**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark one)**

**ý****                                ****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended: June 30,2005**

 

**OR**

 

**o****                                ****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from**               **to**               

 

**Commission file number 0-13093**

 

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**HYPERFEED TECHNOLOGIES, INC.**

(Exact name of registrant as specified in its charter)

 
| **Delaware**                                                                | ** ** | **36-3131704**                        |
|-----------------------------------------------------------------------------|------------|---------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization)            |       | (I.R.S. Employer  Identification No.) |
| ** **                                                                  | ** ** | ** **                            |
| **300  S. Wacker Drive, Suite 300, Chicago, Illinois**                 | ** ** | **60606**                             |
| (Address of  Principal Executive Offices)                                   |       | (Zip Code)                            |
| ** **                                                                  | ** ** | ** **                            |
| Registrant’s telephone number, including area code: **(312) 913-2800** |

 

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Indicate by check markwhether the registrant (1) has filed all reports to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes ý  No o

 

Indicate by check mark whether theregistrant is an accelerated filer (as defined in Rule 12b-2 of theAct) Yes o  No ý

 

The number of shares of common stockoutstanding as of August 3, 2005 was 3,090,900 shares.

 

 

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**HYPERFEEDTECHNOLOGIES, INC.**

 

INDEX

 
| PART I.  | Financial  Information                                                                                                    |   |
|---------------|---------------------------------------------------------------------------------------------------------------------------|--------|
|          |                                                                                                                      |   |
| Item 1.       | Consolidated Balance Sheets  as of June 30, 2005 and December 31, 2004 (unaudited)                              |   |
|          |                                                                                                                      |   |
|          | Consolidated Statements of  Operations for the three and six month periods ended June 30, 2005 and  2004 (unaudited) |   |
|          |                                                                                                                      |   |
|          | Consolidated Statements of  Cash Flows for the six month periods ended June 30, 2005 and 2004  (unaudited)           |   |
|          |                                                                                                                      |   |
|          | Notes to Unaudited Interim  Consolidated Financial Statements                                                             |   |
|          |                                                                                                                      |   |
| Item 2.       | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                               |   |
|          |                                                                                                                      |   |
| Item 3.       | Quantitative and Qualitative  Disclosures about Market Risk                                                               |   |
|          |                                                                                                                      |   |
| Item 4.       | Controls and Procedures                                                                                                   |   |
|          |                                                                                                                      |   |
| PART II. | Other  Information                                                                                                        |   |
|          |                                                                                                                      |   |
| Item 1.       | Legal Proceedings                                                                                                         |   |
|          |                                                                                                                      |   |
| Item 4.       | Submission of Matters to a  Vote of Security Holders                                                                      |   |
|          |                                                                                                                      |   |
| Item 6.       | Exhibits and Reports on  Form 8-K                                                                                    |   |
|          |                                                                                                                      |   |
|          | Company’s Signature Page                                                                                             |   |

 

2

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**PART I**

 

**ITEM 1.Financial Statements**

 

HYPERFEEDTECHNOLOGIES, INC. AND SUBSIDIARY

ConsolidatedBalance Sheets (Unaudited)

 
| ** **                                                                                                                                                                   | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                                                                                   |       |                    |       |                        |       |
| **Current  Assets**                                                                                                                                                          |       |                    |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                   |       | $                       | 176,870    |                        | $          | 193,702 |   |
| Accounts  receivable, less allowance for doubtful accounts of: 2005: $41,204; 2004:  $34,031                                                                                 |       | 368,035                 |       | 576,092                     |       |
| Notes  receivable, less allowance for doubtful accounts of: 2005: $10,830; 2004:  $60,830                                                                                    |       | 90,493                  |       | 93,798                      |       |
| Prepaid expenses  and other current assets                                                                                                                                   |       | 186,234                 |       | 125,890                     |       |
| Assets related  to discontinued operations                                                                                                                                   |       | 57,094                  |       | 72,270                      |       |
| **Total  Current Assets**                                                                                                                                                    |       | 878,726                 |       | 1,061,752                   |       |
|                                                                                                                                                                         |       |                    |       |                        |       |
| Property and  equipment                                                                                                                                                      |       |                    |       |                        |       |
| Computer  equipment                                                                                                                                                          |       | 1,381,448               |       | 1,627,021                   |       |
| Communication  equipment                                                                                                                                                     |       | 783,430                 |       | 1,031,370                   |       |
| Furniture and  fixtures                                                                                                                                                      |       | 84,426                  |       | 106,559                     |       |
| Leasehold  improvements                                                                                                                                                      |       | 9,260                   |       | 531,809                     |       |
|                                                                                                                                                                         |       | 2,258,564               |       | 3,296,759                   |       |
| Less:  Accumulated depreciation and amortization                                                                                                                             |       | (1,603,797              | )          | (2,457,645                  | )          |
| Property and  equipment, net                                                                                                                                                 |       | 654,767                 |       | 839,114                     |       |
| Intangible  assets, net of accumulated amortization of: 2005: $341,250; 2004: $229,167                                                                                       |       | 316,250                 |       | 78,333                      |       |
| Licensed and  developed software costs, net of accumulated amortization of: 2005:  $2,019,252; 2004: $3,016,799                                                              |       | 2,896,782               |       | 1,686,975                   |       |
| Deposits and  other assets                                                                                                                                                   |       | 47,060                  |       | 46,472                      |       |
| **Total  Assets**                                                                                                                                                            |       | $                       | 4,793,585  |                        | $          | 3,712,646 |   |
|                                                                                                                                                                         |       |                    |       |                        |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                               |       |                    |       |                        |       |
| **Current  Liabilities**                                                                                                                                                     |       |                    |       |                        |       |
| Convertible note  payable to affiliate                                                                                                                                       |       | $                       | 2,805,000  |                        | $          | — |   |
| Line of credit                                                                                                                                                               |       | 500,000                 |       | 465,000                     |       |
| Accounts payable                                                                                                                                                             |       | 1,076,384               |       | 634,299                     |       |
| Accrued expenses                                                                                                                                                             |       | 597,629                 |       | 170,547                     |       |
| Accrued  professional fees                                                                                                                                                   |       | 124,000                 |       | 158,225                     |       |
| Accrued  compensation                                                                                                                                                        |       | 87,447                  |       | 77,763                      |       |
| Income taxes  payable                                                                                                                                                        |       | 27,270                  |       | 27,270                      |       |
| Unearned revenue                                                                                                                                                             |       | 173,243                 |       | 268,042                     |       |
| Liabilities  related to discontinued operations                                                                                                                              |       | 810,420                 |       | 849,172                     |       |
| **Total  Current Liabilities**                                                                                                                                               |       | 6,201,393               |       | 2,650,318                   |       |
|                                                                                                                                                                         |       |                    |       |                        |       |
| Accrued  expenses, less current portion                                                                                                                                      |       | 1,081,707               |       | 297,164                     |       |
| **Total  Noncurrent Liabilities**                                                                                                                                            |       | 1,081,707               |       | 297,164                     |       |
| **Total  Liabilities**                                                                                                                                                       |       | 7,283,100               |       | 2,947,482                   |       |
|                                                                                                                                                                         |       |                    |       |                        |       |
| **Stockholders’  Equity**                                                                                                                                               |       |                    |       |                        |       |
| Preferred stock,  $.001 par value; authorized 5,000,000 shares; none issued and outstanding                                                                                  |       | —                  |       | —                      |       |
| Common stock,  $.001 par value; authorized 50,000,000 shares; issued and outstanding  3,090,900 shares at June 30, 2005 and 3,064,493 shares at December 31,  2004 |       | 3,091                   |       | 3,065                       |       |
| Additional  paid-in capital                                                                                                                                                  |       | 46,890,132              |       | 46,111,516                  |       |
| Accumulated  deficit                                                                                                                                                         |       | (49,382,738             | )          | (45,349,417                 | )          |
| **Total  Stockholders’ Equity**                                                                                                                                         |       | (2,489,515              | )          | 765,164                     |       |
| **Total  Liabilities and Stockholders’ Equity**                                                                                                                         |       | $                       | 4,793,585  |                        | $          | 3,712,646 |   |

 

See Notes to UnauditedInterim Consolidated Financial Statements.

 

3

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HYPERFEEDTECHNOLOGIES, INC. AND SUBSIDIARY

ConsolidatedStatements of Operations (Unaudited)

 
| ** **                                                              | ** ** | **For The Three Months Ended  June 30,** | ** ** | **For The Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                              | ** ** | **2005**                                      | ** ** | **2004**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Revenue**                                                             |       |                                          |       |                                        |       |   |   |   |   |
| HyperFeed                                                               |       | $                                             | 957,744    |                                        | $          | 1,218,168 |   | $ | 1,751,925 |   | $ | 1,867,178 |   |
| HYPRWare                                                                |       | 86,785                                        |       | 114,250                                     |       | 181,658 |   | 240,551 |   |
| **Total  Revenue**                                                      |       | 1,044,529                                     |       | 1,332,418                                   |       | 1,933,583 |   | 2,107,729 |   |
|                                                                    |       |                                          |       |                                        |       |   |   |   |   |
| **Direct  Costs of Revenue**                                            |       | 278,754                                       |       | 457,797                                     |       | 561,997 |   | 921,465 |   |
|                                                                    |       |                                          |       |                                        |       |   |   |   |   |
| **Gross  Margin**                                                       |       | 765,775                                       |       | 874,621                                     |       | 1,371,586 |   | 1,186,264 |   |
|                                                                    |       |                                          |       |                                        |       |   |   |   |   |
| **Operating  Expenses**                                                 |       |                                          |       |                                        |       |   |   |   |   |
| Sales and  marketing                                                    |       | 505,447                                       |       | 490,894                                     |       | 848,771 |   | 978,741 |   |
| General and  administrative                                             |       | 737,814                                       |       | 662,908                                     |       | 1,537,883 |   | 1,684,996 |   |
| Research and  development                                               |       | 336,320                                       |       | 419,773                                     |       | 731,405 |   | 743,526 |   |
| Operations                                                              |       | 542,449                                       |       | 602,586                                     |       | 1,045,248 |   | 1,280,680 |   |
| Depreciation and  amortization                                          |       | 195,907                                       |       | 201,240                                     |       | 408,856 |   | 415,308 |   |
| **Total  Operating Expenses**                                           |       | 2,317,937                                     |       | 2,377,401                                   |       | 4,572,163 |   | 5,103,251 |   |
|                                                                    |       |                                          |       |                                        |       |   |   |   |   |
| **Loss  from Operations**                                               |       | (1,552,162                                    | )          | (1,502,780                                  | )          | (3,200,577 | ) | (3,916,987 | ) |
|                                                                    |       |                                          |       |                                        |       |   |   |   |   |
| **Other  Income (Expense)**                                             |       |                                          |       |                                        |       |   |   |   |   |
| Interest income                                                         |       | 44                                            |       | 1,443                                       |       | 82 |   | 8,207 |   |
| Interest expense                                                        |       | (495,504                                      | )          | (267                                        | )          | (793,177 | ) | (267 | ) |
| **Other  Income (Expense), Net**                                        |       | (495,460                                      | )          | 1,176                                       |       | (793,095 | ) | 7,940 |   |
|                                                                    |       |                                          |       |                                        |       |   |   |   |   |
| **Loss  from Continuing Operations Before Income Taxes**                |       | (2,047,622                                    | )          | (1,501,604                                  | )          | (3,993,672 | ) | (3,909,047 | ) |
| Income tax  benefit (expense)                                           |       | —                                        |       | (65,000                                     | )          | — |   | 6,000 |   |
| **Loss  from Continuing Operations**                                    |       | (2,047,622                                    | )          | (1,566,604                                  | )          | (3,993,672 | ) | (3,903,047 | ) |
|                                                                    |       |                                          |       |                                        |       |   |   |   |   |
| **Discontinued  Operations**                                            |       |                                          |       |                                        |       |   |   |   |   |
| Loss from  discontinued operations                                      |       | (17,050                                       | )          | (169,829                                    | )          | (39,649 | ) | (360,522 | ) |
| Income tax  benefit (expense) from discontinued operations              |       | —                                        |       | 65,000                                      |       | — |   | 138,000 |   |
| Gain on  disposition of discontinued operations                         |       | —                                        |       | —                                      |       | — |   | 375,000 |   |
| Income tax  expense from gain on disposition of discontinued operations |       | —                                        |       | —                                      |       | — |   | (144,000 | ) |
| **Income  (Loss) from Discontinued Operations**                         |       | (17,050                                       | )          | (104,829                                    | )          | (39,649 | ) | 8,478 |   |
|                                                                    |       |                                          |       |                                        |       |   |   |   |   |
| **Net  Loss**                                                           |       | $                                             | (2,064,672 | )                                           | $          | (1,671,433 | ) | $ | (4,033,321 | ) | $ | (3,894,569 | ) |
|                                                                    |       |                                          |       |                                        |       |   |   |   |   |
| Basic and  diluted net income (loss) per share:                         |       |                                          |       |                                        |       |   |   |   |   |
| Continuing  operations                                                  |       | $                                             | (0.66      | )                                           | $          | (0.52 | ) | $ | (1.30 | ) | $ | (1.28 | ) |
| Discontinued  operations                                                |       | (0.01                                         | )          | (0.03                                       | )          | (0.01 | ) | 0.01 |   |
| Basic and  diluted net loss per share                                   |       | $                                             | (0.67      | )                                           | $          | (0.55 | ) | $ | (1.31 | ) | $ | (1.27 | ) |
|                                                                    |       |                                          |       |                                        |       |   |   |   |   |
| Basic and diluted  weighted-average common shares outstanding           |       | 3,090,333                                     |       | 3,058,892                                   |       | 3,084,390 |   | 3,055,900 |   |

