities:
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Accounts receivable
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171,828
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1,537,816
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Unbilled receivables
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99,236
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(35,645
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)
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Prepaid expenses and other current assets
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33,224
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33,751
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Deposits
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1,750
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Accounts payable and accrued expenses
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222,005
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(395,729
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Deferred revenue
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(138,670
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160,989
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Net cash (used in)/provided by operating activities
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(301,792
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221,117
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Cash flows from investing activities:
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Sale/(Purchase) of property and equipment
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21
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11,568
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Net cash provided by investing activities
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21
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11,568
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Cash flows from financing activities:
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Payment of deferred financing cost
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(5,000
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Net cash used in financing activities
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(5,000
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)
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Effect of foreign currency exchange rate changes on cash and
cash equivalents
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(1,974
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)
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(4,577
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Net (decrease)/increase in cash and cash equivalents
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(303,745
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)
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223,108
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Cash and cash equivalents at beginning of period
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1,354,989
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912,272
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Cash and cash equivalents at end of period
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$
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1,051,244
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$
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1,135,380
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Supplemental disclosure of cash flow information:
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Cash paid during the period for interest
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$
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$
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Cash paid during the period for income taxes net of refunds
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$
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9,028
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$
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(59,201
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)
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See accompanying notes to consolidated financial statements
5
HELIOS & MATHESON NORTH AMERICA INC.
Notes to Consolidated Financial Statements
(Unaudited)
1) GENERAL:
These financial statements should be read in conjunction with the financial statements
contained in Helios & Matheson North America Inc.s (Helios and Matheson or the Company) Form
10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission (SEC)
and the accompanying financial statements and related notes thereto. The accounting policies used
in preparing these financial statements are the same as those described in the Companys Form 10-K
for the year ended December 31, 2009.
2) CONTROLLED COMPANY:
The Board of Directors has determined that Helios and Matheson is a Controlled Company for
purposes of The NASDAQ Stock Market (NASDAQ) listing requirements. A Controlled Company is a
company of which more than 50% of the voting power for the election of directors is held by an
individual, group or another company. Certain NASDAQ requirements do not apply to a Controlled
Company, including requirements that: (i) a majority of its Board of Directors must be comprised
of independent directors as defined in NASDAQs rules; and (ii) the compensation of officers and
the nomination of directors be determined in accordance with specific rules, generally requiring
determinations by committees comprised solely of independent directors or in meetings at which only
the independent directors are present. The Board of Directors has determined that Helios and
Matheson is a Controlled Company based on the fact that Helios and Matheson Information
Technology, Ltd. (Helios and Matheson Parent) holds, as of August 6, 2010, approximately 84% of
the voting power of the Company.
3) INTERIM FINANCIAL STATEMENTS:
In the opinion of management, the accompanying unaudited consolidated financial statements
contain all the adjustments (consisting only of normal recurring accruals) necessary to present
fairly the consolidated financial position as of June 30, 2010, the consolidated results of
operations for the three and six month periods ended June 30, 2010 and 2009 and cash flows for the
six month period ended June 30, 2010 and 2009.
The consolidated balance sheet at December 31, 2009 has been derived from the audited
financial statements at that date but does not include all the information and footnotes required
by accounting principles generally accepted in the United States of America for complete financial
statements. For further information, refer to the audited consolidated financial statements and
footnotes thereto included in the Form 10-K filed by the Company for the year ended December 31,
2009.
The consolidated results of operations for the six month period ended June 30, 2010 are not
necessarily indicative of the results to be expected for any other interim period or for the full
year.
For the twelve month period ended December 31, 2009, the Company reported an operating loss of
approximately ($2.1) million and for the three and six month periods ended June 30, 2010, the
Company reported operating losses of approximately ($423,000) and ($785,000), respectively. While
the Company continues to focus on revenue growth and cost reductions, including but not limited to
outsourcing and off-shoring solutions, in an attempt to improve its financial condition, there can
be no assurance that the Company will be profitable in future periods.
In managements opinion, cash flows from operations and borrowing capacity combined with cash
on hand will provide adequate flexibility for funding the Companys working capital obligations for
the next twelve months.
4) STOCK BASED COMPENSATION:
The Company has a stock based compensation plan, which is described as follows:
The Companys Stock Option Plan (the Plan) provides for the grant of stock options that are
either incentive or non-qualified for federal income tax purposes. The Plan provides for the
issuance of a maximum of 460,000 shares of common stock (subject to adjustment pursuant to
customary anti-dilution provisions). Stock options vest over a period of between one to four
years.
The exercise price per share of a stock option is established by the Compensation Committee of
the Board of Directors in its discretion but may not be less than the fair market value of a share
of common stock as of the date of grant. The aggregate fair market value of the shares of common
stock with respect to which incentive stock options first become exercisable by an individual to
whom an incentive stock option is granted during any calendar year may not exceed $100,000.
6
Stock options, subject to certain restrictions, may be exercisable any time after full vesting
for a period not to exceed ten years from the date of grant. Such period is established by the
Company in its discretion on the date of grant. Stock options terminate in connection with the
termination of employment.
The Company uses the modified prospective application method as specified by the Financial
Accounting Standards Board (FASB), whereby compensation cost is recognized over the remaining
service period based on the grant-date fair value of those awards as calculated for pro forma
disclosures as originally issued. For the three and six month period ended June 30, 2010, the
Company recorded stock based compensation expense of $1,653 and $7,512. For the three and six
month period ended June 30, 2009, the Company recorded stock based compensation expense of $6,192
and $12,316.
