UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ---- Exchange Act of 1934
For the quarterly period ended March 31, 2005 or
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 0-10541
COMTEX NEWS NETWORK, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3055012
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 N. Washington Street
Suite 301
Alexandria, Virginia 22314
(Address of principal executive offices)
(703) 820-2000
Registrant's Telephone number, including area code
-------------------------------------------------------------
Former address:
4900 Seminary Road, Suite 800
Alexandria, Virginia 22311
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 Rule 12b-2 of the Exchange Act). Yes No X
--- ---
As of May 13, 2005 13,600,247 shares of the Common Stock of the registrant, par
value $0.01 per share, were outstanding.
COMTEX NEWS NETWORK, INC.
TABLE OF CONTENTS
Part I Financial Information: Page No.
--------
Item 1. Financial Statements
Balance Sheets 2
as of March 31, 2005 (unaudited)
and June 30, 2004
Statements of Operations 3
for the Three and Nine Months Ended
March 31, 2005 and 2004 (unaudited)
Statements of Cash Flows 4
for the Nine Months Ended
March 31, 2005 and 2004 (unaudited)
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis 8
of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk 14
Item 4. Controls and Procedures 14
Part II Other Information:
Item 1. Legal Proceedings 14
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security
Holders 15
Item 5. Other Information 15
Item 6. Exhibits 15
SIGNATURES 16
1
Comtex News Network, Inc.
Balance Sheets
March 31, June 30,
2005 2004
------------------ ------------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash $ 920,615 $ 461,419
Accounts Receivable, Net of Allowance of approximately $194,000 and
$156,000 at March 31, 2005 and June 30, 2004, respectively 785,636 807,079
Prepaid Expenses and Other Current Assets 58,411 38,397
------------------ ------------------
TOTAL CURRENT ASSETS 1,764,662 1,306,895
PROPERTY AND EQUIPMENT, NET 510,466 975,620
RESTRICTED CASH - 360,000
DEPOSITS AND OTHER ASSETS 52,357 28,617
------------------ ------------------
TOTAL ASSETS $ 2,327,485 $ 2,671,132
================== ==================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts Payable and Other Accrued Expenses $ 1,229,144 $ 1,260,669
Accrued Payroll Expense 143,442 142,695
Amount due under Bank Financing Agreement 70,926 201,911
Deferred Revenue 14,032 100,297
Note Payable - Other, Current - 60,000
Capital Lease Obligations, Current 17,469 36,599
------------------ ------------------
TOTAL CURRENT LIABILITIES 1,475,013 1,802,171
LONG-TERM LIABILITIES:
Capital Lease Obligations, Long Term 11,202 23,355
Long-Term Note Payable - Affiliate 856,954 856,954
Long-Term Note Payable - Other - 300,000
Deferred Rent 8,958 11,290
------------------ ------------------
TOTAL LONG-TERM LIABILITIES 877,114 1,191,599
------------------ ------------------
TOTAL LIABILITIES 2,352,127 2,993,770
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Common Stock, $0.01 Par Value - 25,000,000 Shares Authorized; Shares
issued and outstanding: 13,600,247 and 13,598,836 at March 31, 2005
and June 30, 2004, respectively 136,002 135,988
Additional Paid-In Capital 12,311,898 12,311,672
Accumulated Deficit (12,472,542) (12,770,298)
------------------ ------------------
Total Stockholders' Deficiency (24,642) (322,638)
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 2,327,485 $ 2,671,132
================== ==================
The accompanying "Notes to Financial Statements" are an
integral part of these financial statements
2
Comtex News Network, Inc.
