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, 2006 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:
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large
Accelerated Filer Yes ___ No ___ Accelerated Filer Yes ___ No ___
Non-Accelerated Filer Yes X No
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 May 15, 2006, 13,700,247 shares of the Common Stock of the registrant, par
value $0.01 per share, were outstanding.
2
COMTEX NEWS NETWORK, INC.
TABLE OF CONTENTS
Part I Financial Information: PAGE NO.
--------
Item 1. Condensed Financial Statements
Condensed Balance Sheets 2
as of March 31, 2006 (unaudited)
and June 30, 2005
Condensed Statements of Operations 3
for the Three and Nine Months Ended
March 31, 2006 and 2005 (unaudited)
Condensed Statements of Cash Flows 4
for the Nine Months Ended
March 31, 2006 and 2005 (unaudited)
Notes to Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis 9
of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Item 4. Controls and Procedures 15
Part II Other Information:
Item 1. Legal Proceedings 16
Item 1A. Risk Factors 16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits 16
SIGNATURES 18
1
Comtex News Network, Inc.
Condensed Balance Sheets
March 31, June 30,
2006 2005
------------ ------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash $ 1,916,493 $ 1,225,323
Accounts Receivable, Net of Allowance of $180,758 877,327 751,433
Prepaid Expenses and Other Current Assets 46,630 223,788
------------ ------------
TOTAL CURRENT ASSETS 2,840,450 2,200,544
PROPERTY AND EQUIPMENT, NET 206,538 425,008
DEPOSITS 49,657 54,657
------------ ------------
TOTAL ASSETS $ 3,096,645 $ 2,680,209
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and Other Accrued Expenses $ 1,105,034 $ 1,072,780
Accrued Payroll Expense 172,107 131,605
Amount due under Bank Financing Agreement -- 151,713
Deferred Revenue 13,003 15,829
Capital Lease Obligations, Current 11,202 16,722
------------ ------------
TOTAL CURRENT LIABILITIES 1,301,346 1,388,649
LONG-TERM LIABILITIES:
Capital Lease Obligations, Long Term -- 6,633
Long-Term Note Payable - Affiliate 856,954 856,954
Deferred Rent 11,855 21,785
------------ ------------
TOTAL LONG-TERM LIABILITIES 868,809 885,372
------------ ------------
TOTAL LIABILITIES 2,170,155 2,274,021
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common Stock, $0.01 Par Value - 25,000,000 Shares Authorized;
13,700,247 and 13,600,247 Shares issued and outstanding, respectively 137,002 136,002
Additional Paid-In Capital 13,077,763 12,311,898
(12,288,275) (12,041,712)
------------ ------------
Total Stockholders' Equity 926,490 406,188
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,096,645 $ 2,680,209
============ ============
The accompanying "Notes to Financial Statements" are an integral part of
these financial statements
2
Comtex News Network, Inc
Condensed Statements of Operations
(Unaudited)
Three months ended Nine months ended
March 31, March 31,
------------------------------------------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Revenues $ 1,966,772 $ 1,927,293 $ 5,895,815 $ 6,000,220
Cost of Revenues
(including depreciation and amortization expense
of approximately $28,000, $70,000, $110,000 and
$269,000) 902,204 917,585 2,777,038 2,864,383
------------ ------------ ------------ ------------
Gross Profit 1,064,568 1,009,708 3,118,777 3,135,837
Operating Expenses:
Technical Operations & Support (Inclusive of
stock-based compensation of $7,626, $0, $18,703,
$0, respectively) 309,183 367,298 974,063 1,036,974
Sales & Marketing (Inclusive of stock-based
compensation of $ 30,438, $ 0, $ 72,141, $ 0
respectively) 197,696 220,853 521,229 535,724
General & Administrative (Inclusive of stock-based
compensation of $ 281,026, $ 0, $ 666,021,
$0, respectively) 633,377 235,754 1,658,174 927,583
Depreciation & Amortization 32,460 77,173 131,411 236,013
------------ ------------ ------------ ------------
Total Operating Expenses 1,172,716 3,284,877 901,078 2,736,294
Operating (Loss) Income (108,148) 108,630 (166,100) 399,543
Other expense, net
Interest Expense (22,235) (26,885) (69,678) (103,343)
Interest and Other Income 5,415 286 5,415 1,556
------------ ------------ ------------ ------------
Other Expense, net (16,820) (26,599) (64,264) (101,787)
(Loss) Income Before Income Taxes (124,968) 82,031 (230,363) 297,756
Income Taxes
300 -- 16,200 --
------------ ------------ ------------ ------------