 

See Notes to UnauditedInterim Consolidated Financial Statements.

 

4

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HYPERFEEDTECHNOLOGIES, INC. AND SUBSIDIARY

ConsolidatedStatements of Cash Flows (Unaudited)

 
| ** **                                                                                                   | ** ** | **For The Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                   | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| **Cash  Flows from Operating Activities:**                                                                   |       |                                        |       |   |   |
| Net loss                                                                                                     |       | $                                           | (4,033,321 | ) | $ | (3,894,569 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities:                   |       |                                        |       |   |   |
| Depreciation and  amortization                                                                               |       | 408,856                                     |       | 415,308 |   |
| Amortization of  licensed and developed software costs                                                       |       | 512,208                                     |       | 658,910 |   |
| Provision for  doubtful accounts                                                                             |       | 17,456                                      |       | 9,996 |   |
| Gain on sale of  equipment                                                                                   |       | —                                      |       | (4,888 | ) |
| Interest and  other expense related to convertible note payable to affiliate                                 |       | 776,250                                     |       | — |   |
| Changes in  assets and liabilities, net of effects from dispositions:                                        |       |                                        |       |   |   |
| Accounts  receivable                                                                                         |       | 190,601                                     |       | (1,031,629 | ) |
| Prepaid expenses  and other current assets                                                                   |       | (60,344                                     | )          | (116,250 | ) |
| Deposits and  other assets                                                                                   |       | (587                                        | )          | — |   |
| Accounts payable                                                                                             |       | 442,085                                     |       | 189,280 |   |
| Accrued expenses                                                                                             |       | 187,084                                     |       | 22,722 |   |
| Unearned revenue                                                                                             |       | (94,799                                     | )          | 888,710 |   |
| Net cash used in  continuing operations                                                                      |       | (1,654,511                                  | )          | (2,862,410 | ) |
| Net cash used in  discontinued operations                                                                    |       | (23,576                                     | )          | (857,794 | ) |
| **Net  Cash Used In Operating Activities**                                                                   |       | (1,678,087                                  | )          | (3,720,204 | ) |
|                                                                                                         |       |                                        |       |   |   |
| **Cash  Flows from Investing Activities:**                                                                   |       |                                        |       |   |   |
| Purchase of  property and equipment                                                                          |       | (112,427                                    | )          | (190,418 | ) |
| Licensed and  developed software costs capitalized                                                           |       | (722,015                                    | )          | (676,236 | ) |
| Proceeds from  sale of equipment                                                                             |       | —                                      |       | 26,000 |   |
| Purchase of  intangible asset                                                                                |       | (350,000                                    | )          | — |   |
| Repayment of  note receivable                                                                                |       | 3,305                                       |       | 20,835 |   |
| **Net  Cash Used In Investing Activities**                                                                   |       | (1,181,137                                  | )          | (819,819 | ) |
|                                                                                                         |       |                                        |       |   |   |
| **Cash  Flows from Financing Activities:**                                                                   |       |                                        |       |   |   |
| Proceeds from  issuance of common stock                                                                      |       | 2,392                                       |       | 35,014 |   |
| Proceeds from  convertible note payable to affiliate                                                         |       | 2,805,000                                   |       | — |   |
| Net borrowings  under line of credit                                                                         |       | 35,000                                      |       | 200,000 |   |
| **Net  Cash Provided By Financing Activities**                                                               |       | 2,842,392                                   |       | 235,014 |   |
|                                                                                                         |       |                                        |       |   |   |
| **Net  decrease in cash and cash equivalents**                                                               |       | (16,832                                     | )          | (4,305,009 | ) |
| Cash and cash  equivalents:                                                                                  |       |                                        |       |   |   |
| Beginning of the  period                                                                                     |       | 193,702                                     |       | 4,668,038 |   |
|                                                                                                         |       |                                        |       |   |   |
| **End of  the period**                                                                                       |       | $                                           | 176,870    |   | $ | 363,029 |   |
|                                                                                                         |       |                                        |       |   |   |
| **Supplemental  disclosures of noncash operating activities:**                                               |       |                                        |       |   |   |
| Beneficial  conversion feature and commitment fee related to convertible note payable to  affiliate (Note 5) |       | $                                           | 776,250    |   | $ | — |   |
| ** **                                                                                                   |       |                                        |       |   |   |   |   |
| **Supplemental  disclosures of noncash investing and financing activities:**                                 |       |                                        |       |   |   |   |   |
| Acquisition of licensed  software utilizing long-term commitment (Note 4)                                    |       | $                                           | 1,000,000  |   | $ | — |   |

 

See Notes to UnauditedInterim Consolidated Financial Statements.

 

5

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HYPERFEEDTECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO UNAUDITEDINTERIM CONSOLIDATED FINANCIAL STATEMENTS

 

(1) NATURE OFBUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

 

HyperFeed Technologies, Inc.(“HyperFeed” or the “Company”) is a provider of enterprise-wide ticker plantand transaction technology software and services to exchanges, financialinstitutions, content providers, channel partners, and value-added resellers.HyperFeed’s advanced software technology serves as a corporate-wide tickerplant, enabling firms in the financial services industry with the flexibilityand agility to control their own data sources and data content in acost-effective manner.

 

The Company has overtwenty years experience designing, building, and running ticker plants for theNorth American financial marketplace. The Company’s software technology,including the Company’s HTPX product, is currently being used by over thirtycustomers, including exchanges, large financial institutions, and customers ofthe Company’s Data Delivery Utility product. Additionally, the Company hasdeployed more than 1,500 of HyperFeed’s high performance single server HBOXproducts at customer sites. HyperFeed’s technology supports many firmsdemanding transaction and order routing systems.

 

The Company principallyderives revenue from licensing technology and providing management andmaintenance services of HTPX and HBOX software, ticker plant technologies, andmanaged services. Additionally, the Company derives revenue from thedevelopment of customized software.

 

HYPRWare, Inc. (“HYPRWare”)is a majority-owned subsidiary of HyperFeed that receives royalties for formercustomers currently serviced by a channel partner.

 

CURRENT OPERATIONS:  The Company has sustained significant lossesin recent years and in the first six months of 2005. In particular, the Companyincurred a net loss of $4.0 million for the first six months of 2005, comparedto a net loss of $3.9 million for the same period in 2004, and an overall netloss of $4.9 million for the fiscal year ended December 31, 2004. Therecurring losses may raise substantial doubt about the Company’s ability tocontinue as a going concern.  The Company expects to secure additionalcapital from PICO in the quarter ending September 30, 2005.  The Company currently believes, althoughthere can be no assurances in this regard, that its existing and anticipatedcapital resources, including cash and cash equivalents, accounts receivable,assets related to discontinued operations, cash expected to be received fromholdbacks associated with the sale of its institutional consolidated marketdata feed business, available credit under the Restated Convertible Note,and potential capital from financingsources, including PICO, are sufficient to fund its operations over the nexttwelve months. However, the Company may not have sufficient capital resourcesto repay or refinance the Restated Convertible Note when it comes due in March of2006. If the Company requires additional capital resources, there can be noassurances that such capital will be available or that such capital will beavailable on terms satisfactory to the Company; if the Company does not obtainsuch capital, then the Company will be able to fund its operations for ashorter period of time.

 

Following the sale of itsinstitutional consolidated market data feed business in late 2003, HyperFeedhas completed almost two years of operations under its current business model;that is, a business model built on providing ticker plant technologies andrelated consulting services directly and through sales channels in thefinancial services industry, rather than principally using its ticker planttechnology internally as part of a consolidated market data feed business toservice customers. In addition, the Company announced in the first quarter of2005 its acquisition of the assets of Focus Technology Group LLC, including itsSmart Order Routing Technology for Traders (“SORTT”). SORTT features theability to ensure Regulation NMS compliance as well as to break apart anelectronic order and send it to multiple execution venues to gain priceimprovement.

 

In the second quarter of2005, the Company entered into an exclusive license agreement to licenseglobally in perpetuity the source code for Telerate’s Trading Room System(“TRS”) and Active8 technology from Reuters Limited and Moneyline Telerate.Under the terms of the license, the Company is entitled to use and furtherdevelop the TRS technology and the Active8 technology to offer its own marketdata platform and associated data display workstation worldwide. Based on theTRS technology, HyperFeed launched the HyperFeed Market Data Platform (“HMDP”)product. HMDP integrates market data from many sources into many types ofdisplay or application software - transactional, web distribution, riskmanagement, or other mid- and back-office system. Based on the Active8technology, HyperFeed launched the Open Collaborative Container (“OCC”) productto work with HMDP. OCC is intended to provide a professional financial desktop thatis fully customizable for various classes of end users. HMDP and OCC expand theCompany’s product line and the Company intends to market them globally.

