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 September 30, 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
--- ---
Indicate by check mark whether the registrant is a Shell Company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
--- ---
As of November 11, 2005 13,700,247 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 September 30, 2005 (unaudited)
and June 30, 2005
Statements of Income 3
for the Three Months Ended
September 30, 2005 and 2004 (unaudited)
Statements of Cash Flows 4
for the Three Months Ended
September 30, 2005 and 2004 (unaudited)
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis 9
of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk 13
Item 4. Controls and Procedures 13
Part II Other Information:
Item 1. Legal Proceedings 14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits 14
SIGNATURES 16
1
Comtex News Network, Inc.
Balance Sheets
September 30, June 30,
2005 2005
---------------- ----------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash $ 1,403,798 $ 1,225,323
Accounts Receivable, Net of Allowance of $180,758
at September 30, 2005 and June 30, 2005 944,792 751,433
Prepaid Expenses and Other Current Assets 33,921 223,789
---------------- ----------------
TOTAL CURRENT ASSETS 2,382,511 2,200,544
PROPERTY AND EQUIPMENT, NET 337,888 425,008
DEPOSITS AND OTHER ASSETS 49,657 54,657
---------------- ----------------
TOTAL ASSETS $ 2,770,056 $ 2,680,209
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and Other Accrued Expenses $ 1,124,483 $ 1,072,780
Accrued Payroll Expense 147,536 131,605
Amount due under Bank Financing Agreement - 151,713
Deferred Revenue 17,012 15,829
Capital Lease Obligations, Current 17,793 16,722
---------------- ----------------
TOTAL CURRENT LIABILITIES 1,306,824 1,388,649
LONG-TERM LIABILITIES:
Capital Lease Obligations, Long Term 1,779 6,633
Long-Term Note Payable - Affiliate 856,954 856,954
Deferred Rent 18,707 21,785
---------------- ----------------
TOTAL LONG-TERM LIABILITIES 877,440 885,372
---------------- ----------------
TOTAL LIABILITIES 2,184,264 2,274,021
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common Stock, $0.01 Par Value - 25,000,000 Shares Authorized;
13,600,247 Shares issued and outstanding 136,002 136,002
Additional Paid-In Capital 12,428,620 12,311,898
Accumulated Deficit (11,978,830) (12,041,712)
---------------- ----------------
Total Stockholders' Equity 585,792 406,188
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,770,056 $ 2,680,209
================ ================
The accompanying "Notes to Financial Statements" are an integral part of these financial statements
2
Comtex News Network, Inc.
Statements of Income
(Unaudited)
Three months ended
September 30,
---------------------------------
2005 2004
--------------- ---------------
Revenues $ 1,996,431 $ 1,987,349
Cost of Revenues
(including depreciation and amortization expense
of approximately $45,000 and $99,000 respectively 936,427 979,782
--------------- ---------------
Gross Profit 1,060,004 1,007,567
Operating Expenses
Technical Operations & Support 320,115 331,740
Sales & Marketing 143,562 141,170
General & Administrative 315,001 322,376
Stock-based Compensation 116,722 -
Depreciation & Amortization 60,839 80,549
--------------- ---------------
Total Operating Expenses 956,239 875,835
Operating Income 103,765 131,732
Other (expense)
Interest Expense (24,983) (35,239)
(Other Expense)
- (215)
--------------- ---------------
Other Expense (24,983) (35,454)
Income Before Income Taxes 78,782 96,278
Income Taxes 15,900 -
--------------- ---------------
Net Income $ 62,882 $ 96,278
=============== ===============
Basic Earnings Per Common Share $ 0.01 $ 0.01
=============== ===============
Weighted Average Number of Common Share 13,600,247 13,598,836
=============== ===============
Diluted Earnings Per Common Share $ 0.01 $ 0.01
=============== ===============
Weighted Average Number of Shares Assuming Dilution 14,784,325 14,706,989
=============== ===============
a) Stock-based compensation costs are allocated in operating expense categories as follows: Technical
Operations & Support - $8,138; Sales & Marketing - $5,663; General & Administrative - $102,921.