Statements of Operations
(Unaudited)
Three months ended Nine months ended
March 31, March 31,
---------------------------- ----------------------------
2005 2004 2005 2004
---------------------------- ----------------------------
Revenues $ 1,927,293 $ 1,962,035 $ 6,000,220 $ 6,148,975
Cost of Revenues
(including depreciation and amortization expense
of approximately $70,000, $99,000, $269,000 and
$298,000, respectively) 917,585 847,462 2,864,383 2,694,243
---------------------------- ----------------------------
Gross Profit 1,009,708 1,114,573 3,135,837 3,454,732
Operating Expenses
Technical Operations & Support 367,298 499,904 1,036,974 1,657,778
Sales & Marketing 220,853 173,830 535,724 418,402
General & Administrative 235,754 338,553 927,583 1,413,711
Settlement with Former Landlord - 15,000 - 478,447
Loss on Disposal of Assets Related to Lease Termination - - - 300,410
Stock-based Compensation - 16,000 - 67,864
Depreciation & Amortization 77,173 97,155 236,013 380,897
---------------------------- ----------------------------
Total Operating Expenses 901,078 1,140,442 2,736,294 4,717,509
Operating Income / (Loss) 108,630 (25,869) 399,543 (1,262,777)
Other income/(expense)
Interest Expense (26,885) (34,288) (103,343) (84,792)
Interest Income/ (Other Expense) 286 (7,504) 1,556 (7,042)
---------------------------- ----------------------------
Other Expense, net (26,599) (41,792) (101,787) (91,834)
Income (Loss ) Before Income Taxes 82,031 (67,661) 297,756 (1,354,611)
Income Taxes - - - 425
---------------------------- ----------------------------
Net Income (Loss) $ 82,031 $ (67,661) $ 297,756 $(1,355,036)
============================ ============================
Basic Earnings (Loss) Per Common Share $ 0.01 $ (0.00) $ 0.02 $ (0.10)
============================ ============================
Weighted Average Number of Common Share 13,600,247 13,588,041 13,599,777 13,559,617
============================ ============================
Diluted Earnings (Loss ) Per Common Share $ 0.01 $ (0.00) $ 0.02 $ (0.10)
============================ ============================
Weighted Average Number of Shares Assuming Dilution 14,745,616 13,588,041 14,735,605 13,559,617
============================ ============================
The accompanying "Notes to Financial Statements" are an
integral part of these financial statements
3
Comtex News Network, Inc.
Statements of Cash Flows
(Unaudited)
Nine Months Ended
March 31,
-----------------------------
2005 2004
-------------- --------------
Cash Flows from Operating Activities:
Net Income (Loss) $ 297,756 $(1,355,036)
Adjustments to reconcile net income (Loss) to net cash
provided by operating activities:
Depreciation and Amortization 505,038 679,085
Bad Debt Expense 15,000 (25,066)
Stock Based Compensation - 67,864
Loss on Disposal of Assets - 307,914
Settlement with Former Landlord - 360,000
Changes in Assets and Liabilities:
Accounts Receivable 6,443 111,381
Prepaid Expenses and Other Current Assets (20,014) 17,080
Deposits and Other Assets (23,740) 46,371
Accounts Payable and Accrued Expenses (31,525) 266,902
Accrued Payroll Expense 747 (247,057)
Deferred Revenue (86,265) (46,995)
Deferred Rent (2,332) (65,511)
------------- --------------
Net Cash provided by Operating Activities 661,108 116,932
Cash Flows from Investing Activities:
Proceeds from Sale of Assets - 53,580
Decrease / (Increase) in Restricted Cash 360,000 (360,000)
Purchases of Property and Equipment (39,884) (82,599)
------------- --------------
Net Cash Provided by / (used in) Investing Activities 320,116 (389,019)
Cash Flows from Financing Activities:
Repayments - Capital Lease Obligations (31,283) (46,976)
Repayment of note payable (360,000) -
Net Proceeds from (Repayments on) Bank Financing Agreement (130,985) 164,373
Issuance of Stock under Employee Stock Purchase Plan 240 829
Proceeds from Exercise of Stock Options - 33,773
-------------- --------------
Net Cash provided by/(used in) Financing Activities: (522,028) 151,999
Net Increase/(Decrease) in Cash 459,196 (120,088)
Cash at Beginning of Period 461,419 464,981
-------------- --------------
Cash at End of Period $ 920,615 $ 344,893
============== ==============
The accompanying "Notes to Financial Statements" are an
integral part of these financial statements
4
COMTEX NEWS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2005
1. Basis of Presentation
---------------------
The accompanying interim financial statements of Comtex News Network,
Inc. (the "Company" or "Comtex") are unaudited, but in the opinion of management
reflect all adjustments (consisting only of normal recurring accruals) necessary
for a fair presentation of results for such periods. In November of 2004, the
company sold its inactive wholly owned subsidiary nFactory Comtex, S.L. for an