 

Under the currentbusiness model, HyperFeed entered into agreements to provide its technology andservices to a variety of participants in the financial services industry. Manyof these agreements were entered into in the latter part of 2004 and in thefirst six

 

6

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months of 2005 (“RecentAgreements”). Substantially all of these agreements are structured to provide alicense fee that is payable monthly over a multiple year term. The Companybelieves that its revenues in any given period will increase to the extent itrecognizes revenue from the Recent Agreements. Further, the Company believesthat it will continue to develop and realize new customers for its technologyand services.

 

In the first quarter of2005, the Company amended and restated an existing Convertible Note with PICO Holdings Inc. (“PICO”), the Company’smajority stockholder, increasing the amount available for borrowing from$1.5 million up to $4.0 million, payable one year from the date of theamendment, as described in Note 5 ofthe Notes to Unaudited Interim Consolidated Financial Statements.

 

PRINCIPLES OFCONSOLIDATION:  The accompanyingunaudited interim consolidated financial statements include the accounts ofHyperFeed and its subsidiary HYPRWare and have been prepared in accordance withaccounting principles generally accepted in the United States of America forinterim financial information and in conjunction with the rules andregulations of the Securities and Exchange Commission. Accordingly, they do notinclude all of the information and footnotes required by accounting principlesgenerally accepted in the United States of America for complete financialstatements. The consolidated interim financial statements include alladjustments, including the elimination of all significant intercompanytransactions in consolidation, which, in the opinion of management, arenecessary in order to make the financial statements not misleading. For furtherinformation, refer to the consolidated financial statements and footnotesincluded in the Company’s annual report on Form 10-K for the year endedDecember 31, 2004.

 

REVENUE RECOGNITION:  The Company principally derives revenue fromlicensing technology and providing management and maintenance services of HTPXand HBOX software, ticker plant technologies, and managed services. Additionally,the Company derives revenue from the development of customized software.

 

Revenue is recognizedfrom the licensing of HTPX and HBOX (1) as payments from customers becomedue when the fee is not fixed or determinable at the outset of the arrangementor (2) ratably over the term of the agreement when post-contract customersupport (“PCS”) has a duration of one year or less. PCS is recognized ratablyover the term. Revenue for the development of customized software, consulting,and implementation services is recognized based on time and materials from theapplication of contract accounting for the development of customized software,or based on an hourly rate when it is not a fixed fee arrangement. Forlicensing of the Company’s software through its sales channels, revenue isrecognized as payments from the reseller become due and generally commencesafter the software is installed at the reseller’s customer site.

 

The Company applies theprovisions of Statement of Position (“SOP”) 97-2, “Software RevenueRecognition,” as amended, which specifies the following four criteria that mustbe met prior to recognizing revenue: (1) persuasive evidence of theexistence of an arrangement; (2) delivery; (3) fixed or determinablefee; and (4) probable collection. In addition, revenue earned on softwarearrangements involving multiple elements is allocated to each element based onthe relative fair values of the elements. When applicable, revenue allocated toHyperFeed’s software products (including specified upgrades/enhancements) isrecognized upon delivery of the products. If the fee is considered fixed anddeterminable, it is recognized as revenue when the sale is effected. If the feeis not considered fixed and determinable, it is recognized as revenue aspayments from customers become due. Revenue allocated to PCS is recognizedratably over the term of the support and revenue allocated to service elements(such as training) is recognized as the services are performed.

 

In accordance with SOP 97-2,revenue from contracts that do not require significant production,modification, or customization of software is recognized when the abovecriteria are met. Revenue from contracts that require significant production,modification, or customization of software is accounted for in conformity withthe provisions of Accounting Research Bulletin No. 45, “Long-TermConstruction Contracts,” using the relevant guidance therein, and SOP 81-1,“Accounting for Performance of Construction-Type and Certain Production-TypeContracts.” SOP 81-1 provides for revenue recognition under the “percentage-of-completion”or “completed contract” method depending on the facts and circumstances ofcontracts entered into and management’s ability to reasonably estimate itsprogress toward completion. Contract losses, if any, are provided for in theirentirety in the period they become known, without regard to thepercentage-of-completion. For those contracts for which the Company cannotreasonably estimate progress toward completion, the Company employs the completedcontract method of accounting. Revenue from arrangements accounted for undercontract accounting are allocated among licensed technologies, managedservices, and consulting fees based on the contractual terms of thearrangements.

 

The use of contract accountinginherently includes the use of estimates of progress toward completion. Suchestimates are subject to periodic revisions and, as a result, the financialstatements could be materially impacted.

 

The Company applies theprovisions of Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Accountingfor Revenue Arrangements with Multiple Deliverables.” EITF 00-21addresses certain aspects of the accounting by a vendor for arrangements underwhich it will perform multiple revenue-generating activities. Specifically,EITF 00-21 addresses how to determine whether an arrangement involvingmultiple deliverables contains more than one earnings process and, if it does,how to divide the arrangement

 

7

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into separate units ofaccounting consistent with the identified earnings processes for revenuerecognition purposes. EITF 00-21 also addresses how arrangementconsideration should be measured and allocated to the separate units ofaccounting in the arrangement.

 

HYPRWare derives revenuefrom royalties related to license fees for customers it referred to TownsendAnalytics, Ltd. (“Townsend”) prior to December 31, 2002. Revenue isrecorded as royalties are reported from Townsend.

 

LICENSED AND DEVELOPEDSOFTWARE COSTS:  Licensed and developedsoftware costs are accounted for in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 86, “Accounting for the Costs ofComputer Software to Be Sold, Leased, or Otherwise Marketed.” Costs associatedwith the planning and design phase of software development, including codingand testing activities necessary to establish technological feasibility ofcomputer software products to be licensed or otherwise marketed, are expensedas research and development costs as incurred. Once technological feasibilityhas been determined, costs incurred in the construction phase of softwaredevelopment including coding, testing, and product quality assurance arecapitalized. In accordance with SFAS No. 86, the Company has capitalizedlicensed software for which the Company believes technological feasibility hasbeen established.

 

Amortization commences atthe time of capitalization or, in the case of a new service offering, at thetime the service becomes available for use. Unamortized capitalized costsdetermined to be in excess of the net realizable value of the product areexpensed at the date of such determination. The accumulated amortization andrelated licensed and developed software costs are removed from the respective accountseffective in the year following full amortization.

 

The Company’s policy isto amortize capitalized software costs by the greater of (1) the ratiothat current gross revenue for a product bear to the total of current andanticipated future gross revenue for that product or (2) the straight linemethod over three years, the remaining estimated economic life of the productincluding the period being reported. The Company assesses the recoverability ofits licensed and developed software costs against estimated future undiscountedcash flows. Given the highly competitive environment in which the Companyoperates and rapid technological changes, it is reasonably possible that thoseestimates of anticipated future gross revenue, the remaining estimated economiclife of the product, or both may be reduced significantly.

 

STOCK BASEDCOMPENSATION:  At June 30, 2005, theCompany had one stock-based employee compensation plan as described in Note 4of the Notes to Consolidated Financial Statements in the Company’s annualreport on Form 10-K for the year ended December 31, 2004. Theplan is accounted for under the recognition and measurement principles ofAccounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees,” and related Interpretations. No stock-based employeecompensation is reflected in net income (loss), as all options granted underthe plan had an exercise price equal to the market value of the underlyingcommon stock on the date of grant. The following table illustrates the effecton net loss and earnings per share if the Company had applied the fair valuerecognition provisions of Statement of Financial Accounting Standards No. 123,“Accounting for Stock-Based Compensation,” to stock-based employee compensationfor the three and six months ended June 30, 2005 and 2004:

 
| ** **                                                                                                                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                 | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net loss, as  reported                                                                                                     |       | $                                     | (2,064,672 | )                                   | $          | (1,671,433 | ) | $ | (4,033,321 | ) | $ | (3,894,569 | ) |
| Compensation  benefit (expense) related to stock options granted and employee stock  purchase plan issuances, net of taxes |       | (47,285                               | )          | 61,532                              |       | (100,283 | ) | (7,140 | ) |
| Pro forma net  loss                                                                                                        |       | $                                     | (2,111,957 | )                                   | $          | (1,609,901 | ) | $ | (4,133,604 | ) | $ | (3,901,709 | ) |
|                                                                                                                       |       |                                  |       |                                |       |   |   |   |   |
| Basic and  diluted net loss per share, as reported                                                                         |       | $                                     | (0.67      | )                                   | $          | (0.55 | ) | $ | (1.31 | ) | $ | (1.27 | ) |
| Pro forma basic  and diluted net loss per share                                                                            |       | $                                     | (0.68      | )                                   | $          | (0.53 | ) | $ | (1.34 | ) | $ | (1.28 | ) |

 

The compensation benefitrelated to stock options granted and employee stock purchase plan issuances forthe three months ended June 30, 2004 resulted from the cancellation duringthe second quarter of 2004 of certain options that had not become fully vestedat the time of cancellation.

 

ACCOUNTS RECEIVABLE:Included in the Company’s accounts receivable balances in the ConsolidatedBalance Sheets are unbilled receivables of zero at December 31, 2004 and$18,750 at June 30, 2005.

 

SOFTWARE LICENSEINDEMNIFICATIONS: In November 2002, the Financial Accounting StandardsBoard (“FASB”) issued FASB Interpretation No. 45, “Guarantor’s Accountingand Disclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others” (“FIN 45”). FIN 45 requires that the Company recognizethe fair value for certain guarantee and indemnification arrangements issued ormodified by the Company after December 31, 2002. In addition, the Companymust continue to monitor the conditions that are subject to the guarantees andindemnifications, as required under previously existing generally

 

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accepted accountingprinciples, in order to identify if a loss has occurred. If the Companydetermines that a loss is probable, the estimated loss must be recognized as itrelates to applicable guarantees and indemnifications. Some of the softwarelicenses granted by the Company contain provisions that indemnify customers ofthe Company’s software from damages and costs resulting from claims allegingthat the Company’s software infringes on the intellectual property rights of athird party. Historically, the Company has not been required to pay materialamounts in connection with claims asserted under these provisions and,accordingly, the Company has not recorded a liability relating to theseindemnification provisions.