Information with respect to options under the Companys Plan is as follows:
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Weighted
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Number of
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Average
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Shares
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Exercise Price
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Balance December 31, 2009
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35,500
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$
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4.62
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Granted during 1st Qtr 2010
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Exercised during 1st Qtr 2010
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Forfeitures during 1st Qtr 2010
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Balance March 31, 2010
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35,500
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$
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4.62
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Granted during 2nd Qtr 2010
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Exercised during 2nd Qtr 2010
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Forfeitures during 2nd Qtr 2010
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Balance June 30, 2010
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|
|
35,500
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$
|
4.62
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|
The following table summarizes the status of the stock options outstanding and exercisable at June
30, 2010:
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Stock Options Outstanding
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Number of
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Weighted
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|
|
Weighted-
|
|
|
Stock
|
|
Exercise Price
|
|
Average
|
|
|
Number of
|
|
|
Remaining
|
|
|
Options
|
|
Range
|
|
Exercise Price
|
|
|
Options
|
|
|
Contractual Life
|
|
|
Exercisable
|
|
$0.00 - $4.80
|
|
$
|
3.06
|
|
|
|
15,500
|
|
|
1.0 years
|
|
|
15,500
|
|
$4.80 - $9.60
|
|
$
|
5.82
|
|
|
|
20,000
|
|
|
5.8 years
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,500
|
|
|
|
|
|
|
|
35,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2010, 35,500 stock options were exercisable with a weighted average exercise price
of $4.62.
7
5) NET LOSS PER SHARE
:
The following table sets forth the computation of basic and diluted net loss per share for
the six months and the three months ended June 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(789,795
|
)
|
|
$
|
(1,197,803
|
)
|
|
$
|
(426,722
|
)
|
|
$
|
(454,642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to
common stockholders
|
|
$
|
(789,795
|
)
|
|
$
|
(1,197,803
|
)
|
|
$
|
(426,722
|
)
|
|
$
|
(454,642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common
stockholders & assumed conversion
|
|
$
|
(789,795
|
)
|
|
$
|
(1,197,803
|
)
|
|
$
|
(426,722
|
)
|
|
$
|
(454,642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted loss
per share weighted-average shares
|
|
|
3,086,362
|
|
|
|
2,396,707
|
|
|
|
3,086,362
|
|
|
|
2,396,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(0.26
|
)
|
|
$
|
(0.50
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the six and three month periods ended June 30, 2010 and June 30, 2009, all options and
warrants outstanding were excluded from the computation of net loss per share because the effect
would have been anti-dilutive.
6) CONCENTRATION OF CREDIT RISK:
The revenues of two customers represented approximately 23% and 22% of the revenues for the
six month period ended June 30, 2010. The revenues of two customers represented approximately 25%
and 11% of revenues for the same period in 2009. No other customer represented greater than 10% of
the Companys revenues for such periods.
7) CREDIT ARRANGEMENT:
The Company has entered into a Loan and Security Agreement (the Loan Agreement) with Keltic
Financial Partners, LP II (Keltic). The Loan Agreement, which was set to expire December 31,
2009, has been extended through December 31, 2010 with no material changes in terms and conditions.
Under the Loan Agreement, the Company has a line of credit up to $1.0 million based on the
Companys eligible accounts receivable balances at an interest rate based on the higher of prime
rate plus 2.75%, 90 day LIBOR rate plus 5.25% or 7%. Net availability at June 30, 2010 was
approximately $1.0 million. The Loan Agreement has certain financial covenants that shall apply
only if the Company has any outstanding obligations to Keltic including borrowing under the
facility. The Company had no outstanding balance at June 30, 2010, or at December 31, 2009, under
the Loan Agreement.
8) CONTRACTUAL OBLIGATIONS AND COMMITMENTS:
The Company has the following commitments as of June 30, 2010: two operating lease
obligations, one for its corporate headquarters located in New York and another for its branch
office in New Jersey.
The Company has decided not to renew or extend its lease for the New Jersey facility which
expires August 31, 2010.
8
The Companys commitments at June 30, 2010, are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
Less Than
|
|
|
1 - 3
|
|
|
3 - 5
|
|
|
More Than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
Long Term Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employment Contracts
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Lease Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent
(2)
|
|
|
614,248
|
|
|
|
306,328
|
|
|
|
307,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
614,248
|
|
|
$
|
306,328
|
|
|
$
|
307,920
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The Companys employment agreement with Salvatore M. Quadrino, the Companys
prior Interim Chief Executive Officer and current Chief Financial Officer and Secretary, expired on
June 30, 2010. The Company elected not to renew this agreement. Effective July 1, 2010, no named
executive officers of the Company have employment agreements.
|
|
(2)
|
|
The Company has a New York facility with a lease term expiring July 31, 2012,
and a New Jersey facility with a lease term expiring August 31, 2010. The Company has decided not
to renew or extend the lease for the New Jersey facility but instead to consolidate its operations
in its New York facility.
|
As of June 30, 2010, the Company does not have any Off Balance Sheet Arrangements.
9) PROVISION FOR INCOME TAXES
The provision for income taxes as reflected in the consolidated statements of operations
varies from the expected statutory rate primarily due to a provision for minimum state taxes and
the recording of additional valuation allowance against deferred tax assets. Internal Revenue Code
Section 382 (the Code) places a limitation on the utilization of Federal net operating loss and
other credit carry-forwards when an ownership change, as defined by the tax law, occurs.
Generally, this occurs when a greater than 50 percent change in ownership occurs. On September 5,
2006, Helios and Matheson Parent acquired a greater than 50 percent ownership of the Company.
Accordingly, the actual utilization of the net operating loss carry-forwards for tax purposes are
limited annually under the Code to a percentage (currently about four and a half percent) of the
fair market value of the Company at the date of this ownership change. The Company did not
generate taxable income during the six months ended June 30, 2010. The Company maintains a
valuation allowance against additional deferred tax assets arising from net operating loss
carry-forwards since, in the opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized.
10) SUBSEQUENT EVENTS
Management completed an analysis of all subsequent events occurring after June 30, 2010, the
balance sheet date, through August 16, 2010, the date upon which the quarter-end consolidated
financial statements were issued, and determined the following disclosures to be necessary or
appropriate:
On July 20, 2010, the Company received a letter from NASDAQ regarding compliance with NASDAQ
Listing Rule 5550(a)(5) which requires a minimum market value of publicly held shares of
$1,000,000. The Company received communication from NASDAQ that its market value of publicly held
shares fell short of $1,000,000 for the last 30 consecutive business days. Pursuant to the Listing
Rules, NASDAQ has communicated to the Company that it has 180 calendar days from July 20, 2010 to
regain
compliance. In order to regain compliance, the market value of publicly held shares must close
at $1,000,000 or more for a minimum of 10 consecutive business days during the 180 day grace
period.