immaterial amount. The results of operations for any interim period are not
necessarily indicative of results for the full year. The balance sheet at June
30, 2004 has been derived from the audited financial statements at that date but
does not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 2004 ("2004 Form 10-K"), filed
with the Securities and Exchange Commission on September 28, 2004, as amended
and filed with the Securities and Exchange Commission on October 28, 2004.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS 123, the Company's net income
(loss) and net income (loss) per share would have been adjusted to the pro
forma amounts indicated below:
Three months ended Nine months ended
March 31, March 31,
---------------------------- -----------------------------
2005 2004 2005 2004
---------------------------- -----------------------------
Net Income (Loss), as reported $ 82,031 $ (67,661) $ 297,756 $(1,355,036)
Deduct: Total stock-based employee compensation
expense determined under fair-value-based method for
all awards, net of related tax effects 38,810 86,152 121,729 292,072
------------------------------------------------------------
Pro Forma Net Income (Loss) 43,221 (153,813) 176,027 (1,647,108)
============================================================
Basic Income (Loss) Per Share, as reported $ 0.01 $ (0.00) $ 0.02 $ (0.10)
============================ =============================
Diluted Income (Loss) Per Share, as reported $ 0.01 $ (0.00) $ 0.02 $ (0.10)
============================ =============================
Basic Income (Loss) Per Share, pro forma $ 0.00 $ (0.01) $ 0.01 $ (0.12)
============================ =============================
Diluted Income (Loss) Per Share, pro forma $ 0.00 $ (0.01) $ 0.01 $ (0.12)
============================ =============================
The per share weighted-average fair value of stock options granted for the three
and nine month periods ended March 31, 2005 and 2004 was $0.18 and $0.19, and
$0.17 and $0.16 respectively, on the grant date with the following weighted
average assumptions:
Three months ended Nine months ended
March 31, March 31,
---------------------------- -----------------------------
2005 2004 2005 2004
---------------------------- -----------------------------
Expected dividend yield 0 0% 0 0%
Risk-free interest rate 4.0% 3.80% - 4.36% 4.00% - 4.48% 3.56% - 4.50%
Expected life (in years) 10 10 10 5
============================ =============================
Volatility 1.5 1.50 1.5 1.10 - 1.23
============================ =============================
5
The Company accounts for non-employee stock-based awards in which goods or
services are the consideration received for the equity instruments issued based
on the fair value of the equity instruments issued in accordance with the EITF
96-18, Accounting For Equity Instruments That Are Issued To Other Than Employees
For Acquiring, or in Conjunction With Selling Goods or Services.
Income (loss) per share is presented in accordance with the provisions of SFAS
No. 128, "Earnings Per Share" ("EPS"). Basic EPS excludes dilution for
potentially dilutive securities and is computed by dividing income (losses)
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock and resulted in the issuance of common
stock. Diluted net loss per share is equal to basic net loss per share since all
potentially dilutive securities are anti-dilutive for each of the periods
presented with a net loss. Diluted net income per common share for the three and
nine month periods ended March 31, 2005 do not include the effects of options to
purchase approximately .3 million and .8 million as the inclusion of these
options would have been anti-dilutive due to the options' exercise prices being
greater than the average market price of the Company's common shares during the
respective periods. Diluted net (loss) per common share for the three and nine
month periods ended March 31, 2004 do not include the effects of options to
purchase approximately 2.5 million shares of common stock, and approximately 1.1
million shares of common stock related to the note payable to AMASYS, on an "as
if" converted basis, since their inclusion would have an antidilutive effect.
2. Income Taxes
------------
There is no provision for income taxes for the nine months ended March 31, 2005
due to the utilization of federal and state net operating loss carryforwards.
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax bases of assets and liabilities using the enacted tax rates in effect
for the year in which the differences are expected to reverse. Deferred tax
assets are reduced by a valuation allowance when the Company cannot make the
determination that it is more likely than not that some portion or all of the
related tax asset will be realized.