The accompanying "Notes to Financial Statements" are an integral part of these financial statements
3
Comtex News Network, Inc.
Statements of Cash Flows
(Unaudited)
Three Months Ended
September 30,
---------------------------
2005 2004
------------ ------------
Cash Flows from Operating Activities:
Net Income $ 62,882 $ 96,278
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and Amortization 105,639 179,945
Bad Debt Expense - 15,000
Stock Based Compensation 116,722 -
Changes in Assets and Liabilities:
Accounts Receivable (193,359) (192,275)
Prepaid Expenses and Other Current Assets 189,867 5,633
Deposits and Other Assets 5,000 -
Accounts Payable and Accrued Expenses 51,703 (298,628)
Accrued Payroll Expense 15,931 (18,692)
Deferred Revenue 1,183 (35,967)
Deferred Rent (3,078) (552)
------------ ------------
Net Cash provided by/(used in) Operating Activities 352,490 (249,258)
Cash Flows used in Investing Activity
Purchases of Property and Equipment (18,519) (14,629)
------------ ------------
Cash Flows from Financing Activities:
Repayments - Capital Lease Obligations (3,783) (14,810)
Net (Repayments on)/Proceeds from Bank Financing Agreement (151,713) 272,580
------------ ------------
Net Cash (used in)/provided by Financing Activities (155,496) 257,770
Net Increase/(Decrease) in Cash 178,475 (6,117)
Cash at Beginning of Year 1,225,323 461,419
------------ ------------
Cash at End of Period $ 1,403,798 $ 455,302
============ ============
The accompanying "Notes to Financial Statements" are an integral part of these financial statements
4
COMTEX NEWS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 30, 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, 2005 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, 2005 ("2005 Form 10-K"), filed
with the Securities and Exchange Commission on September 28, 2005.
On December 16, 2004, the FASB issued SFAS No. 123R, SHARE-BASED PAYMENT. SFAS
No. 123R which addresses the accounting for share-based payment transactions in
which an enterprise receives employee services in exchange for (a) equity
instruments of the enterprise or (b) liabilities that are based on the fair
value of the enterprise's equity instruments or that may be settled by the
issuance of such equity instruments. SFAS No. 123R eliminates the ability to
account for share-based compensation transactions using Accounting Principles
Board Opinion No. 25 and generally requires that such transactions be accounted
for using a fair-value-based method. Comtex adopted this standard on its
effective date, July 1, 2005.
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 and
net income per share would have been adjusted to the pro forma amounts indicated
below:
Three months ended
September 30, 2004
----------------------
Net Income, as reported $ 96,278
Deduct: Total stock-based employee compensation
expense determined under fair-value-based method
for all awards, net of related tax effects 82,919
----------------------
Pro Forma Net Income 13,359
======================
Basic and Diluted Income Per Share, as reported $ 0.01
======================
Basic and Diluted Income Per Share, pro forma $ 0.00
======================
The per share weighted-average fair value of stock options granted for the three
month period ended September 30, 2004 was $0.17 on the grant date with the
following weighted average assumptions:
5
Three months ended
September 30,2005
--------------------------
Expected dividend yield 0
Risk-free interest rate 4.12% - 4.48%
Expected life (in years) 10
Volatility 1.5
The company has one stock-based employee compensation plan, which is described
more fully below. Prior to July 1, 2005, the company accounted for this plan
under the recognition and measurement provisions of APB Opinion 25, Accounting
for stock issued to employees, and related interpretations, as permitted by FASB
Statement No.123, Accounting for Stock-Based Compensation. Effective July 1,
2005, the company adopted the fair value recognition provisions of FASB
Statement No. 123(R), Share-Based Payment, using the modified-prospective
transition method. Under this method, compensation cost recognized for the three
months ended September 30, 2005 includes: (a) compensation costs for all share
based payments granted prior to, but not yet vested as of July 1, 2005, based on
grant-date fair value estimated in accordance with the original provisions of
statement 123, and (b) compensation cost for all share-based payments granted
subsequent to July 1, 2005, based on the grant-date fair value estimated in
accordance with the provisions of 123(R). Results for prior periods have not
been restated. As a result of adopting Statement 123(R) on July 1, 2005, the
company's income before income taxes and net income for the three month period
ended September 30, 2005 are approximately $117,000 lower than if it had
continued to account for share-based compensation under Opinion 25. There would
have been no effect on basic and diluted earnings per share, cash flow from
operations, and cash flow from financing activities for the three month period
ended September 30, 2005, if the company had not adopted statement 123(R).