9
On July 23, 2010, the Company received a second letter from NASDAQ regarding compliance with
NASDAQ Listing Rule 5550(a)(2) which requires a minimum bid price of $1.00 per share. The Company
received communication from NASDAQ that the bid price of its listed securities closed below $1.00
for the last 30 consecutive business days. Pursuant to the Listing Rules, NASDAQ has communicated
to the Company that it has a grace period of 180 calendar days from July 23, 2010, to regain
compliance with the $1.00 minimum bid price requirement. In order to regain compliance, the bid
price must close at $1.00 or more for a minimum of 10 consecutive business days during the 180 day
grace period.
On July 21, 2010, the Board of Directors of Helios and Matheson (the Board) appointed Mr.
David Quint, Jr. to serve as a member of the Board, increasing the number of directors to six.
On
or about July 23, 2010, the Company became aware that Cogito Ltd (Cogito), a software company, whose products the
Company has marketed since 1991 under an exclusive perpetual distribution agreement, initiated an
action against the Company in the Supreme Court of the State of New York (New York County) assigned
index no. 651072/2010 for claims for
$282,000 for royalties allegedly owed to Cogito by the Company and for damages for alleged lost
business and loss of goodwill and clients for amounts of over $2.0 million. On July 27, 2010, the
Court granted Cogito a temporary restraining order that is expected to remain in force through the
balance of August 2010 and ordered service of a copy of this
order, together with the papers upon which it is granted by personal
service upon the Company on or before July 27, 2010. This was
not done. Additionally, the Company became aware that on or about July 27, 2010, Cogito filed an Amended Complaint wherein
Cogito amended its allegations of claimed compensatory damages for breaches of the agreement and
lost business, goodwill and clients to over $4.7 million.
Although
the Company became aware of the action, the Company is disputing the purported
service of process in relation thereto. The Company strongly disputes the claims and intends to
vigorously defend the action and assert appropriate counter claims. A hearing is presently set for
August 31, 2010 concerning Cogitos request for injunctive relief and other relief from the Court.
To date discovery has not commenced and no trial date is set.
On August 4, 2010, the Company entered into and consummated a Securities Purchase Agreement
with Helios and Matheson Inc. (HM Inc.), a Delaware corporation and wholly-owned subsidiary of
Helios and Matheson Parent, pursuant to which HM Inc. purchased 2,739,726 shares of the Companys
common stock at a price of $0.73 per share, equal to the closing bid price of the Companys common
stock on August 3, 2010, for a total investment of $2,000,000 (the Private Placement). The
investment by HM Inc. was part of a plan submitted by the Company to NASDAQ to regain compliance
with NASDAQs minimum $2,500,000 stockholders equity requirement. The Private Placement increased
Helios and Matheson Parents ownership to approximately 84% of the voting power of the Company.
As a result of the Private Placement, which closed on August 6, 2010, the Company believes
that it has regained compliance with NASDAQs minimum stockholders equity requirement of
$2,500,000. NASDAQ will continue to monitor the Companys ongoing compliance with the minimum
stockholders equity requirement and, if at the time of the Companys periodic report for the
quarter ending September 30, 2010 the Company does not evidence compliance, the Company may be
subject to delisting. The Company is evaluating alternative courses of action to resolve the bid
price and market value of publicly held shares NASDAQ listing requirements which remain unresolved.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of significant factors affecting the Companys operating
results, liquidity and capital resources should be read in conjunction with the accompanying
financial statements and related notes.
Statements included in this Managements Discussion and Analysis of Financial Condition and
Results of Operations and elsewhere in this document that do not relate to present or historical
conditions are forward-looking statements within the meaning of that term under Section 27A of
the Securities Act of 1933, as amended, and under Section 21E of the Securities Exchange Act of
1934, as amended. Additional oral or written forward-looking statements may be made by the Company
from time to time, and such statements may be included in documents that are filed with the SEC.
Such forward-looking statements involve risk and uncertainties that could cause results or outcomes
to differ materially from those expressed in such forward-looking statements. Forward-looking
statements may include, without limitation, statements made pursuant to the safe harbor provision
of the Private Securities Litigation Reform Act of 1995. Words such as believes, forecasts,
intends, possible, expects, estimates, anticipates, or plans and similar expressions
are intended to identify forward-looking statements. The Company cautions readers that results
predicted by forward-looking statements, including, without limitation, those relating to the
Companys future business prospects, revenues, working capital, liquidity, capital needs, interest
costs, and income are subject to certain risks and uncertainties that could cause actual
results to differ materially from those indicated in the forward-looking statements. The
important factors on which such statements are based, include but are not limited to, assumptions
concerning the magnitude of the ongoing economic crisis, including its impact on the Companys
customers, demand trends in the information technology industry and the continuing needs of current
and prospective customers for the Companys services.
10
Overview
Since 1983, Helios and Matheson has provided IT services and solutions to Fortune 1000
companies and other large organizations. In 1997, Helios and Matheson became a public company
headquartered in New York, New York. In addition, the Company has offices in Clark, New Jersey and
Bangalore, India. The Companys common stock is currently listed on the NASDAQ Capital Market
CM
under the symbol HMNA. Prior to January 30, 2007, the Companys name was The A
Consulting Team, Inc.
Helios and Matheson provides a wide range of high quality, consulting solutions, through an
integrated suite of market driven Service Lines in the areas of Application Value Management,
Application Development and Integration, Independent Validation, Information Management and
Strategic Sourcing for Fortune 1000 companies and other large organizations. These services
historically account for approximately 90% of the Companys revenues. The Companys solutions are
based on an understanding of each clients enterprise model. The Companys accumulated knowledge
may be applied to new projects such as planning, designing and implementing enterprise-wide
information systems, database management services, performance optimization, migrations and
conversions, strategic sourcing, outsourcing and systems integration.