3. Commitments and Contingencies
-----------------------------
In July 2003, the Company commenced negotiations with its landlord regarding the
proposed termination of the lease obligation at 4900 Seminary Road. On December
9, 2003, the Company and Plaza I-A executed a settlement agreement terminating
the subject lease and the above lawsuit was dismissed on or about December 17,
2003. The total remaining liability on the lease was approximately $2.6 million
prior to the settlement agreement. Pursuant to the terms of the settlement
agreement, the Company paid rent and legal fees of approximately $147,000 and
entered into a four-year note payable to Plaza I-A for $360,000, which was
6
secured by a $360,000 certificate-of-deposit-backed standby letter of credit
(Note 4). In January 2005, the note was repaid and the
certificate-of-deposit-backed standby letter of credit was released.
On April 15, 2004, the Company's former Chairman/CEO and President, who both
resigned on February 5, 2004, filed a demand for arbitration against the Company
related to the terms of their employment agreements. The demand alleged a breach
of the employment agreements and requested payment of approximately $129,000 to
the former employees. The company denies the allegations and intends to
vigorously defend this action. Based upon events to date in the arbitration, the
company has accrued $80,000 in expenses as of March 31, 2005.
The Company is also involved in routine legal proceedings occurring in the
ordinary course of business, which in the aggregate are believed by management
to be immaterial to our financial condition.
4. Notes Payable
-------------
In December 2003, in connection with the lease termination discussed above (see
"Commitments and Contingencies"), the Company executed a four-year note payable
in the amount of $360,000 to Plaza I-A, effective November 1, 2003, with
interest payable monthly at 4% per annum and principal payments of $10,000 per
month, beginning January 1, 2004. The note was secured by a letter of credit
provided by Silicon Valley Bank (the "Bank"). The letter of credit was secured
by the Company's $360,000 certificate of deposit held by the Bank. In January
2005, the note was repaid and the certificate-of-deposit-backed standby letter
of credit was released.
Also in December 2003, the Company entered into an Accounts Receivable Purchase
Agreement with the Bank (the "Financing Agreement"), which provides for a
revolving line of credit of up to $1 million collateralized by the Company's
accounts receivable. As of December 27, 2004, the Company entered into the
Second Amendment to the Accounts Receivable Purchase Agreement, dated as of
December 18, 2003, by and between the Bank and the Company. Under this Amended
Agreement, the applicable rates were lowered, certain covenants were amended and
the term was extended through the end of calendar 2005. At March 31, 2005,
$70,926 was due to the Bank related to advances under the Financing Agreement.
The company is required to maintain a $300,000 minimum balance of cash in the
bank at all times.
On December 9, 2003, the Company executed an amendment to the Amended,
Consolidated and Restated 10% Senior Subordinated Secured Note (the "Amended
Note"), payable to Amasys Corporation ("Amasys"), an affiliated company, (said
amendment the "Third Amendment") for the purpose of reducing the price at which
the Amended Note may be converted into common stock of the Company. Pursuant to
the Third Amendment, Amasys agreed to subordinate the Amended Note to both the
Company's note payable to its former landlord and to the Financing Agreement. In
consideration for these subordination agreements, the Company agreed to reduce
the conversion price stipulated in the Amended Note from the previously-stated
conversion price of $1.20 per share to $0.75 per share, and to increase this
conversion price by $0.05 every one hundred and eighty (180) days thereafter. At
the date of the transaction the conversion price of the Amended Note was in
excess of the stock price. As of March 31, 2005, the Amended Note had a
principal balance of $856,954.
7
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The following discussion of our financial condition and results of operations
should be read in conjunction with financial statements and the related notes
included elsewhere in this Form 10-Q and the consolidated financial statements
and related notes and Management's Discussion and Analysis of Financial
Condition and Results of Operations included in our annual report on Form 10-K
for the year ended June 30, 2004 filed with the Securities and Exchange
Commission on September 28, 2004, as amended and filed with the Securities and
Exchange Commission on October 28, 2004. Historical results and percentage
relationships among any amounts in the Consolidated Financial Statements are not
expected to be indicative of trends in operating results for any future period.
