**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****WASHINGTON, D.C. 20549**

**FORM 10-Q**
| **(Mark one)** |                                                                                                   |
|----------------|--------------------------------------------------------------------------------------------------------|
| **x**          | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **     | ** **                                                                                             |

**For the quarterly period ended: March 31,2006**

**OR**
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|---------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                              |

**For the transition period from                to**

**Commission file number 0-13093**

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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’stelephone number, including area code:**(312) 913-2800**

 

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Indicate by checkmark whether 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 x  No o

Indicateby check mark whether the registrant is a large accelerated filer, andaccelerated Filer, or a non-accelerated filer. (as defined in Rule 12b-2of the Act). Large Accelerated Filer oAccelerated Filer oNon-Accelerated Filer x

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Act). Yes o  No x

Thenumber of shares of common stock outstanding as of May 4, 2006 was7,643,474 shares.

 

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HYPERFEED TECHNOLOGIES, INC. ANDSUBSIDIARY

INDEX

 
|               | ** ** | ** **                                                                                                                   | ** ** | **PAGE** |
|---------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| PART I.  |       | Financial Information                                                                                                        |       |     |
|          |       |                                                                                                                         |       |     |
| Item 1.       |       | Financial Statements                                                                                                         |       |     |
|          |       |                                                                                                                         |       |     |
|          |       | Consolidated  Balance Sheets as of March 31, 2006 and December 31, 2005  (unaudited)                               |       |     |
|          |       |                                                                                                                         |       |     |
|          |       | Consolidated Statements of Operations for the three  months ended March 31, 2006 and 2005 (unaudited)    |       |     |
|          |       |                                                                                                                         |       |     |
|          |       | Consolidated Statements of Cash Flows for the three  months ended March 31, 2006 and 2005 (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 1A.      |       | Risk Factors                                                                                                                 |       |     |
|          |       |                                                                                                                         |       |     |
| Item 2.       |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                 |       |     |
|          |       |                                                                                                                         |       |     |
| Item 6.       |       | Exhibits                                                                                                                     |       |     |
|          |       |                                                                                                                         |       |     |
|          |       | Company’s  Signature Page                                                                                               |       |     |

 

2

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**PART I**

**ITEM 1. FinancialStatements**

HYPERFEED TECHNOLOGIES, INC. AND SUBSIDIARYConsolidated Balance Sheets (Unaudited)
| ** **                                                                                                                                                                    | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                                                                                    | ** ** | ** **               | ** ** | ** **                  | ** ** |
| **Current Assets**                                                                                                                                                            | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Cash and cash equivalents                                                                                                                                                     |       | $                        | 181,455    |                        | $          | 302,171 |   |
| Short-term investment                                                                                                                                                         |       | 75,000                   |       | —-                     |       |
| Accounts receivable, less allowance for doubtful  accounts of: 2006: $141,255; 2005: $101,309                                                                  |       | 442,078                  |       | 191,656                     |       |
| Notes receivable, less allowance for doubtful  accounts of: 2006: $10,830; 2005: $10,830                                                                                      |       | 14,243                   |       | 90,493                      |       |
| Prepaid expenses and other current assets                                                                                                                                     |       | 277,631                  |       | 64,351                      |       |
| Assets related to discontinued operations                                                                                                                                     |       | 57,094                   |       | 57,094                      |       |
| **Total  Current Assets**                                                                                                                                                     |       | 1,047,501                |       | 705,765                     |       |
|                                                                                                                                                                          |       |                     |       |                        |       |
| Property and equipment                                                                                                                                                        |       |                     |       |                        |       |
| Computer equipment                                                                                                                                                            |       | 1,301,719                |       | 1,511,660                   |       |
| Communication equipment                                                                                                                                                       |       | 555,935                  |       | 737,993                     |       |
| Furniture and fixtures                                                                                                                                                        |       | 54,856                   |       | 74,853                      |       |
| Leasehold improvements                                                                                                                                                        |       | —                   |       | 9,260                       |       |
|                                                                                                                                                                          |       | 1,912,510                |       | 2,333,766                   |       |
| Less: Accumulated depreciation and amortization                                                                                                                               |       | (1,334,876               | )          | (1,798,168                  | )          |
| Property and  equipment, net                                                                                                                                                  |       | 577,634                  |       | 535,598                     |       |
| Intangible  assets, net of accumulated amortization of: 2006: $158,750; 2005: $432,917                                                                                        |       | 191,250                  |       | 224,583                     |       |
| Software  development costs, net of accumulated amortization of: 2006: $1,939,400;  2005: $2,709,165                                                                     |       | 3,200,451                |       | 3,102,182                   |       |
| Deposits and  other assets                                                                                                                                                    |       | 53,017                   |       | 47,390                      |       |
| **Total  Assets**                                                                                                                                                             |       | $                        | 5,069,853  |                        | $          | 4,615,518 |   |
|                                                                                                                                                                          |       |                     |       |                        |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                                | ** ** | ** **               | ** ** | ** **                  | ** ** |
| **Current Liabilities**                                                                                                                                                       | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Convertible note payable to affiliate                                                                                                                                         |       | $                        | 4,160,000  |                        | $          | 810,000 |   |
| Line of credit                                                                                                                                                                |       | —                   |       | 500,000                     |       |
| Accounts payable                                                                                                                                                              |       | 2,057,711                |       | 1,423,756                   |       |
| Accrued expenses                                                                                                                                                              |       | 290,249                  |       | 272,342                     |       |
| Accrued professional fees                                                                                                                                                     |       | 193,930                  |       | 189,975                     |       |
| Accrued compensation                                                                                                                                                          |       | 92,745                   |       | 80,279                      |       |
| Income taxes payable                                                                                                                                                          |       | 12,014                   |       | 12,014                      |       |
| Unearned revenue                                                                                                                                                              |       | 371,914                  |       | 245,774                     |       |
| Liabilities related to discontinued operations                                                                                                                                |       | 489,613                  |       | 533,548                     |       |
| **Total  Current Liabilities**                                                                                                                                                |       | 7,668,176                |       | 4,067,688                   |       |
|                                                                                                                                                                          |       |                     |       |                        |       |
| Accounts  payable, less current portion                                                                                                                                       |       | —                   |       | 815,625                     |       |
| Accrued  expenses, less current portion                                                                                                                                       |       | 263,205                  |       | 287,347                     |       |
| **Total  Noncurrent Liabilities**                                                                                                                                             |       | 263,205                  |       | 1,102,972                   |       |
| **Total  Liabilities**                                                                                                                                                        |       | 7,931,381                |       | 5,170,660                   |       |
|                                                                                                                                                                          |       |                     |       |                        |       |
| **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  7,643,474 shares at March 31, 2006 and 7,641,889 shares at  December 31, 2005 |       | 7,644                    |       | 7,642                       |       |
| Additional  paid-in capital                                                                                                                                                   |       | 56,585,995               |       | 54,238,176                  |       |
| Accumulated  deficit                                                                                                                                                          |       | (59,455,167              | )          | (54,800,960                 | )          |
| **Total  Stockholders’ Equity**                                                                                                                                          |       | (2,861,528               | )          | (555,142                    | )          |
| **Total Liabilities and  Stockholders’ Equity**                                                                                                                          |       | $                        | 5,069,853  |                        | $          | 4,615,518 |   |