The Company is dedicated to providing cost efficient competitive services to its clients
through its Flexible Delivery Model which allows for dynamically configurable Onsite, Onshore or
Offshore service delivery based on the needs of the clients. This capability is made possible
either through Helios and Matheson Global Services Private Limited (HMGS), the Companys
subsidiary operating in Bangalore, India or Helios and Matheson Parent. The Companys ability to
blend more offshore work into its pricing should allow it to be more price competitive. To date,
any offshore work being performed through Helios and Matheson Parent has been de minimus.
Rapid technological advances and the wide acceptance and use of the Internet as a driving
force in commerce accelerated the growth of the IT industry. These advances, including more
powerful and less expensive computer technology, fueled the transition from predominantly
centralized mainframe computer systems to open and distributed computing environments and the
advent of capabilities such as relational databases, imaging, software development productivity
tools, and web-enabled software. These advances expand the benefits that users can derive from
computer-based information systems and improve the price-to-performance ratios of such systems. As
a result, an increasing number of companies are employing IT in new ways, often to gain competitive
advantages in the marketplace, and IT services have become an essential component of many companys
long-term growth strategies. The same advances that have enhanced the benefits of computer systems
rendered the development and implementation of such systems increasingly complex, popularizing the
outsourcing of IT development and services to third party IT service providers like the Company.
Many companies outsource such work because outsourcing enables companies to realize cost
efficiencies. Accordingly, organizations turn to external IT services organizations such as Helios
& Matheson to develop, support and enhance their internal IT systems.
The Company believes that its business, operating results and financial condition have been
harmed by the recent economic crisis and ongoing economic uncertainty. A significant portion of the
Companys major customers are in the financial services, pharmaceutical and
manufacturing/automotive industries and came under considerable pressure as a result of the
unprecedented economic conditions in the financial markets. Spending on IT consulting services is
largely discretionary. While the Company has not lost any major clients, it has experienced a
pushback of new assignments from existing clients and difficulty in replacing completed projects,
both of which have impacted revenue growth through 2010 year to date.
For the six months ended June 30, 2010, approximately 89% of the Companys consulting services
revenues were generated from clients under time and materials engagements, as compared to
approximately 76% for the six months ended June 30, 2009, with the remainder generated under
fixed-price engagements. The Company has established standard-billing guidelines for consulting
services based on the types of services offered. Actual billing rates are established on a
project-by-project basis and may vary from the standard guidelines. The Company typically bills its
clients for time and materials services on a semi-monthly basis. Arrangements for fixed-price
engagements are made on a case-by-case basis. Consulting services revenues generated under time and
materials engagements are recognized as those services are provided. Revenues from fixed fee
contracts are recorded when work is performed on the basis of the proportionate performance method,
which is based on costs incurred to date relative to total estimated costs.
11
The Companys most significant operating cost is its personnel cost, which is included in cost
of revenues. As a result, the Companys operating performance is primarily based upon billing
margins (billable hourly rate less the consultants hourly cost) and
consultant utilization rates (number of days worked by a consultant during a semi-monthly
billing cycle divided by the number of billing days in that cycle). For the six month period ended
June 30, 2010, gross margin was 22.7% as compared to 25.3% for the six month period ended June 30,
2009. The decrease in gross margin is primarily a result of a decrease in higher margin project
revenue. Large portions of the Companys engagements are on a time and materials basis. While most
of the Companys engagements allow for periodic price adjustments to address, among other things,
increases in consultant costs, to date clients have been averse to accepting cost increases.
Additionally, during the past three years, an increasing number of the Companys clients are
outsourcing the management of their time and material engagements to external Vendor Management
Organizations (VMOs) as a means of monitoring and controlling the costs of external service
providers. The Company has been challenged with absorbing the costs associated with the VMOs which
have negatively impacted the Companys margins.
Helios and Matheson actively manages its personnel utilization rates by monitoring project
requirements and timetables. Helios and Mathesons utilization rate for the six month period ended
June 30, 2010 was approximately 91% as compared to approximately 78% for the six month period ended
June 30, 2009. As projects are completed, consultants either are re-deployed to new projects at
the current client site or to new projects at another client site or are encouraged to participate
in Helios and Mathesons training programs in order to expand their technical skill sets. The
Company carefully monitors consultants that are not utilized. While the Company has established
guidelines for the amount of non-billing time that it allows before a consultant is terminated,
actual terminations vary as circumstances warrant.
Historically, the Company has generated revenues by selling software licenses. In addition to
initial software license fees, the Company has historically derived revenues from the annual
renewal of software licenses. Because future obligations associated with such revenue are
insignificant, revenues from the sale of software licenses are recognized upon delivery of the
software to a customer. The Company views software sales as ancillary to its core consulting
services business. Revenue generated from software sales have varied from period to period.
On March 15, 2010, Cogito notified the Company of Cogitos intent to terminate its exclusive
perpetual distribution agreement with the Company effective thirty days from the date of the
notice. The Company disputes that there are any valid grounds for termination of the Cogito
agreement and communicated its position to Cogito after receiving the notice of termination.
During the notice of termination period and for some time beyond, the Company and Cogito attempted
to reach a mutually agreeable settlement.
On
or about July 23, 2010, the Company became aware that Cogito initiated an action against the Company in the Supreme Court
of the State of New York (New York County) assigned index no. 651072/2010 for claims for $282,000 for royalties allegedly owed to Cogito by the
Company and for damages for alleged lost business and loss of goodwill and clients for amounts of
over $2.0 million. On July 27, 2010 the Court granted Cogito a temporary restraining order that is
expected to remain in force through the balance of August 2010
and ordered service of a copy of this order, together with the papers
upon which it is granted by personal service upon the Company on or
before July 27, 2010. This was not done. Additionally, the Company
became aware that on or about July 27, 2010, Cogito
filed an Amended Complaint wherein Cogito amended its allegations of claimed compensatory damages
for breaches of the agreement and lost business, goodwill and clients to over $4.7 million.