Forward-looking Statements
This Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These statements are subject to a variety of
risks and uncertainties, many of which are beyond our control, which could cause
actual results to differ materially from those contemplated in these
forward-looking statements. In particular, the risks and uncertainties include
those described in our annual report on Form 10-K, as amended, for the year
ended June 30, 2004 and in other periodic Securities and Exchange Commission
filings. These risks and uncertainties include, among other things, the
consolidation of the Internet news market; competition within our markets; the
financial stability of our customers; maintaining a secure and reliable
news-delivery network; maintaining relationships with key content providers;
attracting and retaining key personnel; the volatility of our Common Stock
price; successful marketing of our services to current and new customers; and
operating expense control.
Existing and prospective investors are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. We
undertake no obligation to update or revise the information contained in this
Form 10-Q, whether as a result of new information, future events or
circumstances or otherwise.
8
RESULTS OF OPERATIONS
- ---------------------
Comparison of the three months ended March 31, 2005, to the three months ended
- ------------------------------------------------------------------------------
March 31, 2004
- --------------
During the three months ended March 31, 2005, we reported an operating
profit of approximately $109,000, compared to an operating loss of approximately
$26,000 during the three months ended March 31, 2004. We reported a net profit
of approximately $82,000 for the three months ended March 31, 2005, compared to
a net loss of approximately $68,000 for the three months ended March 31, 2004.
As discussed below, the improvements in operating and net income are due
primarily to decreased operating expenses partially offset by decreases in
revenue and gross profit.
Revenues consist primarily of royalties and fees from the licensing of
content products to information distributors. During the three months ended
March 31, 2005, total revenues were approximately $1,927,000 or approximately
$35,000 (2%) less than the total revenues for the three months ended March 31,
2004. The decrease is due to loss of clients as a result of business
contractions, primarily in the Internet and personal investor markets and
partially offset by growth in database customer revenue.
Our cost of revenues consists primarily of content license fees and
royalties to information providers, depreciation and amortization expense on our
production software, and data communication costs for the delivery of our
products to customers. The cost of revenues for the three months ended March 31,
2005 was approximately $918,000 or approximately $70,000 (8%) more than the cost
of revenues for the three months ended March 31, 2004. The increase in cost is
due to an increase in content royalties of approximately $77,000, and increase
of approximately $32,000 in content fixed fees, which was offset by a decrease
of approximately $29,000 in depreciation and amortization expense and a decrease
of approximately $7,000 in data transmission costs.
Gross profit for the three months ended March 31, 2005 was
approximately $1,010,000 or approximately $105,000 (9%) less than the gross
profit for the same period in the prior year. The gross profit as a percentage
of revenue declined for the three months ended March 31, 2005 to approximately
52% from approximately 57% for the three months ended March 31, 2004. The
decline is due to a net increase in content royalty costs, which was offset by a
decrease in data transmission costs and a decrease in revenues, as discussed
above.
Total operating expenses for the three months ended March 31, 2005 were
approximately $901,000 representing an approximate $239,000 (21%) decrease in
operating expenses from the three months ended March 31, 2004. The decrease in
expenses resulted from a decrease in technical operations support expenses, a
decrease in general and administrative expenses, a decrease in depreciation and
amortization expenses and partially offset by an increase in sales and marketing
expenses.
Technical operations and support expenses during the three months ended
March 31, 2005 decreased approximately $133,000 (27%) from the three months
ended March 31, 2004. The decrease is primarily due to expenses incurred for
outsourced technology services for technical consultants (to provide management,
systems administration, and programming services and to move the production data
center to an offsite, hosted facility) during the three months ended March 31,
9
2004, and was partially offset by increases in personnel expenses in the current
period.
Sales and marketing expenses increased by approximately $47,000 (27%) for the
three months ended March 31, 2005 compared to the three months ended March 31,
2004. The increase is the result of increases in personnel and related expenses
over the same period in the prior year.
General and administrative expenses for the three months ended March
31, 2005 were approximately $103,000 (30%) less than these expenses during the
three months ended March 31, 2004. The decrease resulted primarily from a
decrease in general and administrative personnel and related expenses, as well
as a decrease in rent expense as a result of a reduction in leased office space
and a charge of $15,000 related to a settlement with the Company's former
landlord in the prior year for which there was no such expense in the current
year.
Stock-based compensation was approximately $16,000 during the three months ended
March 31, 2004 and was related to the vesting of warrants granted to a
consultant. There was no such activity during the same period in the current
year.