 

See Notes toUnaudited Interim Consolidated Financial Statements.

3

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HYPERFEED TECHNOLOGIES,INC. AND SUBSIDIARYConsolidated Statements of Operations (Unaudited)
| ** **                                                              | ** ** | **For The Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                              | ** ** | **2006**                                                           | ** ** | **2005** | ** ** |
| **Revenue**                                                             | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| HyperFeed                                                               |       | $                                                                  | 920,911    |   | $ | 794,181 |   |
| HYPRWare                                                                |       | 77,573                                                             |       | 94,873 |   |
| **Total  Revenue**                                                      |       | 998,484                                                            |       | 889,054 |   |
|                                                                    |       |                                                               |       |   |   |
| **Direct  Costs of Revenue**                                            |       | 446,732                                                            |       | 283,243 |   |
|                                                                    |       |                                                               |       |   |   |
| **Gross  Margin**                                                       |       | 551,752                                                            |       | 605,811 |   |
|                                                                    |       |                                                               |       |   |   |
| **Operating Expenses**                                                  | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Sales and marketing                                                     |       | 530,689                                                            |       | 343,324 |   |
| General and administrative                                              |       | 787,101                                                            |       | 800,069 |   |
| Research and development                                                |       | 614,146                                                            |       | 395,085 |   |
| Operations                                                              |       | 1,028,807                                                          |       | 502,799 |   |
| Depreciation and amortization                                           |       | 161,330                                                            |       | 212,949 |   |
| **Total  Operating Expenses**                                           |       | 3,122,073                                                          |       | 2,254,226 |   |
|                                                                    |       |                                                               |       |   |   |
| **Loss  from Operations**                                               |       | (2,570,321                                                         | )          | (1,648,415 | ) |
|                                                                    |       |                                                               |       |   |   |
| **Other Income (Expense)**                                              | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Interest income                                                         |       | 150                                                                |       | 38 |   |
| Interest expense                                                        |       | (2,249,036                                                         | )          | (297,673 | ) |
| **Other  Income (Expense), Net**                                        |       | (2,248,886                                                         | )          | (297,635 | ) |
|                                                                    |       |                                                               |       |   |   |
| **Loss  from Continuing Operations Before Income Taxes**                |       | (4,819,207                                                         | )          | (1,946,050 | ) |
| Income tax benefit                                                      |       | 63,000                                                             |       | — |   |
| **Loss  from Continuing Operations**                                    |       | (4,756,207                                                         | )          | (1,946,050 | ) |
|                                                                    |       |                                                               |       |   |   |
| **Discontinued Operations**                                             | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Loss from discontinued operations                                       |       | —                                                             |       | (22,599 | ) |
| Gain on disposition of discontinued operations                          |       | 165,000                                                            |       | — |   |
| Income tax expense from gain on disposition of  discontinued operations |       | (63,000                                                            | )          | — |   |
| **Income  (Loss) from Discontinued Operations**                         |       | 102,000                                                            |       | (22,599 | ) |
|                                                                    |       |                                                               |       |   |   |
| **Net  Loss**                                                           |       | $                                                                  | (4,654,207 | ) | $ | (1,968,649 | ) |
|                                                                    |       |                                                               |       |   |   |
| Basic and diluted net  income (loss) per share:                         |       |                                                               |       |   |   |
| Continuing operations                                                   |       | $                                                                  | (0.62      | ) | $ | (0.64 | ) |
| Discontinued operations                                                 |       | 0.01                                                               |       | (0.01 | ) |
| Basic and  diluted net loss per share                                   |       | $                                                                  | (0.61      | ) | $ | (0.65 | ) |
|                                                                    |       |                                                               |       |   |   |
| Basic and diluted  weighted-average common shares outstanding           |       | 7,641,889                                                          |       | 3,044,553 |   |

 

See Notes to UnauditedInterim Consolidated Financial Statements.