Stock Option Plan
Stock Options. Stock options are typically granted to employees with an exercise
prices equal to the market price of the Company's stock at the date of grant.
Stock options are issued in accordance with a vesting schedule and, generally
vest over one to three years and have a term of 10 years. Compensation expense
for stock options is recognized over the requisite service period for each
separately vesting portion of the stock option award.
Weighted
Average
Weighted Remaining Aggregate
Number of Average Contractual Intrinsic
Options Exercise Price Term Value
------------ -------------- ----------------- ------------------
Outstanding at June 30, 2005 1,332,929 $0.25
Granted 1,668,000 $0.34
Forfeited -330 $0.27
Outstanding at September 30, 2005 3,000,599 $0.30 6.5 214,356
============ ============== ================= ==================
Vested or Expected to Vest at September 30, 2005 2,917,200 $0.30 6.5 214,356
============ ============== ================= ==================
Exercisable or Convertible at September 30, 2005 1,540,735 $0.30 6.5 137,524
============ ============== ================= ==================
6
As of September 30, 2005, 1,540,735 stock option grants had vested. Of this
total, 985,035 were granted prior to July 1, 2005, and 555,700 were granted
subsequent to July 1, 2005. No options were exercised in the current period.
The fair value of stock options issued in the three-month period ending
September 30, 2005 was estimated to be $0.47, using a Black-Scholes-option
pricing model. The model considers assumptions related to exercise price,
expected volatility, risk-free interest rate, and the weighted average expected
term of the stock option grants. Expected volatility assumptions utilized in the
model were based on historical volatility of the company's stock price over the
expected term. The risk-free rate is derived from the U.S. Treasury yield. The
company used a weighted average expected term. The fair values of options
granted in the first quarter of fiscal 2006 were estimated at the date of grant
with the following assumptions:
Risk-free interest rate 4.2%
Expected Volatility Factor 169%
Expected life (in years) 6.2
Exercise Price $ 0.34
Expected Dividend 0
--------------------
Fair Value of each option $ 0.47
====================
As of September 30, 2005, the company had one share-based plan, which is
described above. The compensation cost charged against income for this plan is
approximately $117,000. This number includes (a) approximately $14,000 of cost
from compensation costs for all share based payments granted prior to, but not
yet vested as of July 1, 2005, based on grant-date fair value estimated in
accordance with the original provisions of statement 123, and (b) $103,000
compensation cost for all share-based payments granted subsequent to July 1,
2005, based on the grant-date fair value estimated in accordance with the
provisions of 123(R), net of 5% discount for post vesting forfeitures based on
an overall low turnover. No income tax benefits are recognized in the income
statement for share-based arrangements due to the utilization of federal and
state net operating loss carryforwards.
As of September 30, 2005, the total compensation cost related to non-vested
awards not yet recognized is $703,000. The weighted-average period over which
this cost is expected to be recognized is 15 months.
Total compensation cost classified as marketing expense pertains to options
granted to employees in the marketing department. In contrast, no performance
was required and no consideration was received for the instrument.
Income 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 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
income per common share for the three months ended September 30, 2005 and 2004
do not include the effects of options to
7
purchase approximately 1.8 million and 1.2 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.
2. INCOME TAXES
There is no provision for income taxes for the three months ended September 30,
2004 due to the utilization of federal and state net operating loss
carryforwards. The provision for income at September 30, 2005 is due to the
alternative minimum tax.