Although
the Company became aware of the action, the Company is disputing the purported
service of process in relation thereto. The Company strongly disputes the claims and intends to
vigorously defend the action and assert appropriate counter claims. A hearing is presently set for
August 31, 2010 concerning Cogitos request for injunctive relief and other relief from the Court.
To date discovery has not commenced and no trial date is set. As a result of Cogitos actions,
the Companys software product revenues have been and will be significantly reduced.
Critical Accounting Policies
The methods, estimates and judgments the Company uses in applying its most critical accounting
polices have a significant impact on the results the Company reports in its consolidated financial
statements. The Company evaluates its estimates and judgments on an on-going basis. Estimates are
based on historical experience and on assumptions that the Company believes to be reasonable under
the circumstances. The Companys experience and assumptions form the basis for its judgments about
the carrying value of assets and liabilities that are not readily apparent from other sources.
Actual results may vary from what is anticipated and different assumptions or estimates about the
future could change reported results. The Company believes the following accounting policies are
the most critical to it, in that they are important to the portrayal of its financial statements
and they require the most difficult, subjective or complex judgments in the preparation of the
consolidated financial statements.
12
Revenue Recognition
Consulting revenues are recognized as services are provided. The Company primarily provides
consulting services under time and material contracts, whereby revenue is recognized as hours and
costs are incurred. Customers for consulting revenues are billed on a weekly, semi-monthly or
monthly basis. Revenues from fixed fee contracts are recorded when work is performed on the
basis of the proportionate performance method, which is based on costs incurred to date relative to
total estimated costs. Any anticipated contract losses are estimated and accrued at the time they
become known and estimable. Unbilled accounts receivables represent amounts recognized as revenue
based on services performed in advance of customer billings. Revenue from sales of software
licenses is recognized upon delivery of the software to a customer because future obligations
associated with such revenue are insignificant.
Allowance for Doubtful Accounts
The Company monitors its accounts receivable balances on a monthly basis to ensure that they
are collectible. On a quarterly basis, the Company uses its historical experience to accurately
determine its accounts receivable reserve. The Companys allowance for doubtful accounts is an
estimate based on specifically identified accounts as well as general reserves. The Company
evaluates specific accounts where it has information that the customer may have an inability to
meet its financial obligations. In these cases, management uses its judgment, based on the best
available facts and circumstances, and records a specific reserve for that customer, against
amounts due, to reduce the receivable to the amount that is expected to be collected. These
specific reserves are reevaluated and adjusted as additional information is received that impacts
the amount reserved. The Company also establishes a general reserve for all customers based on a
range of percentages applied to aging categories. These percentages are based on historical
collection and write-off experience. If circumstances change, the Companys estimate of the
recoverability of amounts due the Company could be reduced or increased by a material amount. Such
a change in estimated recoverability would be accounted for in the period in which the facts that
give rise to the change become known.
Valuation of Deferred Tax Assets
Deferred tax assets are reduced by a valuation allowance when, in the opinion of the Company,
it is more likely than not that some portion or all of the deferred tax assets will not be
realized. The Company assesses the recoverability of deferred tax assets at least annually based
upon the Companys ability to generate sufficient future taxable income and the availability of
effective tax planning strategies.
Stock Based Compensation
The Company uses the modified prospective application method as specified by the FASB whereby
compensation cost is recognized over the remaining service period based on the grant-date fair
value of those awards as calculated for pro forma disclosures as originally issued.
Results of Operations
The following table sets forth the percentage of revenues of certain items included in the
Companys Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of revenues
|
|
|
77.3
|
%
|
|
|
74.7
|
%
|
|
|
77.9
|
%
|
|
|
74.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
22.7
|
%
|
|
|
25.3
|
%
|
|
|
22.1
|
%
|
|
|
25.6
|
%
|
Operating expenses
|
|
|
35.0
|
%
|
|
|
41.5
|
%
|
|
|
36.4
|
%
|
|
|
38.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(12.3
|
)%
|
|
|
(16.1
|
)%
|
|
|
(14.3
|
)%
|
|
|
(12.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(12.3
|
)%
|
|
|
(16.3
|
)%
|
|
|
(14.4
|
)%
|
|
|
(12.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
Comparison of The Three Months Ended June 30, 2010 to The Three Months Ended June 30, 2009
Revenues.
Revenues for the three months ended June 30, 2010 were $3.0 million
compared to $3.6 million for the three months ended June 30, 2009. The decrease is primarily
attributable to a decline in consulting revenue due to difficulty in replacing completed projects
and a pushback of new assignments from existing clients primarily as a result of the current
economic condition in the financial markets and the economy more broadly. In addition, the Company
has experienced a drop off in business from its higher margin project service line as well as a
drop off in software revenue and, as a result, the Company has shifted its emphasis on expanding
its lower margin staffing service line consisting of time and material engagements.
Gross Profit
. The resulting gross profit for the three months ended June 30, 2010 was
$654,000, a decrease of $258,000 or 28.3% from the 2009 comparable period amount of $912,000. As a
percentage of total revenues, gross margin for the three months ended June 30, 2010 was 22.1%
compared to 25.6% for the three months ended June 30, 2009. Gross margin has decreased primarily
as a result of reductions in higher margin project revenue and software revenue.
Operating Expenses.
Operating expenses are comprised of Selling, General and Administrative
(SG&A) expenses, and depreciation and amortization. SG&A expenses for the three months ended
June 30, 2010 were $1.1 million compared to the 2009 comparable period level of $1.3 million. The
decrease in SG&A expenses is associated with various cost reduction initiatives including, but not
limited to, a reduction in employee headcount and pay rates. Depreciation and amortization
expenses decreased $21,000 from $35,000 for the three months ended June 30, 2009 to $14,000 for the
three months ended June 30, 2010.
Taxes.