4

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HYPERFEED TECHNOLOGIES,INC. AND SUBSIDIARYConsolidated Statements of Cash Flows (Unaudited)

 
| ** **                                                                                                   | ** ** | **For The Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                                   | ** ** | **2006**                                                           | ** ** | **2005** | ** ** |
| **Cash Flows from Operating  Activities:**                                                                   | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Net loss                                                                                                     |       | $                                                                  | (4,654,207 | ) | $ | (1,968,649 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities:                   |       |                                                               |       |   |   |
| Depreciation and  amortization                                                                               |       | 161,330                                                            |       | 212,949 |   |
| Amortization of  software development costs                                                                  |       | 319,625                                                            |       | 258,562 |   |
| Non-cash  compensation-related charges                                                                       |       | 76,023                                                             |       | — |   |
| Provision for doubtful  accounts                                                                             |       | 39,946                                                             |       | 7,878 |   |
| Interest and  other expense related to convertible note payable to affiliate                                 |       | 2,270,070                                                          |       | 348,750 |   |
| Changes in  assets and liabilities, net of effects from dispositions:                                        |       |                                                               |       |   |   |
| Accounts  receivable                                                                                         |       | (290,368                                                           | )          | 228,622 |   |
| Prepaid expenses  and other current assets                                                                   |       | (213,280                                                           | )          | (132,643 | ) |
| Deposits and  other assets                                                                                   |       | (5,627                                                             | )          | (557 | ) |
| Accounts payable                                                                                             |       | (181,670                                                           | )          | 229,110 |   |
| Accrued expenses                                                                                             |       | 10,186                                                             |       | 195,758 |   |
| Unearned revenue                                                                                             |       | 126,140                                                            |       | (54,621 | ) |
| Net cash used in  continuing operations                                                                      |       | (2,341,832                                                         | )          | (674,841 | ) |
| Net cash  provided by (used in) discontinued operations                                                      |       | (43,935                                                            | )          | 132,677 |   |
| **Net Cash Used in Operating  Activities**                                                                   |       | (2,385,767                                                         | )          | (542,164 | ) |
|                                                                                                         |       |                                                               |       |   |   |
| **Cash Flows from Investing  Activities:**                                                                   | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Purchase of  property and equipment                                                                          |       | (170,033                                                           | )          | (64,470 | ) |
| Investment in  certificate of deposit                                                                        |       | (75,000                                                            | )          | — |   |
| Software  development costs capitalized                                                                      |       | (417,894                                                           | )          | (338,980 | ) |
| Purchase of  intangible asset                                                                                |       | —                                                             |       | (350,000 | ) |
| Repayment of  note receivable                                                                                |       | 76,250                                                             |       | 3,305 |   |
| **Net Cash Used in Investing  Activities**                                                                   |       | (586,677                                                           | )          | (750,145 | ) |
|                                                                                                         |       |                                                               |       |   |   |
| **Cash Flows from Financing  Activities:**                                                                   | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Proceeds from  issuance of common stock                                                                      |       | 1,728                                                              |       | 1,428 |   |
| Proceeds from  convertible note payable to affiliate                                                         |       | 3,350,000                                                          |       | 1,095,000 |   |
| Net borrowings  (repayments) under line of credit                                                            |       | (500,000                                                           | )          | 35,000 |   |
| **Net Cash Provided by Financing  Activities**                                                               |       | 2,851,728                                                          |       | 1,131,428 |   |
|                                                                                                         |       |                                                               |       |   |   |
| **Net Decrease in Cash and Cash  Equivalents**                                                               |       | (120,716                                                           | )          | (160,881 | ) |
| Cash and cash  equivalents:                                                                                  |       | 302,171                                                            |       | 193,702 |   |
| Beginning of the  period                                                                                     |       |                                                               |       |   |   |
|                                                                                                         |       |                                                               |       |   |   |
| **End of the  Period**                                                                                       |       | $                                                                  | 181,455    |   | $ | 32,821 |   |
|                                                                                                         |       |                                                               |       |   |   |
| **Supplemental Disclosures of  Noncash Operating Activities:**                                               | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Beneficial conversion  feature and commitment fee related to convertible note payable to affiliate  (Note 6) |       | $                                                                  | 2,270,070  |   | $ | 348,750 |   |

 

See Notes to UnauditedInterim Consolidated Financial Statements.

5

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HYPERFEED TECHNOLOGIES, INC. AND SUBSIDIARYNOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(1) NATURE OFBUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

The unauditedconsolidated financial statements herein have been prepared by the Company pursuantto the rules and regulations of the Securities and Exchange Commission.The accompanying interim consolidated financial statements have been preparedunder the presumption that users of the interim financial information haveeither read or have access to the audited financial statements for the latestfiscal year ended December 31, 2005. Accordingly, footnote disclosureswhich would substantially duplicate the disclosures contained in the December 31,2005 audited consolidated financial statements have been omitted from theseinterim consolidated financial statements. Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americahave been condensed or omitted pursuant to such rules and regulations. Inour opinion, the accompanying unaudited consolidated financial statementscontain all adjustments necessary for a fair presentation. Although the Companybelieves that the disclosures are adequate to make the information presentednot misleading, it is suggested that these interim consolidated financialstatements be read in conjunction with the consolidated financial statementsand the notes thereto included in the Company’s latest Annual Report on Form 10-K.