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
secured by a $360,000 certificate-of-deposit-backed standby letter of credit
(See 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 approximately $80,000 in expenses as of September 30, 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
8
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 year 2005. As of September 30,
2005, the balance due to the Bank related to advances under the Financing
Agreement was fully repaid. 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 September 30, 2005, the Amended Note had a
principal balance of $856,954 and the conversion rate was $0.90. The outstanding
principal balance of the Amended Note is due in July 2008.
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, 2005 filed with the Securities and Exchange
Commission on September 28, 2005. 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
9
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, for the year ended June 30, 2005 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.
The company has one stock-based employee compensation plan, which is described
above . Prior to July 1, 2005, the company accounted for this plan under the
recognition and measurement provisions of APB Opinion 25, Accounting for stock
issued to employees, and related interpretations, as permitted by FASB Statement
No.123, Accounting for Stock-Based Compensation. Effective July 1, 2005, the
company adopted the fair value recognition provisions of FASB Statement No.
123(R), Share-Based Payment, using the modified-prospective transition method.
Under this method, compensation cost recognized for the three months ended
September 30, 2005 includes: (a) compensation costs for all share based payments
granted prior to, but not yet vested as of July 1, 2005, based on grant-date
fair value estimated in accordance with the original provisions of statement
123, and (b) compensation cost for all share-based payments granted subsequent
to July 1, 2005, based on the grant-date fair value estimated in accordance with
the provisions of 123(R). Results for prior periods have not been restated. As a
result of adopting Statement 123(R) on July 1, 2005, the company's income before
income taxes and net income for the three month period ended September 30, 2005
are approximately $117,000 lower than if it had continued to account for
share-based compensation under Opinion 25. There would have been no effect on
basic and diluted earnings per share, cash flow from operations, and cash flow
from financing activities for the three month period ended September 30, 2005,
if the company had not adopted statement 123(R).
As of September 30, 2005, the total compensation cost related to non-vested
awards not yet recognized is $703,000. The weighted-average period over which
this cost is expected to be recognized is 15 months.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2005, TO THE THREE MONTHS
ENDED SEPTEMBER 30, 2004
During the three months ended September 30, 2005, we reported an operating
profit of approximately $104,000, compared to $132,000 during the three months
ended September 30, 2004. We reported a net profit of approximately $63,000
during the three months ended September 30, 2005, compared to $96,000 for the
three months ended September 30, 2004. As discussed below, the decline in
operating and net income is due primarily to increased operating expenses,
primarily stock based compensation due to the adoption of SFAS 123 (R) as
discussed above, partially offset by growth in gross profit margins.
Revenues consist primarily of royalty revenues and fees from the licensing of
content products to information distributors. During the three months ended
September 30, 2005, total revenues were approximately $1,996,000 or
approximately $9,000 more than the total revenues for the three months ended
September 30, 2004. The increase is due to growth in database customer revenues
partially offset by a loss of clients as a result of business contractions,
primarily in the Internet and personal investor markets.
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 September 30, 2005
was approximately $936,000 or $43,000 (4%) less than the cost of revenues for
the three months ended September 30, 2004. The decrease in cost is due to a
reduction in content fixed fees of approximately $23,000, a decrease of
approximately $56,000 in depreciation and amortization expense, and a decrease
of approximately $3,000 in data transmission costs which was offset by an
increase in content royalties of approximately $39,000.
Gross profit for the three months ended September 30, 2005 was approximately
$1,060,000 or approximately $52,000 (5%) more than the gross profit for the same
period in the prior year. The gross profit as a percentage of revenue increased
for the three months ended September 30,
10
2005 to approximately 53% from approximately 51% for the three months ended
September 30, 2004. The increase is due to an slight growth in revenues and a
net decrease in content fixed fees, depreciation and amortization and data
transmission costs which was offset by an increase in content royalty costs as
discussed above.