 

(2) SEGMENT INFORMATION

 

While the Companyoperates in one industry, financial services, in applying SFAS No. 131, “Disclosuresabout Segments of an Enterprise and Related Information,” the Company hasidentified two segments within which it operates. HyperFeed derives revenueprincipally by providing ticker plant technologies and related consultingservices, and HYPRWare derives revenue from royalties related to license feescollected by Townsend from subscribers to Townsend’s service over the Internetwho had been referred through HYPRWare. The accounting policies of thereportable segments are the same as those described in Note 1. Financialinformation relating to industry segments were as follows for the three and sixmonths ended June 30, 2005 and June 30, 2004:

 
| ** **                                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                              | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Sales  to unaffiliated customers**                    |       |                                  |       |                                |       |   |   |   |   |
| HyperFeed                                               |       | $                                     | 957,744    |                                | $          | 1,218,168 |   | $ | 1,751,925 |   | $ | 1,867,178 |   |
| HYPRWare                                                |       | 86,785                                |       | 114,250                             |       | 181,658 |   | 240,551 |   |
| Total revenue                                           |       | $                                     | 1,044,529  |                                | $          | 1,332,418 |   | $ | 1,933,583 |   | $ | 2,107,729 |   |
|                                                    |       |                                  |       |                                |       |   |   |   |   |
| HyperFeed                                               |       | 91.7                                  | %          | 91.4                                | %          | 90.6 | % | 88.6 | % |
| HYPRWare                                                |       | 8.3                                   | %          | 8.6                                 | %          | 9.4 | % | 11.4 | % |
| Total revenue                                           |       | 100.0                                 | %          | 100.0                               | %          | 100.0 | % | 100.0 | % |
|                                                    |       |                                  |       |                                |       |   |   |   |   |
| **Operating  income (loss) from continuing operations** |       |                                  |       |                                |       |   |   |   |   |
| HyperFeed                                               |       | $                                     | (1,638,235 | )                                   | $          | (1,608,670 | ) | $ | (3,378,124 | ) | $ | (4,135,759 | ) |
| HYPRWare                                                |       | 86,073                                |       | 105,890                             |       | 177,547 |   | 218,772 |   |
| Total operating  loss from continuing operations        |       | $                                     | (1,552,162 | )                                   | $          | (1,502,780 | ) | $ | (3,200,577 | ) | $ | (3,916,987 | ) |
|                                                    |       |                                  |       |                                |       |   |   |   |   |
| HyperFeed                                               |       |                                  | *          |                                | *          |   | * |   | * |
| HYPRWare                                                |       |                                  | *          |                                | *          |   | * |   | * |
| Total operating  loss from continuing operations        |       |                                  | *          |                                | *          |   | * |   | * |
|                                                    |       |                                  |       |                                |       |   |   |   |   |
| **Identifiable  assets**                                |       |                                  |       |                                |       |   |   |   |   |
| HyperFeed                                               |       | $                                     | 4,655,788  |                                | $          | 5,290,393 |   | $ | 4,655,788 |   | $ | 5,290,393 |   |
| HYPRWare                                                |       | 137,797                               |       | 195,350                             |       | 137,797 |   | 195,350 |   |
| Total  identifiable assets                              |       | $                                     | 4,793,585  |                                | $          | 5,485,743 |   | $ | 4,793,585 |   | $ | 5,485,743 |   |
|                                                    |       |                                  |       |                                |       |   |   |   |   |
| HyperFeed                                               |       | 97.1                                  | %          | 96.4                                | %          | 97.1 | % | 96.4 | % |
| HYPRWare                                                |       | 2.9                                   | %          | 3.6                                 | %          | 2.9 | % | 3.6 | % |
| Total  identifiable assets                              |       | 100.0                                 | %          | 100.0                               | %          | 100.0 | % | 100.0 | % |

 

----

* percentages notmeaningful

 

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(3) INTANGIBLES

 

On September 23,2004, HyperFeed repurchased a customer contract that had been sold by HyperFeedto Interactive Data Corporation (“IDC”) as part of the sale of HyperFeed’sinstitutional consolidated market data feed business in October 2003. As aresult of this repurchase, the Company recorded an intangible asset of$127,500. At June 30, 2005, the intangible asset was fully amortized.

 

On February 16,2005, the Company acquired Focus Technology Group LLC (“Focus”), a Delawarelimited liability company, developer of Smart Order Routing Technology forTraders (“SORTT”). The acquisition strengthened the Company’s position as aleading neutral provider of high performance financial utilities for electronictrading by adding broker-neutral smart order routing technology to the Company’sproduct offerings.

 

The terms and conditionsof the acquisition, including the purchase of the SORTT technology, werespecified in an Asset Purchase Agreement by and among the Company and Focus.The Company purchased substantially all of the assets of Focus, which primarilyconsisted of developed technology, a customer contract and relationships. Theaggregate purchase price consisted of guaranteed and contingent payments. Theguaranteed portion of the purchase price was $350,000, with $250,000 paid atclosing and $100,000 due on the first anniversary following closing. TheCompany’s obligation to make the contingent payments depends on the achievementof certain growth targets for license and maintenance revenues from the SORTTapplications, and will be accounted for as royalty expense in the appropriateperiods. The contingent portion will be paid, if at all, during the three yearperiod following the closing and may not exceed $3.4 million in the aggregate.As of June 30, 2005, the Company did not have any obligation to make thecontingent payments. The Company also entered into employment agreements withtwo principals of Focus.

 

The acquisition of Focuswas considered to be an acquisition of a development stage enterprise, asdefined under SFAS No. 141, “Business Combinations,” and was notconsidered a business combination. As a result, the transaction was accountedfor under SFAS No. 142, “Goodwill and Other Intangible Assets.” Thepurchase price of $350,000 was allocated to the identifiable intangible assetsacquired including developed technology, customer contracts and relationships,and non-compete conditions as noted in the Asset Purchase Agreement on thebasis of their estimated fair values on the acquisition date. The Companyallocated $250,000 to developed technology, $80,000 to non-compete agreements,and $20,000 to customer contracts, with amortization periods of three years,two years, and one year, respectively. The results of operations of Focus willbe included in the 2005 Consolidated Statement of Operations from the date ofthe acquisition. In connection with the Focus acquisition, the Company incurredtransaction fees of approximately $26,000, including legal and accounting fees.

 

Intangible asset data isas follows as of June 30, 2005:

 
| ** **                                  | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| Amortized  intangibles                      |       |                        |       |                          |       |
| Developed  technology                       |       | $                           | 430,000    |                          | $          | (191,250 | ) |
| Non-compete  agreements                     |       | 80,000                      |       | (15,000                       | )          |
| Acquired  customer contract                 |       | 147,500                     |       | (135,000                      | )          |
| Total                                       |       | $                           | 657,500    |                          | $          | (341,250 | ) |
|                                        |       |                        |       |                          |       |
| Estimated  amortization, for the year ended |       |                        |       |                          |       |
| December 31,  2005                     |       | $                           | 203,750    |                          |       |   |
| December 31,  2006                     |       | 125,833                     |       |                          |       |
| December 31,  2007                     |       | 88,333                      |       |                          |       |
| December 31,  2008                     |       | 10,417                      |       |                          |       |

 

The net amortizedintangibles at June 30, 2005 are $316,250. The weighted averageamortization period is 2.53 years in total.

 

(4) LICENSEDSOFTWARE

 

On May 20, 2005, theCompany entered into an exclusive license agreement with Reuters Limited, acorporation organized under the laws of England and Wales (“Reuters”), andMoneyline Telerate, a Delaware corporation (“Telerate”), to license globally inperpetuity the source code for both Telerate’s Trading Room System (“TRS”)and Telerate’s Active8 technology. In accordance with SFAS No. 86, theCompany has recorded the $1.0 million license fee as an asset under licensedand developed software costs with the corresponding liability recorded underaccrued expenses. The license fee is due in two installments with 25% payable January 15,2006 and the remainder payable January 15, 2007. The licensed software hasan estimated useful life of three years and amortization will begin in thethird quarter of 2005.

 

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(5) LINE OF CREDITAND RESTATED CONVERTIBLE NOTE

 

TheCompany has a line of credit under which it may borrow up to $500,000 at prime.The Company is obligated to make monthly payments in respect of accruedinterest. Outstanding principal, together with all accrued and unpaid interest,is due upon demand. The line of credit is secured by the assets of the Company,and contains customary representations, warranties, covenants, and events of default.As of June 30, 2005, the Company had borrowings under the line of creditof $500,000.

 

OnNovember 2, 2004, the Company issued to PICO a Secured ConvertiblePromissory Note (the “Convertible Note”). Under the terms of the ConvertibleNote, the Company may borrow up to $1.5 million from PICO, at an interest rateof 8%. In connection with issuing the Convertible Note and concurrent with thefirst draw, the Company recorded a commitment fee by issuing to PICO 25,000shares of common stock of the Company with a fair value of $75,000 in the firstquarter of 2005. As a result, the Company recorded a prepaid asset of$75,000. At June 30, 2005, the prepaid asset was $49,393, net ofamortization of $25,607.

 

On March 28, 2005,the Company and PICO amended and restated the Convertible Note (the “RestatedConvertible Note”). Under the terms of the Restated Convertible Note, theCompany may borrow up to $4.0 million at an interest rate of prime plus 2.75%.The Company is obligated to repay all outstanding principal and accruedinterest under the Restated Convertible Note on March 28, 2006. TheRestated Convertible Note, which is convertible by PICO at any time, providesthat the number of shares that PICO would receive in connection with aconversion of any amounts outstanding under the Restated Convertible Note wouldbe determined by dividing the total outstanding amount to be converted by thelesser of 80% of the five-day moving average per share price of the Company’scommon stock on the date the Restated Convertible Note was given and 80% of thefive-day moving average per share price of the Company’s common stock on thedate of conversion. The five-day moving average per share price of the Company’scommon stock on the date the Restated Convertible Note was given on March 28,2005 was $2.03. The number of shares of the Company’s common stock issuableupon conversion of the Restated Convertible Note is not subject to a cap.

 

The Restated ConvertibleNote contains a beneficial conversion feature and, as a result, the Companyrecorded additional paid in capital and interest expense of $0.3 million and$0.7 million for the three and six months ended June 30, 2005,respectively, in accordance with EITF Issue No. 00-27, “Applicationof EITF Issue No. 98-5, “Accounting for Convertible Securities withBeneficial Conversion Features or Contingently Adjustable Conversion Ratios,”to Certain Convertible Instruments.” The Restated Convertible Note is securedby the assets of the Company, subordinate to the security interest grantedunder the line of credit, andcontains customary representations, warranties, covenants, and events ofdefault. As of June 30,2005, the Company had borrowed $2.8 million under the terms of the RestatedConvertible Note and recorded accrued interest of $52,589.

 

(6) DISCONTINUEDOPERATIONS

 

On October 31, 2003,the Company sold its institutional consolidated market data feed business toInteractive Data Corporation (“IDC”) for $8.5 million. The sale allowedHyperFeed to focus on its business model as a utility provider of technology,software, and managed services for financial institutions. The sale price of$8.5 million included (1) an initial payment of $7.0 million cash paid on October 31,2003, (2) $625,000 in holdbacks payable upon completion of custom softwareand the fulfillment of certain transition services and (3) an $875,000indemnification holdback. The Company also entered into a transition servicesagreement whereby IDC reimburses HyperFeed on a monthly basis for direct costsrelative to the purchased business. These costs include costs associated withresources dedicated to the transition, communications expenses, and otherrelated costs. The Company received $375,000 of the $625,000 in holdbacksrelated to completion of customer software and fulfillment of certaintransition services during the first quarter of 2004. As of June 30, 2005,the Company remains, subject to satisfaction of certain conditions, eligible toreceive $785,000 from the holdbacks, net of $90,000 attributable to the customercontract repurchased from IDC on September 23, 2004.