HyperFeed Technologies, Inc.(“HyperFeed” or the “Company”) is a provider of enterprise-wide ticker plant,data platform, and transaction technology software and services to exchanges,financial institutions, content providers, channel partners, and value-addedresellers. HyperFeed’s advanced software technology serves as a corporate-wideticker plant, providing firms in the financial services industry with theflexibility and agility to control their own data sources and data content in acost-effective manner.

The Company has overtwenty years of experience designing, building, and running ticker plants forthe North American financial marketplace. The Company’s software technology,including HyperFeed’s Next Generation Ticker Plant (“HTPX”) product, iscurrently being used by over forty customers, including exchanges, largefinancial institutions, and customers of the Company’s High Performance Centerproduct. Additionally, the Company has deployed more than 1,500 of HyperFeed’shigh performance single server HBOX products at customer sites. The Companyalso offers its HyperFeed Market Data Platform (“HMDP”) product, which is basedon Telerate’s Trading Room System (“TRS”) technology, and its OpenCollaborative Container (“OCC”) product for use with HMDP, which is based onTelerate’s Active8 technology. HyperFeed’s technology supports many firmsdemanding transaction and order routing systems.

HyperFeed principallyderives revenue from licensing technology and providing management andmaintenance services of HTPX, HBOX, HMDP, and OCC software, ticker plant anddata platform technologies, and managed services. Additionally, HyperFeedderives revenue from the development of customized software.

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

PICO Holdings, Inc.(“PICO”) owns 80.0% of HyperFeed’s common stock as of March 31, 2006.

CURRENT OPERATIONS:  The Company has sustained significant lossesin recent years and in the first quarter of 2006. In particular, the Companyincurred a net loss of $4.7 million for the first quarter of 2006 compared to anet loss of $2.0 million for the same period in 2005, and an overall net loss of$9.5 million for the fiscal year ended December 31, 2005. Included in thenet loss of $4.7 million for the first quarter of 2006 is $2.2 million ofnon-cash interest expense related to the beneficial conversion feature of theSecured Convertible Promissory Note (the “2006 Convertible Note”) issued by theCompany to PICO in thefirst quarter of 2006 as described in Note 6 of the Notes to UnauditedInterim Consolidated Financial Statements. Additionally, the Company’s negativecash flows from operating activities increased to $2.4 million for the threemonths ended March 31, 2006 compared to $0.5 million for the three monthsended March 31, 2005. The recurring losses and negative cash flows mayraise substantial doubt about the Company’s ability to continue as a goingconcern. Total revenue for the first quarter of 2006 increased 12.3% to $1.0million compared with $0.9 million for the same period in 2005.

The Company currentlybelieves, although there can be no assurances in this regard, that its existingand anticipated capital resources, including cash and cash equivalents,accounts receivable, assets related to discontinued operations, cash expectedto be received from holdbacks associated with the sale of its institutionalconsolidated market data feed business, and potential capital from financingsources, including PICO, will be sufficient to fund its operations over thenext twelve months.

6

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In the first quarter of2006, the Company issued the 2006 Convertible Note to PICO for $10.0 million, payable two yearsfrom issuance, as described in Note 6of the Notes to Unaudited Interim Consolidated Financial Statements. However, the Company may not have sufficientcapital resources to repay or refinance the 2006 Convertible Note when it comesdue in March 2008. In the event that PICO chooses not to convert the 2006Convertible Note and the Company is unable to repay or refinance the 2006Convertible Note at such time, PICO will also have the right to declare the2006 Convertible Note in default and may, at its option, pursue any otherremedies available to it. If the Company requires additional capitalresources, there can be no assurances that such capital will be available orthat such capital will be available on terms satisfactory to the Company. Ifthe Company does not obtain such capital, it may not have sufficient capitalresources to fund continuing operations.

PRINCIPLES OFCONSOLIDATION:  The accompanyingunaudited interim consolidated financial statements include the accounts ofHyperFeed and its subsidiary, HYPRWare, and have been prepared in accordancewith accounting principles generally accepted in the United States of Americafor interim 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 all adjustments,including the elimination of all significant intercompany transactions inconsolidation, which, in the opinion of management, are necessary in order tomake the financial statements not misleading. For further information, refer tothe consolidated financial statements and footnotes included in the Company’sannual report on Form 10-K for the year ended December 31,2005.

REVENUE RECOGNITION:  The Company principally derives revenue fromlicensing technology and providing management and maintenance services of HTPX,HBOX, HMDP, and OCC software, ticker plant and data platform technologies, andmanaged services. Additionally, the Company derives revenue from thedevelopment of customized software.

Revenue is recognizedfrom the licensing of HTPX, HBOX, HMDP, and OCC (1) as payments fromcustomers become due when the fee is not fixed or determinable at the outset ofthe arrangement or (2) ratably over the term of the agreement when postcontract customer support (“PCS”) has a duration of one year or less. PCS isrecognized ratably over the term. Revenue for the development of customizedsoftware, consulting, and implementation services is recognized based on timeand materials from the application of contract accounting for the developmentof customized software, or based on an hourly rate when it is not a fixed feearrangement. For licensing of the Company’s software through its saleschannels, revenue is recognized as payments from the reseller become due andgenerally commences after the software is installed at the reseller’s customersite.

