10-Q 1 t10q-8995.txt 10-Q 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 December 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 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 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 February 12, 2006 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 December 31, 2005 (unaudited) and June 30, 2005 Statements of Operations 3 for the Three and Six Months Ended December 31, 2005 and 2004 (unaudited) Statements of Cash Flows 4 for the six Months Ended December 31, 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 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
Comtex News Network, Inc. Balance Sheets December 31, June 30, 2005 2005 ---------------- ---------------- ASSETS (Unaudited) CURRENT ASSETS Cash $ 1,502,450 $ 1,225,323 Accounts Receivable, Net of Allowance of $180,758 1,001,595 751,433 Prepaid Expenses and Other Current Assets 40,981 223,789 ---------------- ---------------- TOTAL CURRENT ASSETS 2,545,026 2,200,544 PROPERTY AND EQUIPMENT, NET 265,487 425,008 DEPOSITS AND OTHER ASSETS 49,657 54,657 ---------------- ---------------- TOTAL ASSETS $ 2,860,170 $ 2,680,209 ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable and Other Accrued Expenses $ 1,092,248 $ 1,072,780 Accrued Payroll Expense 131,460 131,605 Amount due under Bank Financing Agreement - 151,713 Deferred Revenue 15,758 15,829 Capital Lease Obligations, Current 15,553 16,722 ---------------- ---------------- TOTAL CURRENT LIABILITIES 1,255,019 1,388,649 LONG-TERM LIABILITIES: Capital Lease Obligations, Long Term 0 6,633 Long-Term Note Payable - Affiliate 856,954 856,954 Deferred Rent 15,529 21,785 ---------------- ---------------- TOTAL LONG-TERM LIABILITIES 872,483 885,372 ---------------- ---------------- TOTAL LIABILITIES 2,127,502 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 12,758,673 12,311,898 Accumulated Deficit (12,163,007) (12,041,712) ---------------- ---------------- Total Stockholders' Equity 732,668 406,188 ---------------- ---------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,860,170 $ 2,680,209 ================ ================ 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 Six months ended December 31, December 31, ----------------------------- ------------------------------ 2005 2004 2005 2004 ----------------------------- ------------------------------ Revenues $ 1,932,612 $ 2,085,578 $ 3,929,043 $ 4,072,927 Cost of Revenues (including depreciation and amortization expense of approximately $37,000, $99,000, $82,000 and $199,000) 938,407 967,016 1,874,834 1,946,798 ----------------------------- ------------------------------ Gross Profit 994,204 1,118,562 2,054,209 2,126,129 Operating Expenses: Technical Operations & Support 314,404 337,935 634,519 669,675 Sales & Marketing 157,552 173,701 301,114 314,871 General & Administrative 324,801 369,454 639,802 691,830 Stock-based Compensation (a) 321,053 437,775 Depreciation & Amortization 38,112 78,291 98,951 158,840 ----------------------------- ------------------------------ Total Operating Expenses 1,155,922 959,381 2,112,161 1,835,216 Operating Income (Loss)/ Income (161,717) 159,181 (57,952) 290,913 Other expense, net Interest Expense (22,460) (41,219) (47,443) (76,458) Interest Income - 1,485 - 1,270 ----------------------------- ------------------------------ Other Expense, net (22,460) (39,734) (47,443) (75,188) Income (Loss ) Before Income Taxes (184,177) 119,447 (105,395) 215,725 Income Taxes - - 15,900 - ----------------------------- ------------------------------ Net (Loss) / Income $ (184,177) $ 119,447 $ (121,295) $ 215,725 ============================= ============================== Basic Earnings (Loss) Per Common Share $ (0.01) $ 0.01 $ (0.01) $ 0.02 ============================= ============================== Weighted Average Number of Common Share 13,700,247 13,600,247 13,650,247 13,599,542 ============================= ============================== Diluted Earnings (Loss ) Per Common Share $ (0.01) $ 0.01 $ (0.01) $ 0.01 ============================= ============================== Weighted Average Number of Shares Assuming Dilution 13,700,247 14,645,388 13,650,247 14,644,683 ============================= ============================== (a) Stock-based compensation costs are allocated in operating expense categories as follows: For the three months ended December 31, 2005- Technical Operations & Support - $22,223; Sales & Marketing - $16,756; General & Administrative - $282,074. For the six months ended December 31, 2005 - Technical Operations & Support - $30,361; Sales & Marketing - $22,419; General & Administrative - $384,995 The accompanying "Notes to Financial Statements" are an integral part of these financial statements 3