 

On June 2, 2003, theCompany sold the individual retail investor unit and related assets of itssubsidiary, PCQuote.com, Inc., to Money.net, Inc. The sale was partof the Company’s strategy to reduce its dependence on revenue from theindividual investor and replace and grow that revenue with revenue from HTPXtechnology licensing sales. The sale price consisted of (1) $150,000 cashreceived in June 2003, (2) $70,000 cash received in July 2003,and (3) a $150,000 promissory note due in twelve equal monthlyinstallments commencing on July 15, 2003 with an interest rate of 8.0% perannum. At June 30, 2005, the principal balance remaining on the promissorynote was $90,493 (all of which is past due), net of an allowance of $10,830.HyperFeed is pursuing collection of this promissory note. See also Note 8 of the Notes to Unaudited InterimConsolidated Financial Statements.

 

The dispositions havebeen accounted for as discontinued operations in accordance with SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets” and,accordingly, amounts in the consolidated statements of operations for allperiods shown have been reclassified to reflect the dispositions asdiscontinued operations. The results of operations for the discontinuedbusinesses are as follows:

 

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Operating expenses fromdiscontinued operations were $39,649, unadjusted for taxes, and $222,522, netof a $138,000 tax benefit, for the six months ended June 30, 2005 and2004, respectively. Operating expenses from discontinued operations were$17,050, unadjusted for taxes, and $104,829, net of a $65,000 tax benefit, forthe three months ended June 30, 2005 and 2004, respectively. There were norevenue or direct costs of revenue from discontinued operations for the threeand six months ended June 30, 2005 and 2004.

 

Assets and liabilitiesrelated to discontinued operations consist of the following:

 
| ** **                                                                                      | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Assets  Related to Discontinued Operations**                                                  |       |                    |       |                        |       |
| Accounts  receivable, net of allowance for doubtful accounts of 2005: $209,948; 2004:  $219,848 |       | $                       | 57,094     |                        | $          | 57,090 |   |
| Prepaid expenses  and other current assets                                                      |       | —                  |       | 15,180                      |       |
| **Total  Assets Related to Discontinued Operations**                                            |       | $                       | 57,094     |                        | $          | 72,270 |   |
|                                                                                            |       |                    |       |                        |       |
| **Liabilities  Related to Discontinued Operations**                                             |       |                    |       |                        |       |
| Accounts payable                                                                                |       | $                       | 778,383    |                        | $          | 771,390 |   |
| Accrued expenses                                                                                |       | 23,557                  |       | 56,711                      |       |
| Accrued  compensation                                                                           |       | 8,480                   |       | 10,631                      |       |
| Unearned revenue                                                                                |       | —                  |       | 10,440                      |       |
| **Total  Liabilities Related to Discontinued Operations**                                       |       | $                       | 810,420    |                        | $          | 849,172 |   |

 

(7) SIGNIFICANTCUSTOMERS

 

BetweenJune 2003 and May 2004, HyperFeed signed contracts withTelerate (formerly known as MoneyLine Telerate) to license HyperFeed’s HBOX andHTPX technology to Telerate, provide related maintenance and to developcustomized software. As a result of thesale of Telerate to Reuters, on November 19, 2004, Telerate elected toexercise its contractual right to terminate the agreements between HyperFeedand Telerate. Telerate accounted for approximately 0% and 61.3% of the Company’sconsolidated revenue for the six months ended June 30, 2005 and 2004,respectively, and approximately 0% and 69.5% of the Company’s consolidatedrevenue for the three months ended June 30, 2005 and 2004, respectively.ComStock accounted for approximately 19.1% and 15.4% of the Company’sconsolidated revenue for the six months ended June 30, 2005 and 2004,respectively, and approximately 16.8% and 12.2% of the Company’s consolidatedrevenue for the three months ended June 30, 2005 and 2004, respectively.Susquehanna International Group, LLP accounted for approximately 12.5% and 0%of the Company’s consolidated revenue for the six months ended June 30,2005 and 2004, respectively, and approximately 11.6% and 0% of the Company’sconsolidated revenue for the three months ended June 30, 2005 and 2004,respectively. Townsend accounted for approximately 9.4% and 11.4% of theCompany’s consolidated revenue for the six months ended June 30, 2005 and2004, respectively, and approximately 8.3% and 8.6% of the Company’sconsolidated revenue for the three months ended June 30, 2005 and 2004,respectively.

 

(8) LITIGATION

 

On June 2, 2003, theCompany sold the individual retail investor unit and related assets of itssubsidiary, PCQuote.com, Inc., to Money.net, Inc. On August 24,2004, the Company filed a six-count complaint for breach of contract andamounts due in the Circuit Court of Cook County, Illinois against Money.net.The amounts sought in the complaint are $131,155 for a promissory note,including interest, $31,920 from a datafeed license agreement, and $63,917related to a transition services agreement. On November 17, 2004,Money.net filed a motion to dismiss and, as a result, the Company filed anamended complaint on December 7, 2004. On January 7, 2005, Money.netfiled answers to the amended complaint and a counterclaim. On February 3,2005, the Company answered Money.net’s counterclaim, which included sevenaffirmative defenses. On July 5, 2005, Money.net’s counterclaim wasstricken. On July 19, 2005, the Company filed a motion for summaryjudgment. As of June 30, 2005, the Company had a promissory note andaccounts receivable, net of allowances, of $151,122 due from Money.net.

 

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**ITEM 2Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

The unauditedconsolidated financial statements herein have been prepared by the Companypursuant to the rules and regulations of the Securities and ExchangeCommission. The accompanying interim consolidated financial statements havebeen prepared under the presumption that users of the interim financialinformation have either read or have access to the audited financial statementsfor the latest fiscal year ended December 31, 2004. Accordingly, footnotedisclosures which would substantially duplicate the disclosures contained inthe December 31, 2004 audited consolidated financial statements have beenomitted from these interim consolidated financial statements. Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted pursuant to such rules andregulations. In our opinion, the accompanying unaudited consolidated financialstatements contain all adjustments necessary for a fair presentation. Althoughthe Company believes that the disclosures are adequate to make the informationpresented not misleading, it is suggested that these interim consolidatedfinancial statements be read in conjunction with the consolidated financialstatements and the notes thereto included in the Company’s latest Annual Reporton Form 10-K.

 

This Quarterly Report on Form 10-Qcontains forward-looking statements that involve risks and uncertainties, aswell as assumptions that, if they never materialize or prove incorrect, couldcause the results of HyperFeed Technologies, Inc. (“HyperFeed”) and itssubsidiary, HYPRWare, Inc. (“HYPRWare”) (collectively, the “Company”), todiffer materially from those expressed or implied by such forward-lookingstatements. All statements other than statements of historical fact arestatements that could be deemed forward-looking statements, including anystatements of the plans, strategies and objectives of management for futureoperations; any statements regarding future economic conditions or performance;any statement of expectation or belief; and any statements of assumptionsunderlying any of the foregoing. The risks, uncertainties, and assumptionsreferred to above include risks related to the possibility of requiringadditional financing; the possible issuance of additional shares and significantdilution of our stockholders’ ownership percentage associated with our securedconvertible note payable; the execution of our business plan; the fluctuationsin our financial results; our history of operating losses; attracting andretaining qualified management and key employees; the timely development andintroduction of new product and service initiatives at competitive prices andperformance levels; pending or future legal proceedings; the effect of economicand business conditions generally; and risks that are otherwise described inthe Company’s Annual Report on Form 10-K for the year ended December 31,2004 and from time to time in the Company’s other reports and registrationstatements filed with the Securities and Exchange Commission.

 

OVERVIEW

 

We believe that the firstsix months of 2005 was an important period for us. In particular, we completedalmost two years of operations under our current business model; that is, abusiness model built on providing ticker plant technologies and related consultingservices directly and through sales channels in the financial servicesindustry, rather than principally using our ticker plant technology internallyas part of a consolidated market data feed business to service customers.Additionally, in the first quarter of 2005, we announced our acquisition of theassets of Focus Technology Group LLC, including its Smart Order RoutingTechnology for Traders (“SORTT”). SORTT features the ability to ensureRegulation NMS compliance as well as to break apart an electronic order andsend it to multiple execution venues to gain price improvement.

 

In the second quarter of2005, we entered into an exclusive license agreement to license globally inperpetuity the source code for Telerate’s Trading Room System (“TRS”) andActive8 technology from Reuters Limited and Moneyline Telerate. Under the termsof the license, we are entitled to use and further develop the TRS technologyand the Active8 technology to offer our own market data platform and associateddata display workstation worldwide. Based on the TRS technology, we launchedthe HyperFeed Market Data Platform (“HMDP”) product. HMDP integrates marketdata from many sources into many types of display or application software -transactional, web distribution, risk management, or other mid- and back-officesystem. Based on the Active8 technology, we launched the Open CollaborativeContainer (“OCC”) product to work with HMDP. OCC is intended to provide aprofessional financial desktop that is fully customizable for various classesof end users. HMDP and OCC expand our product line and we intend to market themglobally. The Company has recorded the $1.0 million license fee as an assetunder licensed and developed software costs with the corresponding liabilityrecorded under accrued expenses. The license fee is due in two installmentswith 25% payable January 15, 2006 and the remainder payable January 15,2007.

 

Under our currentbusiness model, we derive our revenues from software licensing, maintenance,and consulting fees. In general, we expect that our licensing fees will bestructured as one time fee with a recurring maintenance fee, a recurringmonthly fee, based upon the nature, size, and scope of the licensee, or amonthly fee, based upon the number of end users that rely upon the products andservices offered by the licensee. Consulting fees charged to customers areexpected to vary based upon the nature, size, and scope of the projectsundertaken.

 

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Our direct costs ofrevenue are composed largely of amortization of licensed and developed softwarecosts, royalty fees and labor associated with consulting services.

 

Our ability tosuccessfully execute our business model will be dependent on our ability tomaintain and develop advanced ticker plant technologies in a cost effectivemanner and aggressively license such technologies to the financial servicesindustry.

 

During the first quarterof 2005, we amended and restated an existing Convertible Note (the “RestatedConvertible Note”) with PICOHoldings Inc. (“PICO”), our majority stockholder, increasing the amountavailable for borrowing from $1.5 million up to $4.0 million, payable one yearfrom the date of the amendment, as described in Note 5 of the Notes to Unaudited Interim Consolidated FinancialStatements.

 

RESULTS OF OPERATIONS:FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004

 

**Revenue**

 

Totalrevenue for the six months ended June 30, 2005 decreased 8.3% to $1.9million compared with $2.1 million for the six months ended June 30, 2004.Total revenue for the three months ended June 30, 2005 decreased 21.6% to$1.0 million compared with $1.3 million for the three months ended June 30,2004. Both HyperFeed and HYPRWare revenue decreased for the three and six monthsended June 30, 2005 compared to the same periods in 2004.

 

HyperFeed revenuedecreased 6.2% to $1.8 million for the six months ended June 30, 2005 ascompared to $1.9 million for the six months ended June 30, 2004. HyperFeedrevenue decreased 21.4% to $1.0 million for the three months ended June 30,2005 as compared to  $1.2 million for thecomparable period in 2004. HyperFeed’s revenue from Telerate for the three andsix months ended June 30, 2004 was $0.9 million, or 76.1%, and $1.3million, or 69.3%, respectively. As a result of the sale of Telerate toReuters, on November 19, 2004, Telerate elected to exercise itscontractual right to terminate the license agreement between HyperFeed andTelerate executed in 2004. The Company did not record any revenue from Telerateduring three and six months ended June 30, 2005 and does not currentlyexpect future revenue from Telerate. Excluding revenue from Telerate in 2004,HyperFeed revenue increased $1.2 million, or 205.1%, for the six months ended June 30,2005 and $0.7 million, or 228.6%, for the three months ended June 30,2005. These increases resulted from an increase in the number of customersusing HyperFeed’s technology. HyperFeed revenue is derived from HTPX and HBOXsoftware and ticker plant technologies and includes software license,maintenance, and consulting revenue, including revenue from multi-yearcontracts with Chicago Board Options Exchange, Philadelphia Stock Exchange,ComStock, Susquehanna International Group, LLP, and The Nasdaq Stock Market, Inc.