The Company applies theprovisions of AICPA 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 above criteriaare 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 the percentage-of-completion.For those contracts which the Company cannot reasonably estimate progresstoward completion, the Company employs the completed contract method ofaccounting. Revenue from arrangements accounted for under contract accountingare allocated among licensed technologies, managed services, and consultingfees based on the contractual terms of the arrangements.

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.

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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.

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 ANDDEVELOPED 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.

Amortizationcommences at the time of capitalization or, in the case of a new serviceoffering, at the time the service becomes available for use. Unamortizedcapitalized costs determined to be in excess of the net realizable value of theproduct are expensed at the date of such determination. The accumulated amortizationand related software development costs are removed from the respective accountseffective in the year following full amortization.

The Company’spolicy is to amortize capitalized software costs by the straight-line methodover three to five years, the remaining estimated economic life of the productincluding the period being reported. The Company assesses the recoverability ofits software development costs against estimated future undiscounted cashflows. Given the highly competitive environment and technological changes, itis reasonably possible that those estimates of anticipated future grossrevenue, the remaining estimated economic life of the product, or both may bereduced significantly.

STOCK BASEDCOMPENSATION:  Effective January 1,2006, the Company adopted SFAS No. 123(R), “Share-Based Payment,” usingthe modified-prospective-transition method. Under this transition method,compensation cost in 2006 includes cost for options granted prior to but notvested as of December 31, 2005, and options granted in 2006. Therefore,results for prior periods have not been restated. The Company recognizedcompensation expense of approximately $0.1 million for the three months ended March 31,2006

The following tableillustrates the effect on net income and earnings per share if the Company hadapplied the fair value recognition provisions of SFAS No. 123 during thethree months ended March 31, 2005. For the purposes of this pro formadisclosure, the value of the options is estimated using a Black-Scholes option-pricingmodel and amortized to expense over the options vesting periods.
| ** **                                                                                                                   | ** ** | **Three Months  Ended  March 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| Net loss, as  reported                                                                                                       |       | $                                                  | (1,968,649 | ) |
| Compensation  expense related to stock options granted and employee stock purchase plan  issuances, net of taxes   |       | (52,998                                            | )          |
| Pro forma net  loss                                                                                                          |       | $                                                  | (2,021,647 | ) |
|                                                                                                                         |       |                                               |       |
| Basic and  diluted net loss per share, as reported                                                                           |       | $                                                  | (0.65      | ) |
| Pro forma basic and  diluted net loss per share                                                                              |       | $                                                  | (0.66      | ) |

 

As of April 1, 2006,the Company has approximately $0.8 million of unrecognized compensation costrelated to unvested share-based compensation awards granted, which the Companyexpects to recognize over the next four years.

ACCOUNTS RECEIVABLE:Included in the Company’s accounts receivable balances in the Consolidated BalanceSheets are unbilled receivables of $29,991 at March 31, 2006. The Companydid not have any unbilled receivables at December 31, 2005.

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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 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) EMPLOYEE STOCKOPTIONS AND STOCK APPRECIATION RIGHTS

The fair value ofeach option and stock appreciation right (“SAR”) grant is estimated using theBlack-Scholes option-pricing model with the following weighted-averageassumptions for the three months ended March 31, 2006 and 2005:

|                          | ** ** | **2006** | ** **        | **2005** | ** **        |
|--------------------------|------------|----------|-------------------|----------|-------------------|
| Expected life            |       | 5.00     |   years | 5.00     |   years |
| Dividend rate            |       | 0        | %                 | 0        | %                 |
| Risk-free  interest rate |       | 4.32     | %                 | 4.00     | %                 |
| Volatility factors       |       | 94       | %                 | 106      | %                 |

 

Theweighted-average exercise price and weighted-average fair value of optionsgranted during the three months ended March 31, 2006 and 2005 where themarket price equals, exceeds, or is less than the exercise price at the time ofgrant is as follows:

|                      | ** ** | **2006**   | ** ** | **2005**    | ** ** |
|----------------------|------------|------------|------------|-------------|------------|
| ** **           | ** ** | **Equals** | ** ** | **Exceeds** | ** ** | **Is Less Than** | ** ** | **Equals** | ** ** | **Exceeds** | ** ** | **Is Less Than** | ** ** |
| Exercise price       |       | $          | 1.35       |        | —     |   | — |   | $ | 2.35 |   | — |   | — |   |
| Fair value of option |       | $          | 0.99       |        | —     |   | — |   | $ | 1.85 |   | — |   | — |   |

 

No SARs were granted induring the three months ended March 31, 2006 and 2005.