Comtex News Network, Inc. Statements of Cash Flows (Unaudited) Six Months Ended December 31, --------------------------- 2005 2004 ------------- ------------- Cash Flows from Operating Activities: Net (Loss) Income $ (121,295) $ 215,725 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and Amortization 180,698 357,631 Bad Debt Expense - 15,000 Stock Based Compensation 437,775 - Changes in Assets and Liabilities: Accounts Receivable (250,162) 138,890 Prepaid Expenses and Other Current Assets 182,807 755 Deposits and Other Assets 5,000 - Accounts Payable and Accrued Expenses 19,468 (158,713) Accrued Payroll Expense (145) 43,244 Deferred Revenue (71) (71,223) Deferred Rent (6,256) (1,105) ------------- ------------- Net Cash provided by Operating Activities 447,819 540,204 Cash Flows used in Investing Activity- Purchases of Property and Equipment (21,177) (34,762) ------------- ------------- Cash Flows from Financing Activities: Repayments - Capital Lease Obligations (7,802) (22,850) Repayments on Bank Financing Agreement (151,713) (133,671) Proceeds from Exercise of Stock Options 10,000 - ------------- ------------- Net Cash used in Financing Activities (149,515) (156,521) Net Increase in Cash 277,127 348,921 Cash at Beginning of Period 1,225,323 461,419 ------------- ------------- Cash at End of Period $ 1,502,450 $ 810,340 ============= ============= ------------- ------------- Supplemental Disclosure of Cash Flow Information: 2005 2004 ------------- ------------- Cash paid for income taxes 15,900 - Cash paid for interest expense 47,443 76,458 The accompanying "Notes to Financial Statements" are an integral part of these financial statements 4
COMTEX NEWS NETWORK, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) December 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, 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 Six months ended December 31, December 31, --------------------- --------------------- 2004 2004 --------------------- --------------------- Net Income, as reported $ 119,447 $ 215,725 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 119,447 132,806 ===================== ===================== Basic Income Per Share, as reported $ 0.01 $ 0.02 ===================== ===================== Diluted Income Per Share, as reported $ 0.01 $ 0.01 ===================== ===================== Basic Income Per Share, pro forma $ 0.01 $ 0.01 ===================== ===================== Diluted Income Per Share, pro forma $ 0.01 $ 0.01 ===================== =====================
The per share weighted-average fair value of stock options granted for the three and six month periods ended December 31, 2004 was $0.23 and $0.17 respectively, on the grant date with the following weighted average assumptions: 5 Three months ended Six months ended December 31, December 31, --------------------- --------------------- 2004 2004 --------------------- --------------------- Expected dividend yield 0 0 Risk-free interest rate 4.12% - 4.48% 4.12% - 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 six months ended December 31, 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 and six month periods ended December 31, 2005 were approximately $321,000 and $438,000 lower than if it had continued to account for share-based compensation under Opinion 25. Basic and diluted earnings per share would have been $0.01 had the company not adopted SFAS 123R compared to $(0.01) 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 six month periods ended December 31, 2005, 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 (10,330) $0.82 ------------ Outstanding at December 31, 2005 2,890,599 $0.31 6.3 $ 385,690 ============ ============== ================= ================== Vested or Expected to Vest 2,807,199 $0.31 6.3 $ 379,852 ============ ============== ================= ================== Exercisable or Convertible at December 31, 2005 2,048,465 $0.31 6.3 $ 288,466 ============ ============== ================= ==================
6 As of December 31, 2005, 2,048,465 stock option grants had vested. Of this total, 964,765 were granted prior to July 1, 2005, and 1,083,700 were granted subsequent to July 1, 2005. In the six months ended December 31, 2005, 100,000 options were exercised. The intrinsic value of these options was $3000, during the six months ended December 31, 2005. The fair value of stock options issued in the six-month period ending December 31, 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 expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. No options were granted in three-month period ended December 31, 2005. 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 December 31, 2005, the company had one share-based plan, which is described above. The plan expired as of October 12, 2005. The compensation cost charged against income for this plan was approximately $438,000. This number includes (a) approximately $28,000 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) $410,000 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 December 31, 2005, the total compensation cost related to non-vested awards not yet recognized is approximately $484,000. The weighted-average period over which this cost is expected to be recognized is 4 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 (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 7 converted into common stock and resulted in the issuance of common stock. Diluted net income (loss) per common share for the three and six month periods ended December 31, 2005 and 2004 do not include the effects of options to purchase approximately .9 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 six months ended December 31, 2004 due to the utilization of federal and state net operating loss carryforwards. The provision for income tax for the six months ended December 31, 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 December 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. 8 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 December 31, 2005, 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 December 31, 2005, the balance due to the Bank related to advances under the Financing Agreement was fully repaid. 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 December 31, 2005, 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. 