 

HYPRWare revenuedecreased 24.5% to $181,658 for the six months ended June 30, 2005compared with $240,551 for the six months ended June 30, 2004. For thethree months ended June 30, 2005, HYPRWare revenue decreased 24.0% to$86,785 compared with $181,658 for the three months ended June 30, 2004.HYPRWare derives revenue from royalties related to license fees for customersit referred to Townsend Analytics, Ltd. (“Townsend”) prior to December 31,2002. The decline in HYPRWare service revenue is due to a decrease in royaltiesfrom Townsend as former HYPRWare customers serviced by Townsend decrease.HyperFeed currently expects that any future revenue recognized by HYPRWare willbe derived exclusively from royalties from the licensing agreement with Townsend.

 

**TotalExpenses**

 

Total expenses (includingdirect costs of revenue, operating expenses, and expenses in discontinuedoperations) decreased 6.6% to $6.0 million for the six months ended June 30,2005 compared with $6.4 million for the six months ended June 30, 2004.Total expenses increased 3.5% to $3.1 million for the three months ended June 30,2005 compared with $3.0 million for the three months ended June 30, 2004.The decrease in expenses across the six month periods was principally due toexpenses of $0.4 million incurred in connection with the severance agreemententered into with the Company’s former Chief Executive Officer in the firstquarter of 2004 and a $0.7 million reduction of labor costs, communicationscosts, and third-party fees resulting from the streamlining of operations,including costs associated with discontinued operations, offset by a $0.7million interest expense related to the Restated Convertible Note issued by the Companyto PICO described in Note 5 of the Notesto Unaudited Interim Consolidated Financial Statements.

 

**DirectCosts of Revenue**

 

Total direct costs of revenue decreased 39.0% to $0.6 million for thesix months ended June 30, 2005 compared with $0.9 million for the sixmonths ended June 30, 2004. For the three months ended June 30, 2005,total direct costs of revenue decreased 39.1% to $0.3 million compared with$0.5 million for the three months ended June 30, 2004. The principalcomponent of these decreases across the

 

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threeand six month periods was software development labor costs resulting fromchanges in the employee mix related to a shift from development of customerspecific software for Telerate to development of capitalized software products.Amortization of licensed and developed software costs decreased 22.3% to $0.5million for the six months ended June 30, 2005 as compared to $0.7 millionfor the six months ended June 30, 2004. Amortization of licensed anddeveloped software costs remained relatively unchanged at $0.3 million for thethree months ended June 30, 2005 and 2004. The decrease in amortization oflicensed and developed software costs resulted from the acceleration ofamortization in 2004 of the developed software used during the transition serviceagreement period related to the sale of HyperFeed’s institutional consolidatedmarket data feed business to Interactive Data Corporation (“IDC”) in October 2003.There are no direct costs of revenue related to HYPRWare service revenue assuch amounts consist solely of royalty income. Gross margin increased 15.6% to$1.4 million for the six months ended June 30, 2005 compared with a lossof $1.2 million for the six months ended June 30, 2004. Gross margindecreased 12.4% to $0.8 million for the three months ended June 30, 2005compared with a loss of $0.9 million for the three months ended June 30,2004. Direct costs as a percentage of total revenue decreased to 29.1% for thesix months ended June 30, 2005 compared with 43.7% for the six monthsended June 30, 2004. Direct costs as a percentage of total revenuedecreased to 26.7% for the three months ended June 30, 2005 compared with34.4% for the three months ended June 30, 2004.

 

**OperatingExpenses**

 

Totaloperating expenses decreased 10.4% to $4.6 million for the six months ended June 30,2005 compared with $5.1 million for the six months ended June 30, 2004.For the three months ended June 30, 2005, total operating expensesdecreased 2.5% to $2.3 million compared with $2.4 million for the three monthsended June 30, 2004. Decreases were experienced in sales and marketingcosts, general and administrative expenses, and operations costs for the sixmonths ended June 30, 2005 as compared with the same period in 2004. Forthe three months ended June 30, 2005, decreases were experienced inresearch and development costs and operations costs as compared to the threemonths ended June 30, 2004. Total operating expenses as a percentage oftotal revenue decreased to 236.5% for the six months ended June 30, 2005compared to 242.1% for the six months ended June 30, 2004. Total operatingexpenses as a percentage of total revenue increased to 221.9% for the threemonths ended June 30, 2005 compared to 178.4% for the three months ended June 30,2004.

 

Salesand marketing costs decreased 13.3% to $0.8 million for the six months ended June 30,2005 compared with $1.0 million for the six months ended June 30, 2004.Sales and marketing costs remained unchanged at $0.5 million for the threemonths ended June 30, 2005 and 2004. The decrease for the six-month periodwas primarily due to a reduction in labor costs of $0.1 million resulting froma reduction in personnel caused by attrition. Sales costs as a percentage oftotal revenue decreased to 43.9% for the six months ended June 30, 2005compared to 46.4% for the six months ended June 30, 2004. Sales costs as apercentage of total revenue increased to 48.4% for the three months ended June 30,2005 compared to 36.8% for the three months ended June 30, 2004.

 

General and administrativeexpenses decreased 8.7% to $1.5 million for the six months ended June 30,2005 compared with $1.7 million for the six months ended June 30, 2004.General and administrative expenses remained unchanged at $0.7 million for thethree months ended June 30, 2005 and 2004. The decrease for the six-monthperiod was primarily due to expenses of $0.4 million incurred in connectionwith the severance agreement entered into with the Company’s former ChiefExecutive Officer in the first quarter of 2004, offset by a $0.1 millionincrease in professional fees and related expenses and a $0.1 million increasein facilities costs. General and administrative expenses as a percentage oftotal revenue decreased to 79.5% for the six months ended June 30, 2005compared to 79.9% for the six months ended June 30, 2004. General andadministrative expenses as a percentage of total revenue increased to 70.6% forthe three months ended June 30, 2005 compared to 49.8% for the threemonths ended June 30, 2004.

 

Researchand development costs remained unchanged at $0.7 million for the six monthsended June 30, 2005 and 2004. Research and development costs decreased19.9% to $0.3 million for the three months ended June 30, 2005 comparedwith $0.4 million for the three months ended June 30, 2004. The decreasefor the three-month period resulted from the allocation of software developmentlabor related to development of customer specific software for Telerate todirect costs of revenue in 2004. Research and development costs as a percentageof total revenue increased to 37.8% for the six months ended June 30, 2005compared to 35.3% for the six months ended June 30, 2004. Research anddevelopment costs as a percentage of total revenue decreased to 32.2% for thethree months ended June 30, 2005 compared to 31.5% for the three monthsended June 30, 2004.

 

Operations costsdecreased 18.4% to $1.0 million for the six months ended June 30, 2005compared with $1.3 million for the six months ended June 30, 2004.Operations costs decreased 10.0% to $0.5 million for the three months ended June 30,2005 compared with $0.6 million for the three months ended June 30, 2004.The decrease is principally due to a reduction in labor costs resulting from areduction in personnel and consulting services as part of a streamlining ofoperations in the second quarter of 2004. Operations costs consist of technicalsupport, data maintenance, data access, and communications costs. Operationscosts as a percentage of total revenue decreased to 54.1% for the six monthsended June 30, 2005 compared to 60.8% for the six months ended June 30,2004. Operations costs as a percentage of total revenue increased to 51.9% forthe three months ended June 30, 2005 compared to 45.2% for the threemonths ended June 30, 2004.

 

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Depreciationand amortization remained unchanged at $0.4 million for the six months ended June 30,2005 and 2004 and at $0.2 million for the three months ended June 30, 2005and 2004. Depreciation and amortization as a percentage of total revenuedecreased to 21.1% for the six months ended June 30, 2005 compared to19.7% for the six months ended June 30, 2004. Depreciation andamortization as a percentage of total revenue decreased to 18.8% for the threemonths ended June 30, 2005 compared to 15.1% for the three months ended June 30,2004.

 

**DiscontinuedOperations**

 

In June 2003, theCompany sold the individual retail investor unit and related assets of itssubsidiary, PCQuote.com, Inc., and, in October 2003, the Company soldits institutional consolidated market data feed business. The Company recordeda net loss from discontinued operations of $39,649, unadjusted for tax, for thesix months ended June 30, 2005 compared with net loss of $0.2 million, netof tax benefit of $0.1 million, for the six months ended June 30, 2004.The Company recorded a net loss from discontinued operations of $17,050,unadjusted for tax, for the three months ended June 30, 2005 compared withnet loss of $0.1 million, net of tax benefit of $0.1 million, for the threemonths ended June 30, 2004. The net loss for the six and three monthsended June 30, 2005 and 2004 resulted from the incurrence of inboundcommunications costs associated with the Company’s obligation under atransition services agreement related to the sale of its consolidated marketdata feed business. The Company recorded $0.2 million, net of tax expense of$0.1 million, as a gain on disposition of discontinued operations during thefirst quarter of 2004 related to holdbacks from the sale of the consolidatedmarket data feed business.

 

Assets related todiscontinued operations consist of (1) a receivable for the reimbursementof expenses from IDC and accounts receivable, net of allowance, prior to November 1,2003 and (2) prepaid accounts from data access and communications vendors.Liabilities related to discontinued operations consist of (1) payables tocommunications vendors, (2) accruals for data costs, severance, and rentassociated with discontinued properties, and (3) accrued vacation foremployees dedicated to the transition service. See Note 6 of the Notes toUnaudited Interim Consolidated Financial Statements.

 

LIQUIDITY AND CAPITALRESOURCES

 

Net cash and cashequivalents were unchanged at $0.2 million at June 30, 2005 and December 31,2004.

 

Operating activities usednet cash of $1.7 million for the six months ended June 30, 2005 comparedto net cash used of $3.7 million for the six months ended June 30, 2004.For the six months ended June 30, 2005, continuing operations used $1.7million of cash compared to net cash used of $2.9 million for the six monthsended June 30, 2004. The change in cash used for continuing operationsprimarily resulted from (i) $0.8 million provided from the non-cashexpense related to interest and the beneficial conversion feature of theRestated Convertible Note in 2005; (ii) $1.0 million used by the increasein accounts receivable due from Telerate in 2004, and (iii) $0.9 millionprovided from the increase in unearned revenue due to advanced billings andone-time sales in 2004. For the six months ended June 30, 2005,discontinued operations used $23,576 compared to cash used of $0.9 million forthe six months ended June 30, 2004. The change in cash used fordiscontinued operations resulted from the funding of discontinued operations in2004 and the wind-down of those operations in 2005.