Net (Loss) Income $ (125,268) $ 82,031 $ (246,563) $ 297,756
============ ============ ============ ============
Basic (Loss) Earnings Per Common Share $ (0.01) $ 0.01 $ (0.02) $ 0.02
============ ============ ============ ============
Weighted Average Number of Common Share 13,700,247 13,600,247 13,633,094 13,599,777
============ ============ ============ ============
Diluted (Loss) Earnings Per Common Share
$ (0.01) $ 0.01 $ (0.02) $ 0.02
============ ============ ============ ============
Weighted Average Number of Shares Assuming Dilution 13,700,247 14,745,616 13,633,094 14,735,605
============ ============ ============ ============
The accompanying "Notes to Financial Statements" are an integral part of
these financial statements
3
Comtex News Network, Inc.
Condensed Statements of Cash Flows
(Unaudited)
Nine Months Ended
March 31,
--------------------------
2006 2005
----------- -----------
Cash Flows from Operating Activities:
Net(Loss)Income $ (246,563) $ 297,756
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and Amortization 241,258 505,038
Bad Debt Expense
-- 15,000
Stock Based Compensation 756,865 --
Changes in Assets and Liabilities:
Accounts Receivable (125,894) 6,443
Prepaid Expenses and Other Current Assets 177,158 (20,014)
Deposits 5,000 (23,740)
Accounts Payable and Accrued Expenses 32,254 (31,525)
Accrued Payroll Expense 40,502 747
Deferred Revenue (2,826) (86,265)
Deferred Rent (9,930) (2,332)
----------- -----------
Net Cash provided by Operating Activities 867,824 661,108
Cash Flows from Investing Activities:
Decrease in Restricted Cash -- 360,000
Purchases of Property and Equipment (22,788) (39,884)
----------- -----------
Net Cash provided by (used in) Investing Activities
(22,788) 320,116
Cash Flows from Financing Activities:
Repayments - Capital Lease Obligations (12,153) (31,283)
Repayment of Note Payable (360,000)
Repayments on Bank Financing Agreement (151,713) (130,985)
Issuance of Stock under Employee Stock Purchase Plan 240
Proceeds from Exercise of Stock Options 10,000 --
----------- -----------
Net Cash used in Financing Activities (153,866) (522,028)
Net Increase in Cash 691,170 459,196
Cash at Beginning of Period 1,225,323 461,419
----------- -----------
Cash at End of Period $ 1,916,493 $ 920,615
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes $ 16,200 --
Cash paid for interest expense $ 69,678 $ 103,343
The accompanying "Notes to Financial Statements" are an integral part of
these financial statements
4
COMTEX NEWS NETWORK, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2006
1. BASIS OF PRESENTATION
The accompanying condensed 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 adjustments)
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. 123(R), SHARE-BASED PAYMENT. SFAS
No. 123(R) 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. 123(R) 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(R), the Company's net income and
net income per share would have been adjusted to the pro forma amounts indicated
below:
Three months ended Nine months ended
March 31, March 31,
----------- -----------
2005 2005
----------- -----------
Net Income, as reported $ 82,031 $ 297,756
Deduct: Total stock-based employee compensation
expense determined under fair-value-based method for
all awards, net of related tax effects 38,810 121,729
----------- -----------
Pro Forma Net Income 43,221 176,027
=========== ===========
Basic Income Per Share, as reported $ 0.01 $ 0.02
=========== ===========
Diluted Income Per Share, as reported $ 0.01 $ 0.02
=========== ===========
Basic Income Per Share, pro forma $ 0.00 $ 0.01
===========
Diluted Income Per Share, pro forma $ 0.00 $ 0.01
=========== ===========
The per share weighted-average fair value of stock options granted for the three
and nine month periods ended March 31, 2005 was $0.18 and $0.19 respectively, on
the grant date with the following weighted average assumptions:
5
Three months ended Nine months ended
March 31, March 31,
--------- ---------
2005 2005
--------- ---------
Expected dividend yield 0 0
Risk-free interest rate 4.0% 4.00% - 4.48%
Expected life (in years) 10 10
====== ============
Volatility 1.5 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
and nine months ended March 31, 2006 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 and
nine month periods ended March 31, 2006 were $319,090 and $756,865 lower than if
it had continued to account for share-based compensation under APB Opinion 25.