(3) SEGMENTINFORMATION

While the Companyoperates in one industry, financial services, in applying SFAS No. 131, “Disclosuresabout Segments of an Enterprise and Related Information,” the Company hasidentified three segments within which it operates. HyperFeed has two businesssegments, which are HTPX and HMDP. HTPX is offered as a complete turnkeysolution for the normalization, databasing, integration and transmission ofhigh performance, real-time data sources from market data sources, contentproviders, and proprietary in-house sources. HMDP, which the Company acquiredin the second quarter of 2005, is a market data platform that integrates marketdata from any source into any type of display or application software:transactional, web distribution, risk management, or other mid and back-officesystems. HMDP is currently generating no revenue because it is still in thedevelopmental stage. In the first quarter of 2006, HyperFeed first began todifferentiate between HTPX and HMDP based upon the operating results of eachsegment and to allocate resources accordingly. HYPRWare derives revenue fromroyalties related to license fees collected by Townsend from subscribers toTownsend’s service over the Internet who had been referred through HYPRWare.The accounting policies of the reportable segments are the same as thosedescribed in Note 1 of the Notes to Unaudited Interim Consolidated FinancialStatements. Financial information relating to industry segments were as followsfor the three months ended March 31, 2006 and March 31, 2005:

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| ** **                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Sales to unaffiliated customers                    |       |                                             |       |   |   |
| HyperFeed - HTPX                                   |       | $                                                | 920,911    |   | $ | 794,181 |   |
| HyperFeed - HMDP                                   |       | —                                           |       | — |   |
| HYPRWare                                           |       | 77,573                                           |       | 94,873 |   |
| Total revenue                                      |       | $                                                | 998,484    |   | $ | 889,054 |   |
|                                               |       |                                             |       |   |   |
| HyperFeed - HTPX                                   |       | 92.2                                             | %          | 89.3 | % |
| HyperFeed - HMDP                                   |       | —                                           |       | — |   |
| HYPRWare                                           |       | 7.8                                              | %          | 10.7 | % |
| Total revenue                                      |       | 100.0                                            | %          | 100.0 | % |
|                                               |       |                                             |       |   |   |
| Operating income (loss) from continuing operations |       |                                             |       |   |   |
| HyperFeed - HTPX                                   |       | $                                                | (2,177,845 | ) | $ | (1,739,889 | ) |
| HyperFeed — HMDP                              |       | (469,215                                         | )          | — |   |
| HYPRWare                                           |       | 76,739                                           |       | 91,474 |   |
| Total operating loss from continuing operations    |       | $                                                | (2,570,321 | ) | $ | (1,648,415 | ) |
|                                               |       |                                             |       |   |   |
| HyperFeed - HTPX                                   |       | *                                                |       | * |   |
| HyperFeed - HMDP                                   |       | *                                                |       | * |   |
| HYPRWare                                           |       | *                                                |       | * |   |
| Total operating loss from continuing operations    |       | *                                                |       | * |   |
|                                               |       |                                             |       |   |   |
| Identifiable assets                                |       |                                             |       |   |   |
| HyperFeed - HTPX                                   |       | $                                                | 3,828,655  |   | $ | 3,570,648 |   |
| HyperFeed - HMDP                                   |       | 1,156,876                                        |       | — |   |
| HYPRWare                                           |       | 84,322                                           |       | 141,873 |   |
| Total identifiable assets                          |       | $                                                | 5,069,853  |   | $ | 3,712,521 |   |
|                                               |       |                                             |       |   |   |
| HyperFeed - HTPX                                   |       | 75.5                                             | %          | 96.2 | % |
| HyperFeed - HMDP                                   |       | 22.8                                             | %          | — |   |
| HYPRWare                                           |       | 1.7                                              | %          | 3.8 | % |
| Total  identifiable assets                         |       | 100.0                                            | %          | 100.0 | % |

 

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* percentages notmeaningful

(4) INTANGIBLES

OnApril 30, 2001, the Company acquired certain assets of Marketscreen.com, Inc.(“Marketscreen”) for $100,000 and 45,000 shares of HyperFeed’s common stockand, in conjunction with the Marketscreen acquisition, acquired certain assetsof Lasdorf Corporate Services, Inc. (“Lasdorf”) for $300,000. Theacquisitions of Marketscreen and of Lasdorf’s intellectual property wereaccounted for under the purchase method of accounting. The total purchase priceof $1,607,609 consisted of $1,147,500 for the fair value of common stockissued, $400,000 of cash consideration, and $60,109 for acquisition fees andexpenses.

Duringthe fourth quarter of 2002, the Company conducted a review of the carryingvalue of goodwill and purchased intangible assets. Certain intangibles weredetermined to be impaired because the carrying amount of the assets exceededthe undiscounted future cash flows expected to be derived from the assets. Theimpairment losses aggregating $0.7 million were measured as the amount by whichthe carrying amounts of the assets exceeded the fair values of the assets,determined based on the discounted future cash flows expected to be derivedfrom the assets. No impairment losses were recorded since the fourth quarter of2002. At December 31, 2005, the intangible asset was fully amortized.

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On September 23,2004, the Company repurchased a customer contract that had been sold byHyperFeed to Interactive Data Corporation (“IDC”) as part of the sale ofHyperFeed’s institutional consolidated market data feed business in October 2003.As a result of this repurchase, the Company recorded an intangible asset of$127,500. At December 31, 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 Company purchased substantially all of the assets ofFocus, which primarily consisted of developed technology, a customer contractand relationships. The acquisition of Focus was considered to be an acquisitionof a development stage enterprise, as defined under SFAS No. 141, “BusinessCombinations,” and was not considered a business combination. As a result, thetransaction was accounted for under SFAS No. 142, “Goodwill and Other IntangibleAssets.” The guaranteed portion of the purchase price was $350,000, with$250,000 paid at closing and $100,000 due on the first anniversary followingclosing, and was allocated to the identifiable intangible assets on the basisof their estimated fair values on the acquisition date. The Company allocated$250,000 to developed technology, $80,000 to non-compete agreements, and$20,000 to customer contracts, with amortization periods of three years, twoyears, and one year, respectively. The purchase price also included acontingent portion dependent upon the achievement of certain growth targets forlicense and maintenance revenues from the SORTT applications through February 2008,not to exceed $3.4 million in the aggregate. As of March 31, 2006, the Companydid not have any contingent payments due.