 

Investing activities usednet cash of $1.2 million for the six months ended June 30, 2005 comparedto net cash used of $0.8 million for the six months ended June 30, 2004.During the six months ended June 30, 2005, the Company invested $0.1million in equipment and $0.7 million in its licensed and developed softwarecosts. During the six months ended June 30, 2004, the Company invested$0.2 million in equipment and $0.7 million in its licensed and developedsoftware costs. In the first quarter of 2005, the Company acquired the assetsof Focus Technology Group LLC for $0.4 million, as described in Note 3 of theNotes to Unaudited Interim Consolidated Financial Statements.

 

Financing activitiesprovided net cash of $2.8 million for the six months ended June 30, 2005compared to net cash provided of $0.2 million for the six months ended June 30,2004. The long-term commitment related to licensed software of $1.0 million resultedfrom the deferred payment of the license fee for Telerate’s Trading Room System(“TRS”) and Active8 technology, which is a noncash item for the six monthsended June 30, 2005.

 

TheCompany has a line of credit under which it may borrow up to $500,000 at prime.The Company is obligated to make monthly payments in respect of accruedinterest and outstanding principal, together with all accrued and unpaidinterest, is due upon demand. The line of credit is secured by the assets ofthe Company, and contains customary representations, warranties, covenants, andevents of default. As of June 30, 2005, the Company had borrowings underthe line of credit of $500,000.

 

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OnNovember 2, 2004, the Company issued to PICO a Secured ConvertiblePromissory Note (the “Convertible Note”). Under the terms of the ConvertibleNote, the Company may borrow up to $1.5 million from PICO, at an interest rateof 8%. In connection with issuing the Convertible Note and concurrent with thefirst draw, the Company issued to PICO 25,000 shares of common stock of theCompany with a fair value of $75,000 in the first quarter of 2005.

 

On March 28, 2005,the Company and PICO amended and restated the Convertible Note, which the Companyrefers to as the Restated Convertible Note. Under the terms of the RestatedConvertible Note, the Company may borrow up to $4.0 million at an interest rateof prime plus 2.75%. The Company is obligated to repay all outstandingprincipal and accrued interest under the Restated Convertible Note on March 28,2006. The Restated Convertible Note, which is convertible by PICO at any time,provides that the number of shares that PICO would receive in connection with aconversion of any amounts outstanding under the Restated Convertible Note wouldbe determined by dividing the total outstanding amount to be converted by thelesser of 80% of the five-day moving average per share price of the Company’scommon stock on the date the Restated Convertible Note was given and 80% of thefive-day moving average per share price of the Company’s common stock on thedate of conversion. The five-day moving average per share price of the Company’scommon stock on the date the Restated Convertible Note was given on March 28,2005 was $2.03. The number of shares of the Company’s common stock issuableupon conversion of the Restated Convertible Note is not subject to a cap.

 

The Restated ConvertibleNote contains a beneficial conversion feature and, as a result, the Company recorded$0.3 million of additional paid in capital and interest expense at June 30,2005. The Restated Convertible Note is secured by the assets of the Company,subordinate to the security interest granted under the line of credit and contains customary representations,warranties, covenants, and events of default. As of June 30, 2005, the Company had borrowed $2.8 million underthe terms of the Restated Convertible Note and recorded accrued interest of$52,589.

 

Manyof HyperFeed’s agreements were entered into in the latter part of 2004 andfirst six months of 2005 (“Recent Agreements”). Substantially all of theseagreements are structured to provide a license fee that is payable monthly overa multiple year term. The Company believes that its revenues in any givenperiod will increase to the extent it recognizes revenue from the RecentAgreements. Further, the Company believes that it will continue to develop andrealize new customers for its technology and services. Although there can be noassurances in this regard, the Company believes that these two factors, amongother things, will assist it in achieving profitability.

 

The Company has sustainedsignificant losses in recent years and in the first six months of 2005. Inparticular, the Company incurred a net loss of $4.0 million for the first sixmonths of 2005, compared to a net loss of $3.9 million for the same period in2004, and an overall net loss of $4.9 million for the fiscal year ended December 31,2004. The recurring losses may raise substantial doubt about the Company’sability to continue as a going concern. The Company expects to secure additional capital from PICO in thequarter ending September 30, 2005. The Company currently believes,although there can be no assurances in this regard, that its existing andanticipated capital resources, including cash and cash equivalents, accountsreceivable, assets related to discontinued operations, cash expected to bereceived from holdbacks associated with the sale of its institutionalconsolidated market data feed business, available credit under the RestatedConvertible Note, and potential capital from financing sources, including PICO, are sufficient to fund itsoperations over the next twelve months. However, the Company may not havesufficient capital resources to repay or refinance the Restated ConvertibleNote when it comes due in March of 2006. In the event that PICO choosesnot to convert the Restated Convertible Note into the Company’s common stockand the Company is unable to repay or refinance the Restated Convertible Noteat such time, PICO will have the right to declare the Restated Convertible Notein default and may, at its option, pursue any other remedies available to it.If the Company requires additional capital resources, there can be noassurances that such capital will be available or that such capital will beavailable on terms satisfactory to the Company; if the Company does not obtainsuch capital, then the Company will be able to fund its operations for ashorter period of time.

 

The Company hasconsidered and is willing to consider further various alternatives to enhancingstockholder value, including mergers and acquisitions and other strategictransactions. In addition, the Company has explored and is willing to explorefurther strategic relationships and joint ventures with other technology andfinancial services firms.

 

OFF BALANCE SHEET ARRANGEMENTS

 

The Company has an existing letter of credit in the amount of $75,000.The Company is not a party to any other off-balance sheet arrangements thathave, or are reasonably likely to have, a current or future material effect onthe Company’s financial condition, revenues, expenses, results of operations,liquidity, capital expenditures or capital resources.

 

CRITICAL ACCOUNTINGPOLICIES AND ESTIMATES

 

**General**: Management’s Discussion and Analysisof Financial Condition and Results of Operations discusses the Company’sconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United

 

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States of America. Thepreparation of these financial statements requires the Company’s management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenue and expensesduring the reporting period.

 

On an ongoing basis,management evaluates its estimates and judgments, including those related tobad debts and intangible assets. Management bases its estimates and judgmentson historical experience and on various other factors that are believed to bereasonable under the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions. Management believes thefollowing critical accounting policies, among others, affect its moresignificant judgments and estimates used in the preparation of its consolidatedfinancial statements.

 

**RevenueRecognition**: The Company principally derives revenue fromlicensing technology and providing management and maintenance services of HTPXand HBOX software, ticker plant technologies, and managed services.Additionally, the Company derives revenue from the development of customizedsoftware.

 

Revenue is recognizedfrom the licensing of HTPX and HBOX (1) as payments from customers becomedue when the fee is not fixed or determinable at the outset of the arrangementor (2) ratably over the term of the agreement when post-contract customersupport (“PCS”) has a duration of one year or less. PCS is recognized ratablyover the term. Revenue for the development of customized software, consulting,and implementation services is recognized based on time and materials from theapplication of contract accounting for the development of customized software,or based on an hourly rate when it is not a fixed fee arrangement. For licensingof the Company’s software through its sales channels, revenue is recognized aspayments from the reseller become due and generally commences after thesoftware is installed at the reseller’s customer site.

 

The Company applies theprovisions of Statement of Position (“SOP”) 97-2, “Software RevenueRecognition,” as amended, which specifies the following four criteria that mustbe met prior to recognizing revenue: (1) persuasive evidence of theexistence of an arrangement; (2) delivery; (3) fixed or determinablefee; and (4) probable collection. In addition, revenue earned on softwarearrangements involving multiple elements is allocated to each element based onthe relative fair value of the elements. When applicable, revenue allocated toHyperFeed’s software products (including specified upgrades/enhancements) isrecognized upon delivery of the products. If the fee is considered fixed anddeterminable, it is recognized as revenue when the sale is effected. If the feeis not considered fixed and determinable, it is recognized as revenue aspayments from customers become due. Revenue allocated to PCS is recognizedratably over the term of the support and revenue allocated to service elements(such as training) is recognized as the services are performed.

 

In accordance with SOP 97-2,revenue from contracts that do not require significant production,modification, or customization of software is recognized when the abovecriteria are met. Revenue from contracts that require significant production,modification, or customization of software is accounted for in conformity withthe provisions of Accounting Research Bulletin No. 45, “Long-TermConstruction Contracts,” using the relevant guidance therein, and SOP 81-1,“Accounting for Performance of Construction-Type and Certain Production-TypeContracts.” SOP 81-1 provides for revenue recognition under the “percentage-of-completion”or “completed contract” method depending on the facts and circumstances ofcontracts entered into and management’s ability to reasonably estimate itsprogress toward completion. Contract losses, if any, are provided for in theirentirety in the period they become known, without regard to thepercentage-of-completion. For those contracts for which the Company cannotreasonably estimate progress toward completion, the Company employs thecompleted contract method of accounting. Revenue from arrangements accountedfor under contract accounting are allocated among licensed technologies,managed services, and consulting fees based on the contractual terms of thearrangements.

 

The use of contractaccounting inherently includes the use of estimates of progress towardcompletion. Such estimates are subject to periodic revisions and, as a result,the financial statements could be materially impacted.

 

The Company applies theprovisions of Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Accountingfor Revenue Arrangements with Multiple Deliverables.” EITF 00-21addresses certain aspects of the accounting by a vendor for arrangements underwhich it will perform multiple revenue-generating activities. Specifically,EITF 00-21 addresses how to determine whether an arrangement involvingmultiple deliverables contains more than one earnings process and, if it does,how to divide the arrangement into separate units of accounting consistent withthe identified earnings processes for revenue recognition purposes. EITF 00-21also addresses how arrangement consideration should be measured and allocatedto the separate units of accounting in the arrangement.

 

On October 31, 2003,the Company sold its institutional consolidated market data feed business.Revenue recognized prior to October 31, 2003, related to the assets soldand included in discontinued operations was principally derived from servicecontracts for the provision of market data only and service contracts for theprovision of market data together with analytical software. HyperFeed

 

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primarily serviced thebusiness-to-business marketplace. Revenue from service contracts was recognizedratably over the contract term as the contracted services were rendered.

 

On June 2, 2003, theCompany sold certain assets of HYPRWare, consisting of its retail investor unitand Web site. Revenue recognized prior to June 2, 2003 related to theHYPRWare assets sold was primarily derived from analytics service, powered bythe HyperFeed data feed, for Internet users in the consumer marketplace andfrom the sale of advertising on its Web site. Revenue from the sale ofadvertising was recognized as the advertising was displayed on the Web site.

 

HYPRWare derives revenuefrom royalties related to license fees for customers it referred to Townsendprior to December 31, 2002. Revenue is recorded as royalties are reportedfrom Townsend.

 

**AllowanceFor Doubtful Accounts**: The Company maintains allowances fordoubtful accounts for estimated losses resulting from the inability of itscustomers to make payments for services or debtors to satisfy note receivableobligations. The Company analyzes accounts receivable, customercredit-worthiness, current economic trends and changes in its customer paymentterms when evaluating the adequacy of the allowance for doubtful accounts andnotes receivable. If the financial condition of the Company’s customers ordebtors deteriorates, resulting in an impairment of their ability to makepayments, additional allowances may be required.