Taxes for the three months ended June 30, 2010 were $5,000 compared to $4,000 for the
three months ended June 30, 2009. For the three months ended June 30, 2009, the Company recorded a
tax provision of $5,000 for minimum state taxes which was partially offset by ($1,000) related to
provision to return adjustments from the filing of state and federal tax returns compared to a tax
provision of $5,000 solely for minimum state taxes for the three months ended June 30, 2010.
Net Loss.
As a result of the above, the Company had a net loss of ($427,000) or ($0.14) per
basic and diluted share for the three months ended June 30, 2010 compared to a net loss of
($455,000) or ($0.19) per basic and diluted share for the three months ended June 30, 2009.
Comparison of The Six Months Ended June 30, 2010 to The Six Months Ended June 30, 2009
Revenues.
Revenues for the six months ended June 30, 2010 were $6.4 million compared
to $7.4 million for the six months ended June 30, 2009. The decrease is primarily attributable to
a decline in consulting revenue due to difficulty in replacing completed projects and a pushback of
new assignments from existing clients primarily as a result of the unprecedented crisis in the
financial markets and the economy more broadly. In addition, the Company has experienced a drop
off in business from its higher margin project service line as well as a drop off in software
revenue and, as a result, the Company has shifted its emphasis on expanding its lower margin
staffing service line consisting of time and material engagements.
Gross Profit.
The resulting gross profit for the six months ended June 30, 2010 was $1.5
million, a decrease of $411,000 or 22% from the 2009 comparable period amount of $1.9 million. As
a percentage of total revenues, gross margin for the six months ended June 30, 2010 was 22.7%
compared to 25.3% for the six months ended June 30, 2009. Gross margin has decreased primarily as
a result of reductions in higher margin project revenue and software revenue.
Operating Expenses.
Operating expenses are comprised of Selling, General and Administrative
(SG&A) expenses, and depreciation and amortization. SG&A expenses for the six months ended June
30, 2010 were $2.2 million compared to the 2009 comparable period level of $3.0 million. The
decrease in SG&A expenses is associated with various cost reduction initiatives including, but not
limited to, a reduction in employee headcount and pay rates. Depreciation and amortization
expenses decreased $39,000 from $70,000 for the six months ended June 30, 2009 to $31,000 for the
six months ended June 30, 2010.
Taxes.
Taxes for the six months ended June 30, 2010 were $9,000 compared to $11,000 for the
six months ended June 30, 2009. For the six months ended June 30, 2009, the Company recorded a tax
provision of $9,000 for minimum state taxes which was increased by $2,000 related to provision to
return adjustments from the filing of state and federal tax returns compared to a tax provision of
$9,000 solely for minimum state taxes for the six months ended June 30, 2010.
Net Loss.
As a result of the above, the Company had a net loss of ($790,000) or ($0.26) per
basic and diluted share for the six months ended June 30, 2010 compared to a net loss of ($1.2)
million or ($0.50) per basic and diluted share for the six months ended June 30, 2009.
14
Liquidity and Capital Resources
The Company had an operating net loss of ($785,000) and a net loss of ($790,000) for the six
months ended June 30, 2010. During the six months ended June 30, 2009, the Company had an
operating and net loss of ($1.2) million, both of which included a charge of $167,000 to record
severance and tax expense associated with the termination of the Companys former Chief Operating
Officer. The Company believes that its business, operating results and financial condition have
been harmed by the recent economic crisis and ongoing economic uncertainty which continue to
adversely affect the IT spending of its clients. A significant portion of the Companys major
customers are in the financial services industry and have come under considerable pressure as a
result of the unprecedented economic conditions in the financial markets. While the Company has
not lost any major clients, it has experienced a pushback of assignments from existing clients and
difficulty replacing high-margin completed projects, both of which have impacted revenue growth
through the second quarter of 2010. While the Company continues to focus on revenue growth and
cost reductions, including but not limited to eliminating non-billing resources, outsourcing and
off-shoring solutions, in an attempt to improve its financial condition, there can be no assurance
that the Company will be profitable in future periods.
The Companys cash balances were approximately $1.1 million at June 30, 2010 and $1.4 million
at December 31, 2009. Net cash used in operating activities for the six months ended June 30, 2010
was approximately ($302,000) compared to net cash provided by operating activities of approximately
$221,000 for the six months ended June 30, 2009. The decrease in net cash provided is primarily a
result of a decrease in working capital incurred for the six months ended June 30, 2010.
The Companys accounts receivable, less allowance for doubtful accounts, at June 30, 2010 and
at December 31, 2009 were approximately $2.3 million and $2.7 million, respectively, representing
72 and 60 days of sales outstanding (DSO), respectively. The Company believes the increase in
DSO is primarily caused by an increase in terms with one of its major clients. The accounts
receivable at June 30, 2010 and December 31, 2009 included $85,000 and $184,000 of unbilled
revenue, respectively. The Company has provided an allowance for doubtful accounts at the end of
each of the periods presented. After giving effect to this allowance, the Company does not
anticipate any difficulty in collecting amounts due.
For the six month period ended June 30, 2010, there was no cash provided by investing
activities. For the six month period ended June 30, 2009 there was approximately $12,000 of net
cash provided by investing activities relating to the sale of a Company automobile.
For the six month period ended June 30, 2010, there was no cash provided by or used in
financing activities. For the six month period ended June 30, 2009, net cash used in financing
activities was $5,000 and related solely to the extension of the Companys line of credit with
Keltic Financial Partners, LP.
The Company has entered into a Loan and Security Agreement (the Loan Agreement) with Keltic
Financial Partners, LP II (Keltic). The Loan Agreement, which was set to expire December 31,
2009, has been extended through December 31, 2010 with no material changes in terms and conditions.
Under the Loan Agreement, the Company has a line of credit up to $1.0 million based on the
Companys eligible accounts receivable balances at an interest rate based on the higher of prime
rate plus 2.75%, 90 day LIBOR rate plus 5.25% or 7%. Net availability at June 30, 2010 was
approximately $1.0 million. The Loan Agreement has certain financial covenants that shall apply
only if the Company has any outstanding obligations to Keltic including borrowing under the
facility. The Company had no outstanding balance at June 30, 2010, or at December 31, 2009, under
the Loan Agreement.