Intangible asset data isas follows:
| ** **                                  | ** ** | **March 31, 2006** | ** ** | **March 31, 2005** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                  | ** ** | **Gross**                    | ** ** | ** **                   | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | **Carrying**                 | ** ** | **Accumulated**              | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** |
| ** **                                  | ** ** | **Amount**                   | ** ** | **Amortization**             | ** ** | **Amount** | ** ** | **Amortization** | ** ** |
| Amortized intangibles:                      |       |                         |       |                         |       |   |   |   |   |
| Developed technology                        |       | $                            | 250,000    |                         | $          | (93,750 | ) | $ | 430,000 |   | $ | (158,750 | ) |
| Non-compete agreements                      |       | 80,000                       |       | (45,000                      | )          | 80,000 |   | (5,000 | ) |
| Acquired customer contract                  |       | 20,000                       |       | (20,000                      | )          | 147,500 |   | (122,917 | ) |
| Total                                       |       | $                            | 350,000    |                         | $          | (158,750 | ) | $ | 657,500 |   | $ | (286,667 | ) |
|                                        |       |                         |       |                         |       |   |   |   |   |
| Estimated amortization,  for the year ended |       |                         |       |                         |       |   |   |   |   |
| December 31, 2005                      |       | $                            | —     |                         |       |   | $ | 203,750 |   |   |   |
| December 31, 2006                      |       | 125,833                      |       |                         |       | 125,833 |   |   |   |
| December 31, 2007                      |       | 88,333                       |       |                         |       | 88,333 |   |   |   |
| December 31,  2008                     |       | 10,417                       |       |                         |       | 10,417 |   |   |   |

 

The net amortizedintangibles at March 31, 2006 are $191,250. The weighted averageamortization period is 2.66 years in total. The net amortized intangibles at March 31,2005 are $370,833. The weighted average amortization period is 2.53 years intotal.

(5) 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 underaccounts payable. 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 five years and amortization began in the thirdquarter of 2005. As a result of certain disputes between the Company andReuters relating to the license agreement, the Company has not paid the portionof the license fee due on January 15, 2006.

In August 2005, theCompany entered into an exclusive, multi-year distributor agreement withMarketXS, a leading European provider of real-time market data technology andtrading solutions, that gives MarketXS the right to license, distribute, andsupport HyperFeed’s HMDP and OCC products in Europe, the Middle East, andAfrica. HyperFeed plans to provide software upgrades, maintenance and secondlevel support, while MarketXS is expected to provide European development,technical sales, and first level maintenance support. The term of thedistributor agreement varies, with certain elements extending through January 2015.

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(6) LINE OF CREDITAND CONVERTIBLE NOTE

On December 20,2005, the Company issued a Promissory Note to PICO in the amount of $810,000 atan interest rate of 7.0% per annum. The entire unpaid principal balance andrelated interest under the December 20, 2005 Promissory Note was due andpayable not later than January 31, 2006.

On January 23, 2006,the Company issued a Promissory Note to PICO in the amount of $1,500,000 at aninterest rate of 7.0% per annum. The entire unpaid principal balance andrelated interest under the January 23, 2006 Promissory Note was due andpayable not later than February 28, 2006. The Company paid off a $500,000line of credit with the borrowings from the January 23, 2006 PromissoryNote and cancelled the line of credit.

On February 15,2006, the Company issued a Promissory Note to PICO in the amount of $3,310,000at an interest rate of 7.0% per annum. The Company borrowed an additional $1,000,000under the February 15, 2006 Promissory Note. The principal sum borrowedunder the December 20, 2005 Promissory Note, the January 23, 2006Promissory Note, and the February 15, 2006 Promissory Note totaled$3,310,000. In connection with this issuance, the December 20, 2005Promissory Note and the January 23, 2006 Promissory Note were cancelled.The entire unpaid principal balance and related interest under the February 15,2006 Promissory Note was due and payable not later than March 31, 2006.

On March 15, 2006,the Company issued a Promissory Note to PICO in the amount of $4,160,000 at aninterest rate of 7.0% per annum. The Company borrowed an additional $850,000under the March 15, 2006 Promissory Note. The principal sum borrowed underthe February 15, 2006 Promissory Note and the March 15, 2006Promissory Note totaled $4,160,000. In connection with this issuance, the February 15,2006 Promissory Note was cancelled. The entire unpaid principal balance andrelated interest under the March 15, 2006 Promissory Note was due andpayable not later than April 30, 2006.