Basic and diluted earnings per share, would have been $0.01 for the quarter and
$0.04 for the nine months ended March 31, 2006, had the Company not adopted SFAS
123(R) compared to $(0.01) and $(0.02) for the three and nine months ended March
31, 2006, respectively, for basic and diluted earning per share with the
adoption. There would have been no effect on cash flow from operations and cash
flow from financing activities for the three and nine month periods ended March
31, 2006, if the Company had not adopted statement 123(R).
Stock Option Plan
Stock options are typically granted to employees with an exercise price 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
Exercised (100,000) $0.10
Forfeited (14,490) $0.31
Outstanding at March 31, 2006 2,886,439 $0.31 8.8 $ 29,008
========== ===== ===== ==========
Vested or Expected to Vest 2,813,459 $0.30 8.8 $ 29,008
========== ===== ===== ==========
Exercisable at March 31, 2006 2,600,039 $0.47 8.5 $ 16,635
========== ===== ===== ==========
6
As of March 31, 2006, 2,429,489 stock option grants had vested. Of this total,
817,789 were granted prior to July 1, 2005, and 1,611,700 were granted
subsequent to July 1, 2005. In the nine months ended March 31, 2006, 100,000
options were exercised. The intrinsic value of these options was $3,000 during
the nine months ended March 31, 2006.
A summary of the status of the Company's nonvested shares as of March 31, 2006,
and changes during the nine-month period ended March 31, 2006, is presented as
follows:
NONVESTED SHARES SHARES WEIGHTED AVERAGE GRANT DATE FAIR VALUE
----------------------------- ---------- --------------------------------------
Nonvested at June 30, 2005 448,304 $.17
Granted 1,668,000 .47
Vested (1,815,414) .44
Forfeited (14,490) .41
---------- ----
Nonvested at March 31, 2006 286,400 $.19
========== ====
The fair value of stock options issued in the nine-month period ending March 31,
2006 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 expected term of
options represents the period of time that options granted are expected to be
outstanding. No options were granted in the three-month period ended March 31,
2006. 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 March 31, 2006, the Company had one share-based plan, which is described
above. This plan expired as of October 12, 2005. The compensation cost charged
against income for this plan was $756,865 for the nine months ended March 31,
2006. This number includes (a) $39,563 of cost from compensation costs for all
share based payments granted prior to, but not yet vested as of July 1, 2005,
based on the grant-date fair value estimated in accordance with the original
provisions of statement 123, and (b) $717,302 of 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.
7
Stock-based Compensation costs are allocated in operating expense categories as
follows:
For the Three For the Nine
Months ended Months Ended
March 31, 2006 March 31, 2006
-------------- --------------
Technical Operations & Support $ 7,626 $ 18,703
Sales & Marketing 30,438 72,141
General & Administrative 281,026 666,021
-------- --------
Total Stock-based Compensation costs $319,090 $756,865
======== ========
As of March 31, 2006, the total compensation cost related to non-vested awards
not yet recognized is $61,898. The period over which this cost will be
recognized is 17 months.
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 EPS is equal to basic EPS for the three and nine month periods
ended March 31, 2006 since all potentially dilutive securities are
anti-dilutive. Diluted net income (loss) per common share for the three and nine
month periods ended March 31, 2006 and 2005 do not include the effects of
options to purchase of approximately 2.9 million and approximately .9 million
shares of common stock related to the note payable to AMASYS, on an "as if"
converted basis, since their inclusion would have an anti-dilutive effect.