Depreciation and amortization expense for the three months ended March 31, 2005
was approximately $20,000 (21%) lower than the expense during the same period in
the prior year. The decrease was due primarily to the disposal of assets related
to the office move and the expenses associated with the move of our data center
to an offsite, hosted facility in December 2003.
Other expense, net of other income, for the three months ended March 31, 2005
decreased approximately $15,000, or 36%, compared to the three months ended
March 31, 2004. This decrease was primarily due to the loss on disposal of the
assets associated with the office and data center move in 2003.
Comparison of the Nine months ended March 31, 2005, to the nine months ended
- ----------------------------------------------------------------------------
March 31, 2004
- --------------
For the nine months ended March 31, 2005, we reported an operating
profit of approximately $400,000, compared to an operating loss of approximately
$1,263,000 for the nine months ended March 31, 2004. We reported a net profit of
approximately $298,000 for the nine months ended March 31, 2005, compared to a
net loss of approximately $1,355,000 for the nine months ended March 31, 2004.
As discussed below, improvements in operating and net income are due primarily
to decreased operating expenses, partially offset by decrease in gross revenues
and gross profit margins.
Revenues consist primarily of royalty revenues and fees from the
licensing of content products to information distributors. During the nine
months ended March 31, 2005, total revenues were approximately $6,000,000 or
approximately $149,000 (2%) less than the total revenues for the nine months
ended March 31, 2004. The decrease in revenues is due to a loss of clients as a
result of business contractions, primarily in the Internet and personal
investor markets, as well as reductions in our distributor clients' royalty
costs due to a decline in their revenues.
10
Our cost of revenues consists primarily of content license fees and
royalties to information providers, depreciation and amortization expense on our
production software, and data communication costs for the delivery of our
products to customers. The cost of revenues for the nine months ended March 31,
2005 was approximately $2,864,000 or approximately $170,000 (6%) more than the
cost of revenues for the nine months ended March 31, 2004. The increase in cost
is due to an increase in content royalties of approximately $263,000, which was
offset by a decrease in content fixed fees of approximately $18,000, a decrease
of approximately $44,000 in data transmission costs and a decrease of
approximately $29,000 in depreciation and amortization expense.
Gross profit for the nine months ended March 31, 2005 was approximately
$3,136,000 or approximately $319,000 (9%) less than the gross profit for the
same period in the prior year. The gross profit as a percentage of revenue
declined for the nine months ended March 31, 2005 to approximately 52% from
approximately 56% for the nine months ended March 31, 2004. The decline is due
to a decrease in revenues and a net increase in content royalty costs, which was
offset by a decrease in data transmission costs as discussed above.
Total operating expenses for the nine months ended March 31, 2005 were
approximately $2,736,000 representing an approximate $1,981,000 (42%) decrease
in operating expenses from the nine months ended March 31, 2004. The decrease in
expenses resulted from a decrease in technical operations support expenses, a
decrease in general and administrative expenses, a decrease in stock-based
compensation, and a decrease in depreciation and amortization expenses,
partially offset by an increase in sales and marketing expenses. Moreover, in
the nine month period ended March 31, 2004, the Company disposed of various
assets related to the office move and the move of our data center to an
off-site, hosted facility and there was a $478,000 charge related to a
settlement with the Company's former landlord and there was no such expense this
fiscal year.
Technical operations and support expenses during the nine months ended
March 31, 2005 decreased approximately $621,000 (37%) from the nine months ended
March 31, 2004. The decrease is primarily due to expenses incurred for
outsourced technology services during the nine months ended March 31, 2004 for
technical consultants (to provide management, systems administration, and
programming services and to move the production data center to an offsite,
hosted facility), and was partially offset by increases in personnel expenses in
the current period.
Sales and marketing expenses increased by approximately $117,000 (28%) for the
nine months ended March 31, 2005 compared to the nine months ended March 31,
2005. The increase is the result of increases in personnel and related expenses
over the same period in the prior year.
General and administrative expenses for the nine months ended March 31,
2005 were approximately $486,000 (34%) less than these expenses during the nine
months ended March 31, 2004 due to decreases in general and administrative
personnel and related expenses as well as a decrease in rent expense as a result
of a reduction in leased office space. During the nine months ended March 31,
2004, the company settled with a former landlord and thereby reduced its leased
space from one location of approximately 17,000 square feet to two locations
totaling approximately 5,000 square feet, thereby reducing its monthly expense
for leased office space to approximately $11,000 from approximately $40,000.