 

**Valuationof Intangible Assets and Licensed and Developed Software Costs**:The Company assesses the impairment of intangible assets on an annual basis orwhenever events or changes in circumstances indicate that the carrying valuemay not be recoverable. Factors the Company considers important which couldtrigger an impairment review include significant underperformance relative toexpected historical or projected future operating results, significant changesin the manner of its use of the acquired assets or the strategy for its overallbusiness, and significant negative industry or economic trends. The Companyassesses the recoverability of its licensed and developed software costsagainst estimated future revenue over the estimated remaining economic life ofthe software.

 

**Capitalizationof Licensed and Developed Software Costs**: Licensed anddeveloped software costs are accounted for in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costsof Computer Software to Be Sold, Leased, or Otherwise Marketed.” Costsassociated with the planning and design phase of software development,including coding and testing activities necessary to establish technologicalfeasibility of computer software products to be licensed or otherwise marketed,are expensed as research and development costs as incurred. Once technologicalfeasibility has been determined, costs incurred in the construction phase ofsoftware development including coding, testing, and product quality assuranceare capitalized. In accordance with SFAS No. 86, the Company hascapitalized licensed software for which the Company believes technologicalfeasibility has been established.

 

Amortization commences atthe time of capitalization or, in the case of a new service offering, at thetime the service becomes available for use. Unamortized capitalized costsdetermined to be in excess of the net realizable value of the product areexpensed at the date of such determination. The accumulated amortization andrelated licensed and developed software costs are removed from the respectiveaccounts effective in the year following full amortization.

 

The Company’s policy isto amortize capitalized software costs by the greater of (1) the ratiothat current gross revenue for a product bear to the total of current and anticipatedfuture gross revenue for that product or (2) the straight line method overthree years, the remaining estimated economic life of the product including theperiod being reported. The Company assesses the recoverability of its licensedand developed software costs against estimated future undiscounted cash flows.Given the highly competitive environment in which the Company operates andrapid technological changes, it is reasonably possible that those estimates ofanticipated future gross revenue, the remaining estimated economic life of theproduct, or both may be reduced significantly.

 

RECENT ACCOUNTINGPRONOUNCEMENTS

 

In December 2004,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(revised) (“No. 123R”), “Share-Based Payment”, which is effective as ofthe first interim reporting period that begins after January 1, 2006. SFASNo. 123R eliminates the intrinsic value method under Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees,” as analternative method of accounting for stock-based awards. SFAS No. 123Ralso revises the fair value-based method of accounting for share-based paymentliabilities, forfeitures and modifications of stock-based awards and clarifiesSFAS No. 123’s guidance in several areas, including measuring fair value,classifying an award as equity or as a liability and attributing compensationcost to reporting periods. In addition, SFAS No. 123R amends SFAS No. 95,“Statement of Cash Flows,” to require that excess tax benefits be reported as afinancing cash inflow rather than as a reduction of taxes paid, which isincluded within operating cash flows. The Company is in the process ofevaluating the impact of SFAS No. 123R, but does not currently believethat the adoption of SFAS No. 123R will have a material impact on theCompany’s results of operations or financial condition.

 

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In May 2005, theFASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” SFASNo. 154 requires retrospective application to prior periods’ financialstatements of a voluntary change in accounting principle and that a change inmethod of depreciation, amortization, or depletion for long-lived, nonfinancialassets be accounted for as a change in accounting estimate that is effected bya change in accounting principle. SFAS 154 replaces APB Opinion 20, “AccountingChanges”, and SFAS 3, “Reporting Accounting Changes in Interim FinancialStatements”. SFAS No. 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 15,2005. The Company does not believe the adoption of SFAS No. 154 will havea material impact on its results of operations or financial condition.

 

**ITEM 3. Quantitative and Qualitative Disclosures About MarketRisk**

 

At June 30, 2005,the Company had excess cash invested in a money market account. The Companydoes not expect any material loss, if at all, on these investments. The Companyhas a line of credit for $500,000 at prime, secured by the assets of theCompany. As of June 30, 2005, the Company had borrowings against the lineof credit of $500,000.

 

OnNovember 2, 2004, the Company issued to PICO the Convertible Note. Underthe terms of the Convertible Note, the Company may borrow up to $1.5 millionfrom PICO, at an interest rate of 8%. On March 28, 2005, theCompany and PICO amended and restated the Convertible Note. Under the terms ofthe Restated Convertible Note, the Company may borrow up to $4.0 million at aninterest rate of prime plus 2.75%. The Company is obligated to repay alloutstanding principal and accrued interest under the Restated Convertible Noteon March 28, 2006. The Restated Convertible Note provides that the numberof shares that PICO would receive in connection with a conversion of anyamounts outstanding under the Restated Convertible Note would be determined bydividing the total outstanding amount to be converted by the lesser of 80% ofthe five-day moving average per share price of the Company’s common stock onthe date the note was given and 80% of the five-day moving average per shareprice of the Company’s common stock on the date of conversion. The five-daymoving average per share price of the Company’s common stock on the date theRestated Convertible Note was given on March 28, 2005 was $2.03. Thenumber of shares of the Company’s common stock issuable upon conversion of theRestated Convertible Note is not subject to a cap. For every $0.10 per shareincrease over $2.03 in the five-day moving average per share price of theCompany’s common stock —, the Company would incur interest expense of  $0.2 million for the intrinsic value of thebeneficial conversion feature - on the Restated Convertible Note of $2,805,000at June 30, 2005.

 

Asof June 30, 2005, the Company had borrowed $2.8 million under the terms ofthe Restated Convertible Note and recorded accrued interest of $52,589.

 

The Company is subject tovariable interest rates that could fluctuate with market conditions. A 1.0%increase in the prime rate would increase the Company’s interest expense by$1,250 per fiscal quarter on the $500,000 line of credit and by approximately$7,000 per fiscal quarter on the Restated Convertible Note of $2,805,000 at June 30,2005.

 

**ITEM 4. Controls and Procedures**

 

(a)               *Disclosure Controls and Procedures.* TheCompany’s management, with the participation of the Company’s Chief ExecutiveOfficer and Chief Financial Officer, has evaluated the effectiveness of theCompany’s disclosure controls and procedures (as such term is defined in Rule 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of theend of the period covered by this quarterly report. Based on such evaluation,the Company’s Chief Executive Officer and Chief Financial Officer haveconcluded that, as of the end of such period, the Company’s disclosure controlsand procedures are effective in recording, processing, summarizing andreporting, on a timely basis, information required to be disclosed by us in thereports that the Company files or submits under the Exchange Act.

 

(b)              *Internal Control Over Financial Reporting.*Therehave not been any changes in the Company’s internal control over financialreporting (as such term is defined in Rule 15d-15(f) under theExchange Act) during the fiscal quarter to which this report relates that havematerially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 

**Part II**

 

**ITEM 1. Legal Proceedings**

 

On June 2, 2003, theCompany sold the individual retail investor unit and related assets of itssubsidiary, PCQuote.com, Inc., to Money.net, Inc. On August 24,2004, the Company filed a six-count complaint for breach of contract andamounts due in the Circuit Court of Cook County, Illinois against Money.net.The amounts sought in the complaint are $131,155 for a promissory note,including

 

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interest, $31,920 from adatafeed license agreement, and $63,917 related to a transition servicesagreement. On November 17, 2004, Money.net filed a motion to dismiss and,as a result, the Company filed an amended complaint on December 7, 2004.On January 7, 2005, Money.net filed answers to the amended complaint and acounterclaim. On February 3, 2005, the Company answered Money.net’scounterclaim, which included seven affirmative defenses. On July 5, 2005,Money.net’s counterclaim was stricken. On July 19, 2005, the Company fileda motion for summary judgment. As of June 30, 2005, the Company had a promissorynote and accounts receivable, net of allowances, of $151,122 due fromMoney.net.

 

**ITEM 4.Submission of Matters to a Vote of Security Holders**

 

The annual meeting of thestockholders of HyperFeed Technologies, Inc. was held on May 13,2005. The following proposals were submitted, considered and voted upon, asindicated below, by the stockholders.

 

1. To elect five members to our Board of Directors toserve until the 2006 Annual Meeting, or until their successors are elected andshall have qualified.

 

| **Director**         | ** ** | **Shares For** | ** ** | **Shares Withheld** | ** ** |
|----------------------|------------|----------------|------------|---------------------|------------|
| Ronald Langley       |       | 2,742,295      |       | 115,359             |       |
| John R. Hart         |       | 2,742,705      |       | 114,949             |       |
| Kenneth J.  Slepicka |       | 2,745,613      |       | 112,041             |       |
| Louis J. Morgan      |       | 2,745,303      |       | 112,351             |       |
| Carlos C.  Campbell  |       | 2,742,638      |       | 115,016             |       |

 

2. To approve and ratifythe appointment of Deloitte Touche LLP as our independent auditors for 2005.

 

| **Shares For** | ** ** | **Shares Against** | ** ** | **Abstentions** | ** ** |
|----------------|------------|--------------------|------------|-----------------|------------|
| 2,768,914      |       | 88,250             |       | 490             |       |

 

No other matters weresubmitted for vote.

 

**ITEM 6.Exhibits and Reports on Form 8-K**

 

(a)  Exhibits

 

Exhibit 10.1 —Trading Room System Software and Desktop License Agreement, dated May 20,2005, between HyperFeed Technologies, Inc., Moneyline Telerate, andReuters Limited*

 

Exhibit 31.1 -Certification of the Chief Executive Officer Pursuant to Rules 13a-14(a) and15d-14(a) under the Exchange Act.

 

Exhibit 31.2 -Certification of the Chief Financial Officer Pursuant to Rules 13a-14(a) and15d-14(a) under the Exchange Act.

 

Exhibit 32 –Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of theUnited States Code.

 

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* Certain portions ofthis exhibit have been omitted and separately filed with the Securities andExchange Commission pursuant to a request for confidential treatment thereof.

 

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(b)  Reports on Form 8-K

 

A Form 8-K wasfiled on May 12, 2005 attaching a copy of the press release reporting thefirst quarter 2005 results.

 

A Form 8-K wasfiled on June 2, 2005 reporting that the Company entered into an exclusiveagreement with Reuters Limited and Moneyline Telerate to license the sourcecode for Telerate’s Trading Room System (TRS) and Telerate’s Active8technology.

 

A Form 8-K wasfiled on June 8, 2005 reporting that the Company entered into anEmployment Agreement with Paul Pluschkell, the Company’s President and ChiefExecutive Officer, and also entered into Bonus Agreements with Mr. Pluschkell,Tom Wojciechowski, Executive Vice President of Sales, and Randall J. Frapart,Senior Vice President and Chief Financial Officer.

 

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SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 

HYPERFEED TECHNOLOGIES,INC.

 

 
| Date:  | August 4, 2005                                       |
|--------|-----------------------------------------------------------|
|   |                                                      |
| By:    | /s/ Paul Pluschkell                                       |   |
|   |                                                      |
|   | Paul Pluschkell                                           |
|   | President and Chief  Executive Officer                    |
|   |                                                      |
| By:    | /s/ Randall J. Frapart                                    |   |
|   |                                                      |
|   | Randall J. Frapart                                        |
|   | Chief Financial Officer  and Principal Accounting Officer |

 

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