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, respectively 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 nine months ended March 31, 2006
due to the utilization of federal and state net operating loss carryforwards.
The provision for income tax for the nine months ended March 31, 2006 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.
8
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 March 31, 2006.
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 year 2005. As of March 31,
2006, the Company entered into the Third Amendment to the Accounts Receivable
Purchase Agreement, dated December 15, 2005. Under this amended agreement, the
applicable rates were lowered, the financial covenants amended to include no
restriction on cash and the term was extended through the end of calendar year
2006. As of March 31, 2006, the balance due to the Bank related to advances
under the Financing Agreement was fully repaid.
9
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, 2006, the Amended Note had a
principal balance of $856,954 and the conversion rate was $0.95. 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 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.
10
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2006, TO THE THREE MONTHS ENDED
MARCH 31, 2005
- --------------------------------------------------------------------------------
During the three months ended March 31, 2006, we reported a net loss of $125,268
compared to net income of $82,031 during the three months ended March 31, 2005.
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).
Revenues consist primarily of royalty revenues and fees from the licensing of
content products to information distributors. During the three months ended
March 31, 2006, total revenues were $1,966,772 or approximately $39,000 (2%)
more than the total revenues for the three months ended March 31, 2005. The
increase is due to higher revenue from existing customers and from sales to new
customers.
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, 2006 was
$902,204 or approximately $15,000 (2%) less than the cost of revenues for the
three months ended March 31, 2005. The decrease in cost is primarily due to the
renegotiation of fixed costs associated with certain content providers.
Gross profit for the three months ended March 31, 2006 was $1,064,568 or
approximately $55,000 (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 March 31, 2006 to approximately 54% from approximately 52% for the
three months ended March 31, 2005. The increase, as noted in the above
paragraphs, is due to higher profit sales and the renegotiation of lower fixed
costs.
Total operating expenses for the three months ended March 31, 2006 were
$1,172,716 representing an approximate $272,000 (30%) increase in operating
expenses from the three months ended March 31, 2005. The increase in expenses
resulted primarily from 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, sales and marketing expenses, general and
administrative expenses, and depreciation and amortization expenses.
Technical operations and support expenses during the three months ended March
31, 2006 decreased approximately $58,000 (16%) from the three months ended March
31, 2005. The decrease is primarily due to lower 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 was partially offset by increases in
personnel expenses and Stock-based Compensation in the current period. Also, a
concerted effort to reduce expenses related to technology has contributed to
this reduction.
11
Sales and marketing expenses decreased by approximately $23,000 (10%) for the
three months ended March 31, 2006 compared to the three months ended March 31,
2005. The decrease is the result of decreases in personnel and related
commission expenses over the same period in the prior year.
General and administrative expenses for the three months ended March 31, 2006
were reported at $633,377, approximately $398,000 higher than G&A expenses for
the comparable quarter of the prior year. Of this increase, approximately
$281,000 represents stock-based compensation charges versus no such charges for
the prior year third quarter. The increase also resulted from an increase in
rent expense as a result of an increase in leased office space and an increase
in public accounting fees, partially offset by decreases in human resources and
related expenses, a decrease in professional and consulting fees, and a decrease
in business license fees as the result of the tax-exempt categorization by the
City of Alexandria.
Depreciation and amortization expense for the three months ended March 31, 2006
was approximately $45,000 (58%) lower than the expense during the same period in
the prior year. The decrease was due primarily to the disposal of assets in
prior years and the continued use of fully depreciated assets.
Other expense, net of other income, for the three months ended March 31, 2006
decreased approximately $10,000, or 37%, compared to the three months ended
March 31, 2005. This decrease was mainly due to a decrease in interest expenses
related to the bank financing agreement, and a reduction in interest on capital
leases.