Additional decreases resulted primarily from a decrease in personnel and
recruiting costs of approximately $31,000; a decrease in professional and
consulting fees of approximately $175,000; and a decrease in board of director
11
fees of approximately $22,000 due to a decrease in the number of meetings in the
current period. Moreover, in the nine month period ended March 31, 2004, the
Company disposed of various assets related to the office move and the move of
our data center to an off-site, hosted facility and there was a $478,000 charge
related to a settlement with the Company's former landlord, and there was no
such expense this fiscal year.
During the nine months ended March 31, 2004, stock-based compensation of
approximately $68,000 consisted of $20,000 due to the conversion of an incentive
stock option to a non qualified stock option to a member of the Board of
Directors and $48,000 for the vesting of warrants granted to a consultant. There
was no such activity during the same period in the current year.
Depreciation and amortization expense for the nine months ended March 31, 2005
was approximately $145,000 (38%) lower than the expense during the same period
in the prior year. The decrease was due primarily to the disposal of assets
related to the office move and the move of our data center to an off-site,
hosted facility during the nine months ended March 31, 2004.
Other expense, net of other income, for the nine months ended March 31, 2005
increased approximately $10,000, or 11%, compared to the nine months ended March
31, 2004.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------------------
For the nine months ended March 31, 2005, we had an operating profit of
approximately $400,000 and a net profit of approximately $298,000. At March 31,
2005, we had working capital of approximately $290,000, compared to a working
capital deficit of approximately $495,000 at June 30, 2004. We had a net
stockholders' deficiency of approximately $25,000 at March 31, 2005, compared to
a net stockholders' deficiency at June 30, 2004 of approximately $323,000. The
decrease in stockholders' deficiency is due to net income earned during the nine
months ended March 31, 2005.
We had cash of approximately $921,000 at March 31, 2005, compared to $461,000 at
June 30, 2004. For the nine months ended March 31, 2005, operating activities
generated approximately $661,000 in cash. Under the Accounts Receivable Purchase
Agreement with Silicon Valley Bank, the company is required to maintain a
$300,000 minimum balance of cash in the bank at all times.
We made capital expenditures of approximately $40,000 during the nine
months ended March 31, 2005, primarily for computer and communications equipment
for new staff and product development. Financing activities resulted in payments
of approximately $522,000 made on capital leases and repayment of the Line of
Credit for Accounts Receivable Purchase Agreement with Silicon Valley Bank (the
"Financing Agreement") and the note payable to our former landlord, as described
under Notes Payable above.
12
The Company's future contractual obligations and commitments as of March 31,
2005 are as follows:
Amounts Due by Period
------------------------------------------------------------------------------
2005 2006 2007 2008 2009
------------------------------------------------------------------------------
Operating Leases $ 25,860 $ 174,213 $ 101,767 $ - $ -
Capital Leases 6,810 20,219 6,834 - -
Note Payable, Affiliate - - - - 856,954
------------------------------------------------------------------------------
Total $ 32,670 $ 194,432 $ 108,601 $ - $ 856,954
==============================================================================
Currently we are dependent on our cash reserves to fund operations; despite
making a profit for the quarter ended March 31, 2005, we incurred net losses for
the years ended June 30, 2004 and 2003 and our revenue base has been declining.
Assuming no immediate increase in revenue or an infusion of capital, the Company
is at risk of being unable to generate sufficient liquidity to meet its
obligations. The Company utilized and continues to utilize its Financing
Agreement to meet its liquidity needs. Further corporate consolidation or market
deterioration affecting our customers could impair our ability to generate such
revenues. No assurance may be given that we will be able to maintain the revenue
base or the profitable operations that may be necessary to achieve our liquidity
needs.
EBITDA, as defined below, was approximately $905,000 for the nine months ended
March 31, 2005 compared to EBITDA loss of approximately $516,000 for the nine
months ended March 31, 2004. The increase in EBITDA during the nine months ended
March 31, 2005 compared to the nine-month period in the prior year is the net
result of reduced revenues, increased cost of revenues, and reduced operating
expenses. The table below shows the reconciliation from net income (loss) to
EBITDA.