In managements opinion, cash flows from operations and borrowing capacity (assuming obtaining
a commercially reasonable consent if required) combined with cash on hand (including the recent
cash infusion of $2 million on August 6, 2010) will provide adequate flexibility for funding the
Companys working capital obligations for the next twelve months.
For the six months ended June 30 2010, there were no shares of common stock issued pursuant to
the exercise of options issued under the Companys stock option plan.
Off Balance Sheet Arrangements
As of June 30, 2010, the Company does not have any Off Balance Sheet Arrangements.
15
Contractual Obligations and Commitments
The Company has the following commitments as of June 30, 2010: two operating lease
obligations, one for its corporate
headquarters located in New York and another for its branch office in New Jersey.
The Company has decided not to renew or extend its lease for the New Jersey facility which
expires August 31, 2010.
The Companys commitments at June 30, 2010 are reflected and further detailed in the
Contractual Obligation table located in Part I, Item 1, Note 8 of this Form 10-Q.
Inflation
The Company has not suffered material adverse affects from inflation in the past. However, a
substantial increase in the inflation rate in the future may adversely affect customers purchasing
decisions, may increase the costs of borrowing or may have an adverse impact on the Companys
margins and overall cost structure.
Recent Accounting Pronouncements
None.
|
|
|
Item 3.
|
|
Quantitative and Qualitative Disclosures about Market Risk
|
The Company has not entered into market risk sensitive transactions required to be disclosed
under this item.
|
|
|
Item 4.
|
|
Controls and Procedures
|
Evaluation of disclosure controls and procedures.
Divya Ramachandran, the Companys
Principal Executive Officer and Salvatore M. Quadrino, the Companys Principal Financial Officer,
after evaluating the effectiveness of the Companys disclosure controls and procedures (as
defined in the Securities and Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of
the period covered by this report, have concluded that its disclosure controls and procedures are
effective and designed to ensure that material information relating to the Company and its
consolidated subsidiaries would be made known to management by others within these entities.
Changes in internal control.
There were no changes in the Companys internal control
over financial reporting in connection with the evaluation that occurred during its second fiscal
quarter of 2010 that has materially affected or is reasonably likely to materially affect its
internal control over financial reporting.
Part II. Other Information
|
|
|
Item 1.
|
|
Legal Proceedings
|
On March 15, 2010, Cogito notified the Company of Cogitos intent to terminate its exclusive
perpetual distribution agreement with the Company effective thirty days from the date of the
notice. The Company disputes that there are any valid grounds for termination of the Cogito
agreement and communicated its position to Cogito after receiving the notice of termination.
During the notice of termination period and for some time beyond, the Company and Cogito attempted
to reach a mutually agreeable settlement.
On
or about July 23, 2010, the Company became aware that Cogito initiated an action against the Company in the Supreme Court
of the State of New York (New York County) assigned index no. 651072/2010 for $282,000 for royalties allegedly owed to Cogito by the
Company and for damages for alleged lost business and loss of goodwill and clients for amounts of
over $2.0 million. On July 27, 2010 the Court granted Cogito a temporary restraining order that is
expected to remain in force through the balance of August 2010 and ordered service of a copy of this
order, together with the papers upon which it is granted by personal
service upon the Company on or before July 27, 2010. This was
not done. Additionally, HMNA became aware that on or about July 27, 2010, Cogito
filed an Amended Complaint wherein Cogito amended its allegations of claimed compensatory damages
for breaches of the agreement and lost business, goodwill and clients to over $4.7 million.
16
Although
the Company became aware of the action, the Company is disputing the purported
service of process in relation thereto. The Company strongly disputes the claims and intends to
vigorously defend the action and assert appropriate counter
claims. A hearing is presently set for August 31, 2010 concerning Cogitos request for
injunctive relief and other relief from the Court. To date discovery has not commenced and no
trial date is set.
The Companys 2009 Annual Report on Form 10-K includes a detailed discussion of risk factors.
Additional risks or uncertainties not currently known to the Company or that the Company deems to
be immaterial also may materially adversely affect the Companys business, financial condition
and/or operating results. The information presented below updates and should be read in
conjunction with the risk factors and information disclosed in the Companys Form 10-K for the year
ended December 31, 2009.
Going Concern and Capital Requirements
The Companys financial statements have been presented on the basis that it is a going
concern, which contemplates the realization of assets and satisfaction of liabilities in the normal
course of business. At June 30, 2010, the Company had approximately $1.1 million of cash and cash
equivalents on hand as compared to $1.4 million at December 31, 2009. The Company has a line of
credit up to $1.0 million with Keltic based on the Companys eligible accounts receivable balances
which is subject to certain financial covenants that shall apply only if the Company has any
outstanding obligations to Keltic including borrowing under the facility. The combination of an
outstanding balance at the end of any fiscal quarter and earnings before taxes, depreciation and
amortization of less than $25,000 for that quarter will cause a default under the Loan Agreement
and may require the Company to obtain a waiver from Keltic or limit the Companys access to the
line of credit. The Keltic line of credit, which was set to expire on December 31, 2009, has been
extended through December 31, 2010 with no material changes in terms and conditions. For the
twelve month period ended December 31, 2009 the Company reported a net loss of ($2.1) million. For
the six month period ended June 30, 2010, the Company reported a net loss of ($790,000). Beyond
December 31, 2010, there is no guarantee that the Company will be able to renew or replace its
current financing upon expiration on commercially reasonable terms or at all. The ability of the
Company to continue as a going concern is dependent on the Company achieving profitable operations
and or obtaining additional sources of financing in the future.
The Company may require additional financing in the future to continue to implement its
product and services development, marketing and other corporate programs. If the Company is able
to obtain additional debt financing, the terms of such financing could contain restrictive
covenants that might negatively affect its shares of common stock, such as limitations on payments
of dividends and could reduce earnings due to interest expenses. Any further issuance of equity
securities could have a dilutive effect on the holders of the Companys shares of common stock.