Total operating expenses for the three months ended September 30, 2005 were
approximately $956,000 representing an approximate $80,000 (9%) increase in
operating expenses from the three months ended September 30, 2004. The increase
in expenses resulted from an increase in sales and marketing expenses and an
increase in stock-based compensation due to the adoption of SFAS 123 (R) as
discussed above partially offset by a decrease in technical operations support
expenses, a decrease in general and administrative expenses, and a decrease in
depreciation and amortization expenses.
Technical operations and support expenses during the three months ended
September 30, 2005 decreased approximately $12,000 (4%) from the three months
ended September 30, 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), and a decrease in personnel expenses in
the current period.
Sales and marketing expenses increased by approximately $2,000 (2%) for the
three months ended September 30, 2005 compared to the three months ended
September 30, 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 September 30,
2005 were approximately $315,000 (2%) less than these expenses during the three
months ended September 30, 2004. The decrease resulted primarily from a decrease
in general and administrative personnel and related expenses, partially offset
by an increase in rent expense as a result of an increase in leased office
space.
Stock-based compensation was approximately $117,000 during the three months
ended September 30, 2005 and was related to the adoption of the SFAS 123 (R), as
discussed above.
Depreciation and amortization expense for the three months ended September 30,
2005 was approximately $20,000 (24%) 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 offsite,
hosted facility in the prior year.
Other expenses, net of other income, for the three months ended September 30,
2005 decreased approximately $10,000, or 30%, compared to the three months ended
September 30, 2004 mainly due to a decrease in interest expenses related to the
bank financing agreement, settlement of the note payable to our former landlord,
and reduction in interest on capital leases.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
For the three months ended September 30, 2005, we had an operating profit of
approximately $104,000 and a net profit of approximately $63,000. At September
30, 2005, we had working capital of approximately $1,076,000, compared to a
working capital of approximately $812,000
11
at June 30, 2005. We had net stockholders' equity of approximately $586,000 and
$406,000 at September 30, 2005 and June 30, 2005 respectively. The increase in
stockholders' equity is due to net income and stock-based compensation for the
three months ended September 30, 2005.
We had cash of approximately $1,404,000 at September 30, 2005, compared to
$1,225,000 at June 30, 2005. For the three months ended September 30, 2005,
operating activities generated approximately $352,000 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 $19,000 during the three months
ended September 30, 2005, primarily for computer and communications equipment
for new staff and product development. Financing activities resulted in payments
of approximately $155,000 made on capital leases and repayment of the Line of
Credit for Accounts Receivable Purchase Agreement with Silicon Valley Bank (the
"Financing Agreement").
The Company's future contractual obligations and commitments as of September 30,
2005 are as follows:
AMOUNTS DUE BY PERIOD
--------------------------------------------------------
2006 2007 2008
--------------------------------------------------------
Operating Leases $ 151,683 $ 97,872 $ -
Capital Leases 15,164 6,834 -
Note Payable, Affiliate - - 856,954
--------------------------------------------------------
Total $ 166,847 $ 104,706 $ 856,954
========================================================
Currently we are dependent on our cash reserves and accounts receivable
financing through the bank to fund operations. We recorded a net profit for the
quarter ended September 30, 2005 but 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 $327,000 for the three months ended
September 30, 2005 compared to EBITDA of approximately $311,000 for the three
months ended September 30, 2004. The increase in EBITDA during the three months
ended September 30, 2005 compared to the three-month period in the prior year is
the net result of increased revenues and operating expenses, and reduced cost of
revenues. The table below shows the reconciliation from net income to EBITDA.
12
Three Months
Ended September 30,
2005 2004
--------------------------------
Reconciliation to EBITDA:
Net Income $ 63 $ 96
Stock Based Compensation 117 -
Depreciation and Amortization 106 180
Interest/Other Expenses 25 35
Income Taxes 16 -
--------------------------------
EBITDA $ 327 $ 311
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.
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
13
and reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. There have been no significant changes that have
materially affected, or are reasonably likely to materially affect 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
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.
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.
14
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)
November 14, 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)
16