COMPARISON OF THE NINE MONTHS ENDED MARCH 31, 2006, TO THE NINE MONTHS ENDED
MARCH 31, 2005
We reported a net loss of $246,563 for the nine months ended March 31, 2006,
compared to net income of $297,756 for the nine months ended March 31, 2005. As
discussed below, the decline in net income is due primarily to increased
operating expenses and increased stock based compensation due to the adoption of
SFAS 123(R).
Revenues consist primarily of royalty revenues and fees from the licensing of
content products to information distributors. During the nine months ended March
31, 2006, total revenues were $5,895,815 or approximately $104,000 (2%) less
than the total revenues for the nine months ended March 31, 2005. The decrease
in revenues is primarily due to a loss of clients as a result of business
consolidations, primarily in the Internet and personal investor markets, as well
as reductions in our distributor clients' royalty payments to us, due to a
decline in their revenues. This reduction has been partially offset by sales to
new customers.
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, 2006 was
$2,777,038 or approximately $87,000 (3%) less than the cost of revenues for the
nine months ended March 31, 2005. The decrease in cost is due to a reduction in
content fixed fees of approximately $97,000, a decrease of approximately
$159,000 in depreciation and amortization expense, and a decrease of
approximately $6,000 in data transmission costs, which was offset by an increase
in content royalties of approximately $175,000.
12
Gross profit for the nine months ended March 31, 2006 was $3,118,777 or
approximately $17,000 (0.5%) less than the gross profit for the same period in
the prior year. The gross profit as a percentage of revenue for the nine months
ended March 31, 2006 was virtually unchanged at approximately 52%.
Total operating expenses for the nine months ended March 31, 2006 were
$3,284,877 representing an approximate $549,000 (20%) increase in operating
expenses from the nine months ended March 31, 2005. The increase in expenses
resulted from an increase in stock-based compensation due to the adoption of
SFAS 123(R) as discussed above, higher sales and marketing expenses, and higher
general and administrative expenses. These increases were partially offset by a
decrease in technical operations support expenses, and depreciation and
amortization expenses.
Technical operations and support expenses during the nine months ended March 31,
2006 decreased approximately $63,000 (6%) from the nine months ended March 31,
2005. The decrease is primarily due to a reduction in 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 was partially offset by increases in
co-location, personnel expenses and Stock-based Compensation in the current
period. Also, a concerted effort to reduce expenses has contributed to this
reduction.
Sales and marketing expenses decreased by approximately $14,000 (3%) for the
nine months ended March 31, 2006 compared to the nine months ended March 31,
2005. This decrease is primarily related to, a reduction in personnel and
commission expenses offset by the increase in Stock-based Compensation
General and administrative expenses for the nine months ended March 31, 2006
were approximately $731,000 more than G&A expenses during the nine months ended
March 31, 2005, approximately $666,000 of which were attributable to stock-based
compensation charges. The increase also resulted from higher personnel and
recruiting expenses for executive officers, an increase in public accounting
fees of approximately $16,000 and an increase of approximately $25,000 in T&E.
Partially offsetting decreases include lower board of directors' fees of
approximately $6,000 due to a decrease in the number of meetings in the current
period and business license fees as a result of the tax-exempt categorization by
the City of Alexandria.
Depreciation and amortization expense for the nine months ended March 31, 2006
was approximately $105,000 (44%) lower than the expense during the same period
in the prior year. The decrease was due primarily to the disposal of assets in
prior years and the continued use of fully depreciated assets.
Other expense, net of other income, for the nine months ended March 31, 2006
decreased approximately $38,000, or 37%, compared to the nine months ended March
31, 2005. This decrease was mainly due to a decrease in interest expenses
related to the bank financing agreement, and a reduction in interest on capital
leases.
13
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------------------
For the nine months ended March 31, 2006, we had an operating loss of $166,100
and a net loss of $246,563. At March 31, 2006, we had working capital of
$1,539,104, compared to working capital of $811,895 at June 30, 2005. We had net
stockholders' equity of $926,490 and $406,188 at March 31, 2006 and June 30,
2005 respectively. The increase in stockholders' equity is due to the recording
of stock-based compensation and from a net loss for the nine months ended March
31, 2006.