The Companys business, operating results and financial condition (including, potentially, its
ability to continue as a going concern) may be materially harmed if the Company cannot obtain
additional financing.
NASDAQ Listing
On May 17, 2010, the Company received a letter from NASDAQ regarding compliance with NASDAQ
Listing Rule 5550(b)(1) which requires a company to maintain a minimum of $2,500,000 in
stockholders equity for continued listing. The Company received communication from NASDAQ that
its stockholders equity of $2,251,670 as of March 31, 2010, fell short of the minimum required
stockholders equity of $2,500,000. Additionally, the Company did not meet the alternatives of
market value of listed securities or net income from continuing operations. NASDAQ communicated to
the Company that it had 45 calendar days from May 17, 2010 to submit a plan to regain compliance
with the Rule. On August 4, 2010, the Company entered into and consummated a private placement
Securities Purchase Agreement with HM Inc, a Delaware corporation and wholly-owned subsidiary of
Helios and Matheson Parent, pursuant to which HM Inc. purchased 2,739,726 shares of the Companys
common stock at a price of $0.73 per share, equal to the closing bid price of the Companys common
stock on August 3, 2010, for a total investment of $2,000,000. The investment by HM Inc. was part
of a plan submitted by the Company and accepted by NASDAQ to regain compliance with NASDAQs
minimum stockholders equity requirement. As a result of the private placement, which closed on
August 5, 2010, the Company believes that it has regained compliance with NASDAQ Listing Rule
5550(b)(1).
On July 20, 2010, the Company received a letter from NASDAQ regarding compliance with NASDAQ
Listing Rule 5550(a)(5) which requires a minimum market value of publicly held shares of
$1,000,000. The Company received communication from NASDAQ that its market value of publicly held
shares fell short of $1,000,000 for the last 30 consecutive business days. Pursuant to the Listing
Rules, NASDAQ has communicated to the Company that it has 180 calendar days from July 20, 2010 to
regain compliance. In order to regain compliance, the market value of publicly held shares must
close at $1,000,000 or more for a minimum of 10 consecutive business days during the 180 day grace
period.
17
On July 23, 2010, the Company received a second letter from NASDAQ regarding compliance with
NASDAQ Listing Rule 5550(a)(2) which requires a minimum bid price of $1.00 per share. The Company
received communication from NASDAQ that the
bid price of its listed securities closed below $1.00 for the last 30 consecutive business days.
Pursuant to the Listing Rules, NASDAQ has communicated to the Company that it has a grace period of
180 calendar days from July 23, 2010, to regain compliance with the $1.00 minimum bid price
requirement. In order to regain compliance, the bid price must close at $1.00 or more for a minimum
of 10 consecutive business days during the 180 day grace period.
The NASDAQ Capital Market CMs continued listing requirements include requirements both that a
company maintain a minimum bid price of $1 and that the market value of its publicly held shares
(the market value of its shares not held by officers, directors or beneficial owners of more than
10% of the companys total shares outstanding) be at least $1,000,000. At the close of business on
August 10, 2010, the bid price for a share of the Companys stock was $0.85, and the Company
believes the value of its publicly held shares was approximately $801,970 based upon the public
filings of our officers, directors and beneficial owners.
If the Companys common stock is delisted from The NASDAQ Capital Market CM, the market
liquidity of the Companys common stock will likely be significantly limited, which would reduce
stockholders ability to sell the Companys common stock. Additionally any such delisting could
harm the Companys ability to raise capital through alternative financing sources on acceptable
terms, if at all, and may result in the loss of confidence in the Companys financial stability by
suppliers, customers and employees. In addition, a delisting would likely increase the price
volatility of the Companys shares of common stock and have a material adverse impact on the price
of the Companys shares of common stock.
Cogito Litigation
On March 15, 2010, Cogito notified the Company of Cogitos intent to terminate its exclusive
perpetual distribution agreement with the Company effective thirty days from the date of the
notice. On or about July 23, 2010, the Company became aware that Cogito initiated an action against the Company in the Supreme
Court of the State of New York (New York County) assigned index no. 651072/2010 for $282,000 for royalties allegedly owed
to Cogito by the Company and for damages for alleged lost business and loss of goodwill and clients
for amounts of over $2.0 million. On July 27, 2010 the Court granted Cogito a temporary
restraining order that is expected to remain in force through the balance of August 2010. On or
about July 27, 2010, the Company became aware that Cogito filed an Amended Complaint wherein Cogito amended its allegations of
claimed compensatory damages for breaches of the agreement and lost business, goodwill and clients
to over $4.7 million. As a result of Cogitos actions, the Companys software product revenues
have been and will be significantly reduced.
|
|
|
Item 2.
|
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
None.
|
|
|
Item 3.
|
|
Defaults Upon Senior Securities
|
None.
|
|
|
Item 4.
|
|
[Removed and Reserved]
|
None.
|
|
|
Item 5.
|
|
Other Information
|
None.
18
|
|
|
3.1
|
|
Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1
to the Form 10-K, as previously filed with the SEC on March 31, 2010.
|
|
|
|
3.2
|
|
Bylaws of Helios & Matheson North America Inc., incorporated by reference to Exhibit 3.2
to the Form 10-K, as previously filed with the SEC on March 31, 2010.
|
|
|
|
10.1
|
|
Securities Purchase Agreement dated August 4, 2010.
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of
2002.
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of
2002.
|
|
|
|
32.1
|
|
Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.2
|
|
Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
HELIOS & MATHESON NORTH AMERICA INC.
|
|
|
By:
|
/s/ Divya Ramachandran
|
|
Date:
August 16, 2010
|
|
Divya Ramachandran
|
|
|
|
Chief Executive Officer and President
|
|
|
|
|
|
|
By:
|
/s/ Salvatore M. Quadrino
|
|
Date:
August 16, 2010
|
|
Salvatore M. Quadrino
|
|
|
|
Chief Financial Officer
|
|
|
20