Nine Months
Ended March 31,
2005 2004
-----------------------------------
Reconciliation to EBITDA:
Net Income (Loss) $ 298 $ (1,355)
Stock Based Compensation - 68
Depreciation and Amortization 505 679
Interest/Other Expenses 102 92
Income Taxes - -
-----------------------------------
EBITDA $ 905 $ (516)
EBITDA consists of earnings before interest expense, interest and other income,
income taxes, depreciation and amortization. EBITDA does not represent funds
available for management's discretionary use and is not intended to represent
cash flow from operations. EBITDA should also not be construed as a substitute
for operating income or a better measure of liquidity than cash flow from
operating activities, which are determined in accordance with generally accepted
accounting principles. EBITDA excludes components that are significant in
understanding and assessing our results of operations and cash flows. In
addition, EBITDA is not a term defined by U.S. generally accepted accounting
principles, and as a result, our measure of EBITDA might not be comparable to
similarly titled measures used by other companies.
13
However, we believe that EBITDA is relevant and useful information,
which is often reported and widely used by analysts, investors and other
interested parties in our industry. Accordingly, we are disclosing this
information to permit a more comprehensive analysis of our operating
performance, as an additional meaningful measure of performance and liquidity,
and to provide additional information with respect to our ability to meet future
debt service, capital expenditure and working capital requirements. See the
financial statements and notes thereto contained elsewhere in this report for
more detailed information.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
---------------------------------------------------------
None.
Item 4.
CONTROLS AND PROCEDURES
-----------------------
The Company's Chief Executive Officer and Controller have concluded,
based on their evaluation within 90 days prior to the filing date of this
report, that the Company's disclosure controls and procedures (as defined in
Securities Exchange Act Rules 13a-15(e) or 15d-15(e)) are effective to ensure
that information required to be disclosed in the reports that the Company files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Securities
and Exchange Commission's rules and forms. There have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of the foregoing
evaluation.
Part II. Other Information
Item 1. Legal Proceedings
In July 2003, the Company commenced negotiations with its former
landlord, Plaza I-A Associates ("Plaza I-A") regarding the proposed termination
of the lease obligation at 4900 Seminary Road, Alexandria, Virginia. As part of
the negotiations, on September 3, 2003, Plaza I-A filed a lawsuit in Alexandria
General District Court in the Commonwealth of Virginia for approximately $92,000
in unpaid rent and late fees through September 30, 2003.
On December 9, 2003, the Company and Plaza I-A executed a settlement
agreement terminating the subject lease and the above lawsuit was dismissed on
or about December 17, 2003. The total remaining liability on the lease was
approximately $2.6 million prior to the settlement agreement. Pursuant to the
terms of the settlement agreement, the Company paid rent and legal fees of
approximately $147,000 and entered into a four-year note payable to Plaza I-A
for $360,000. Settlement expense with Plaza I-A for the nine months ended March
31, 2004 includes the $360,000 expense for the four-year note, approximately
14
$143,000 in commissions and legal fees, as well as an expense related to the
forfeiture of the Company's security deposit in the face amount of approximately
$62,000, partially offset by the recovery of deferred rent expense of
approximately $87,000.
On April 15, 2004, the Company's former Chairman/CEO and President, who
both resigned on February 5, 2004, filed a demand for arbitration against the
Company related to the terms of their employment agreements. The demand alleged
a breach of the employment agreements and requested payment of approximately
$129,000 to the former employees. The Company denies the allegations and intends
to vigorously defend this action. Based upon events to date in the arbitration,
the Company has accrued $80,000 in expenses at March 31, 2005.
The Company is also involved in routine legal proceedings occurring in
the ordinary course of business, which in the aggregate are believed by
management to be immaterial to our financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
15
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.
COMTEX NEWS NETWORK, INC.
(Registrant)
May 16, 2005 By: /S/ C.W. GILLULY
------------------
C.W. Gilluly, Ed.D.
Chairman and Interim
Chief Executive Officer
(Principal Executive Officer)
By: /S/ HILDA KWENA
---------------
Hilda Kwena
Treasurer & Controller
(Principal Financial and Accounting Officer)