We had cash of $1,916,493 at March 31, 2006, compared to $1,225,323 at June 30,
2005. For the nine months ended March 31, 2006, operating activities generated
$867,824 in cash.
We made capital expenditures of $22,788 during the nine months ended March 31,
2006, primarily for computer and communications equipment for new staff and
product development. Financing activities resulted in payments of approximately
$164,000 made on capital leases and repayment of the Line of Credit for Accounts
Receivable Purchase Agreement with Silicon Valley Bank (the "Financing
Agreement"), and $10,000 in proceeds from exercise of stock options.
The Company's future contractual obligations and commitments as of March 31,
2006 are as follows:
AMOUNTS DUE BY PERIOD
------------------------------------------------------
2006 2007 2008
-------- -------- --------
Operating Leases $ 50,726 $ 97,872 $ --
Capital Leases 5,055 6,834 --
Note Payable, Affiliate -- -- 856,954
-------- -------- --------
Total $ 55,781 $104,706 $856,954
======== ======== ========
Currently we are dependent on our cash reserves to fund operations. We have the
option available to use accounts receivable financing through the bank. We
recorded a net loss for the quarter ended March 31, 2006, and our revenue base
declined. Assuming a continuing erosion of revenue without an infusion of
capital, the Company is at risk of being unable to generate sufficient liquidity
to meet its obligations. The Company utilized and will utilize its Financing
Agreement, should the need arise, 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, excluding the effects of stock based compensation, as defined below, was
approximately $832,000 for the nine months ended March 31, 2006 compared to
EBITDA, excluding the effects of stock based compensation, of approximately
$905,000 for the nine months ended March 31, 2005. The decrease in EBITDA,
excluding the effects of stock based compensation, during the nine months ended
March 31, 2006 compared to the nine-month period in the prior year is the net
result of decreased revenues and reduced cost of revenues, partially offset by
an increase in stock based compensation due to the adoption of SFAS 123(R). The
table below shows the reconciliation from net income to EBITDA, excluding the
effects of stock based compensation;
14
Nine Months
Ended March 31,
2006 2005
----- -----
Reconciliation to EBITDA:
Net (Loss) Income $(247) $ 298
Stock Based Compensation 757 --
Depreciation and Amortization 242 505
Interest/Other Expenses 64 102
Income Taxes 16 --
----- -----
EBITDA $ 832 $ 905
EBITDA, excluding the effects of stock based compensation, consists of earnings
before Stock Based Compensation, interest expense, interest and other income,
income taxes, depreciation and amortization. EBITDA, excluding the effects of
stock, based compensation, does not represent funds available for management's
discretionary use and is not intended to represent cash flow from operations.
EBITDA, excluding the effects of stock based compensation, 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, excluding the effects of
stock based compensation, excludes components that are significant in
understanding and assessing our results of operations and cash flows. In
addition, EBITDA, excluding the effects of stock based compensation, is not a
term defined by U.S. generally accepted accounting principles, and as a result,
our measure of EBITDA, excluding the effects of stock based compensation, might
not be comparable to similarly titled measures used by other companies.
However, we believe that EBITDA, excluding the effects of stock based
compensation 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
---------------------------------------------------------
We are exposed to various market risks, including changes in foreign currency
exchange rates. However, our exposure to currency exchange rate fluctuations
ceased with the shutdown of our foreign subsidiary. We do not engage in hedging
activities.
Item 4.
CONTROLS AND PROCEDURES
-----------------------
The Company's Chief Executive and Principal Accounting Officer has concluded,
based on his 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))
15
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 that have materially affected, or are reasonably likely to
materially affect the Company's internal controls over financial reporting 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 1A. Risk Factors
There have been no material changes from the "Risk Factors" in our Form 10-K for
the fiscal year ended June 30, 2005, filed with the SEC, on September 28, 2005.
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.
16
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 Principal Financial and Accounting 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 Principal Financial and Accounting Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
17
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 15, 2006 By: /S/ C.W. GILLULY
------------------
C.W. Gilluly, Ed.D.
Chairman and Interim
Chief Executive Officer
(Principal Executive Officer)
(Principal Financial and Accounting Officer)
18