9 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. RESULTS OF OPERATIONS COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2005, TO THE THREE MONTHS ENDED DECEMBER 31, 2004 During the three months ended December 31, 2005, we reported an operating loss of approximately $162,000, compared to net income of approximately $159,000 during the three months ended December 31, 2004. We reported net loss of approximately $184,000 during the three months ended December 31, 2005, compared to a net income of approximately $119,000 for the three months ended December 31, 2004. As discussed below, the decline in operating and net income is due primarily to decreased gross profit margins and 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 December 31, 2005, total revenues were approximately $1,933,000 or approximately $153,000 (7%) less than the total revenues for the three months ended December 31, 2004. The decrease is due to a loss of clients as a result of business consolidations, primarily in the Internet and personal investor markets 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 December 31, 2005 was approximately $938,000 or approximately $29,000 (3%) less than the cost of revenues for the three months ended December 31, 2004. The decrease in cost is due to a reduction in content fixed fees of approximately $34,000, a decrease of approximately $62,000 in depreciation and amortization expense, and a decrease 10 of approximately $1,000 in data transmission costs which was offset by an increase in content royalties of approximately $68,000. Gross profit for the three months ended December 31, 2005 was approximately $994,000 or approximately $124,000 (11%) 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 December 31, 2005 to approximately 51% from approximately 54% for the three months ended December 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 three months ended December 31, 2005 were approximately $1,156,000 representing an approximate $197,000 (20%) increase in operating expenses from the three months ended December 31, 2004. The increase in expenses resulted 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 December 31, 2005 decreased approximately $24,000 (7%) from the three months ended December 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), and was partially offset by increases in collocation and personnel expenses in the current period. Sales and marketing expenses decreased by approximately $16,000 (9%) for the three months ended December 31, 2005 compared to the three months ended December 31, 2004. 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 December 31, 2005 were approximately $45,000 (12%) less than these expenses during the three months ended December 31, 2004. The decrease resulted primarily from a decrease in general and administrative and related expenses, partially offset by an increase in rent expense as a result of an increase in leased office space, and an increase in public accounting fees of approximately $8,000. Additional decreases resulted primarily from a decrease in professional and consulting fees of approximately $22,000 and a decrease in business license fees of approximately $10,000 as result of the tax exempt categorization by the City of Alexandria. Stock-based compensation was approximately $321,000 during the three months ended December 31, 2005 and was related to the adoption of the SFAS 123 (R), as discussed above. Depreciation and amortization expense for the three months ended December 31, 2005 was approximately $40,000 (51%) 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 the prior year. Other expense, net of other income, for the three months ended December 31, 2005 decreased approximately $17,000, or 43%, compared to the three months ended December 31, 2004. This 11 decrease was 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. COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 2005, TO THE SIX MONTHS ENDED DECEMBER 31, 2004 During the six months ended December 31, 2005, we reported an operating loss of approximately $58,000, compared to operating income of approximately $291,000 during the six months ended December 31, 2004. We reported a net loss of approximately $121,000 during the six months ended December 31, 2005, compared to net income of approximately $216,000 for the six months ended December 31, 2004. As discussed below, the decline in operating and net income is due primarily to decreased gross profit margins and 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 six months ended December 31, 2005, total revenues were approximately $3,929,000 or approximately $144,000 (4%) less than the total revenues for the six months ended December 31, 2004. 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 costs due to a decline in their revenues. 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 six months ended December 31, 2005 was approximately $1,875,000 or approximately $72,000 (3%) less than the cost of revenues for the six months ended December 31, 2004. The decrease in cost is due to a reduction in content fixed fees of approximately $57,000, a decrease of approximately $117,000 in depreciation and amortization expense, and a decrease of approximately $5,000 in data transmission costs which was offset by an increase in content royalties of approximately $107,000. Gross profit for the six months ended December 31, 2005 was approximately $2,054,000 or approximately $72,000 (3%) less than the gross profit for the same period in the prior year. The gross profit as a percentage of revenue for the six months ended December 31, 2005 was unchanged at approximately 52% as was for the six months ended December 31, 2004. Total operating expenses for the six months ended December 31, 2005 were approximately $2,112,000 representing an approximate $277,000 (15%) increase in operating expenses from the six months ended December 31, 2004. The increase in expenses resulted 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 six months ended December 31, 2005 decreased approximately $35,000 (5%) from the six months ended December 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 12 move the production data center to an offsite, hosted facility), and was partially offset by increases in collocation and personnel expenses in the current period. Sales and marketing expenses decreased by approximately $14,000 (4%) for the six months ended December 31, 2005 compared to the six months ended December 31, 2004. 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 six months ended December 31, 2005 were approximately $52,000 (8%) less than these expenses during the six months ended December 31, 2004. The decrease resulted primarily from a decrease in general and administrative and related expenses, partially offset by an increase in rent expense as a result of an increase in leased office space, an increase in personnel and recruiting expenses due to the appointment of the President and Chief Operation Officer, and an increase in public accounting fees of approximately $12,000. Additional decreases resulted primarily from a decrease in consulting fees of approximately $8,000; a decrease in professional and consulting fees of approximately $30,000; a decrease in board of director fees of approximately $7,000 due to a decrease in the number of meetings in the current period and business license fees as result of the tax exempt categorization by the City of Alexandria. Stock-based compensation was approximately $437,000 during the six months ended December 31, 2005 and was related to the adoption of the SFAS 123 (R), as discussed above. Depreciation and amortization expense for the six months ended December 31, 2005 was approximately $60,000 (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 expenses associated with the move of our data center to an offsite, hosted facility in the prior year. Other expense, net of other income, for the six months ended December 31, 2005 decreased approximately $27,000, or 38%, compared to the six months ended December 31, 2004. This decrease was 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 six months ended December 31, 2005, we had an operating loss of approximately $58,000 and a net loss of approximately $121,000. At December 31, 2005, we had working capital of approximately $1,290,000, compared to a working capital of approximately $812,000 at June 30, 2005. We had net stockholders' equity of approximately $733,000 and $406,000 at December 31, 2005 and June 30, 2005 respectively. The increase in stockholders' equity is primarily due the recording of stock-based compensation for the six months ended December 31, 2005. We had cash of approximately $1,502,000 at December 31, 2005, compared to $1,225,000 at June 30, 2005. For the six months ended December 31, 2005, operating activities generated approximately $448,000 in cash. 13 We made capital expenditures of approximately $21,000 during the six months ended December 31, 2005, primarily for computer and communications equipment for new staff and product development. Financing activities resulted in payments of approximately $150,000 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 December 31, 2005 are as follows:
AMOUNTS DUE BY PERIOD -------------------------------------------------------- 2006 2007 2008 -------------------------------------------------------- Operating Leases $ 101,453 $ 97,872 $ - Capital Leases 10,109 6,834 - Note Payable, Affiliate - - 856,954 -------------------------------------------------------- Total $ 111,562 $ 104,706 $ 856,954 ========================================================
Currently we are dependent on our cash reserves to fund operations and the accounts receivable financing through the bank available. We recorded a net loss for the quarter ended December 31, 2005 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 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, as defined below, was approximately $561,000 for the six months ended December 31, 2005 compared to EBITDA of approximately $648,000 for the six months ended December 31, 2004. The decrease in EBITDA during the six months ended December 31, 2005 compared to the six-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 (loss) income to EBITDA; 14 Three Months Ended December 31, 2005 2004 -------------------------------- Reconciliation to EBITDA: Net (loss) Income $ (121) $ 216 Stock Based Compensation 438 - Depreciation and Amortization 181 357 Interest/Other Expenses 47 75 Income Taxes 16 - ----------------------------------- EBITDA $ 561 $ 648 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 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 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)) 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 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. 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) February 14, 2006 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) 18