OnMarch 30, 2006, the Company issued to PICO the 2006 Convertible Note,which replaced the March 15, 2006 Promissory Note. Under the terms of the2006 Convertible Note, the Company may borrow up to $10.0 million at aninterest rate of prime plus 2.75%. The Company is obligated to repay alloutstanding principal and accrued interest under the 2006 Convertible Note twoyears from issuance. The 2006 Convertible Note, which is convertible by PICO atany time into HyperFeed’s common stock, provides that the number of shares thatPICO would receive in connection with a conversion of any amounts outstandingunder the 2006 Convertible Note would be determined by dividing the totaloutstanding amount to be converted by the lesser of (i) 80% of thefive-day moving average per share price of HyperFeed’s common stock on the dateof conversion or (ii) 80% of $1.05 per share. The number of shares ofHyperFeed’s common stock issuable upon conversion of the 2006 Convertible Noteis not subject to a cap. In addition, in connection with issuing the 2006Convertible Note, the Company issued to PICO a warrant to purchase 125,000shares of HyperFeed’s common stock at an exercise price of $1.05 per share. Thefair value assigned to the warrants was $0.1 million. The warrant expires on March 30, 2009.

The 2006 Convertible Notecontains a beneficial conversion feature and, as a result, the Company recordedadditional paid in capital and interest expense of $2.2 million for the threeended March 31, 2006, 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 2006 Convertible Note is secured byall of the assets of the Company and contains customary representations, warranties, covenants, andevents of default. As of March 31, 2006, the Company has borrowed$4.2 million under the terms of the 2006 Convertible Note and has accruedinterest of $0.1 million.

(7) DISCONTINUEDOPERATIONS

On October 31, 2003,the Company sold its institutional consolidated market data feed business toIDC for $8.5 million. The sale allowed HyperFeed to focus on its business modelas a utility provider of technology, software, and managed services forfinancial institutions. The sale price of $8.5 million included (1) aninitial payment of $7.0 million cash paid on October 31, 2003, (2) $0.6million in holdbacks payable upon completion of custom software and thefulfillment of certain transition services, and (3) an $0.9 millionindemnification holdback. The Company also entered into a transition servicesagreement whereby IDC reimbursed HyperFeed on a monthly basis for direct costsrelative to the purchased business. These costs included costs associated withresources dedicated to the transition, communications expenses, and otherrelated costs. Of the $0.6 million in holdbacks related to completion ofcustomer software and fulfillment of certain transition services, the Companyreceived $0.4 million and waived $0.1 million during the first quarter of 2004and received the final $0.1 million during the third quarter of 2005. Of the$0.9 million, indemnification holdback, as of March 31, 2006, the Companyremains eligible to receive $0.2 million, subject to satisfaction of certainconditions. This amount has previously been reduced by $0.1 millionattributable to the customer contract repurchased from IDC in September 2004,$0.1 million received in the fourth quarter of 2004, $0.3 million received inthe fourth quarter of 2005, and $0.2 million received in the first quarter of2006. The Company expects to receive the remaining holdback in the secondquarter of 2006.

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The disposition wasaccounted for as discontinued operations in accordance with SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets.” The results of operationsfor the discontinued businesses are as follows:

The Company recognized again from discontinued operations of $0.1 million, net of a $0.1 million taxexpense for the three months ended March 31, 2006, and no gain for threemonths ended March 31, 2005. The Company had no operating expenses fromdiscontinued operations for three months ended March 31, 2006 compared tooperating expenses of $22,599, unadjusted for taxes, for the three months endedMarch 31, 2005. There were no revenue or direct costs of revenue fromdiscontinued operations for the three months ended March 31, 2006 and2005.

Assets and liabilitiesrelated to discontinued operations consist of the following:
| ** **                                                                                     | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **Assets  Related to Discontinued Operations**                                                 | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Accounts receivable, net of allowance for doubtful  accounts of 2006: $182,423; 2005: $204,948 |       | $                        | 57,094     |                        | $          | 57,094 |   |
| **Total  Assets Related to Discontinued Operations**                                           |       | $                        | 57,094     |                        | $          | 57,094 |   |
|                                                                                           |       |                     |       |                        |       |
| **Liabilities  Related to Discontinued Operations**                                            | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Accounts payable                                                                               |       | $                        | 227,613    |                        | $          | 45,259 |   |
| Accrued expenses                                                                               |       | 262,000                  |       | 488,289                     |       |
| **Total Liabilities Related to  Discontinued Operations**                                      |       | $                        | 489,613    |                        | $          | 533,548 |   |

 

(8) SIGNIFICANTCUSTOMERS

The Nasdaq Stock Market, Inc.accounted for approximately 13% of the Company’s consolidated revenue for thefirst quarter of 2006 and none of the Company’s consolidated revenue for thefirst quarter of 2005. ComStock, Inc. accounted for approximately 12% and22% of the Company’s consolidated revenue in the first quarter of 2006 and2005, respectively. Townsend accounted for approximately 8% and 11% of theCompany’s consolidated revenue in the first quarter of 2006 and 2005,respectively. Susquehanna International Group, LLP accounted for approximately7% and 14% of the Company’s consolidated revenue in the first quarter of 2006and 2005, respectively.

(9) LITIGATION

On February 23,2006, the Company filed a two-count complaint in the Tax Court of New Jerseycontesting the determination by the New Jersey Division of Taxation thatHyperFeed had nexus with New Jersey for the purposes of (i) the New JerseyCorporation Tax and (ii) the New Jersey Sales and Use Tax for the periodbeginning January 1, 1994 and forward. On April 25, 2006, the Companyreceived notice that the New Jersey Division of Taxation has denied theallegations set forth in the two-count complaint. The Company intends toaggressively contest the determination. As of March 31, 2006, the Companyhad accrued $250,000 in potential tax liability and recorded the expense indiscontinued operations.

The Company is aparty to various other legal proceedings incidental to its business operations,none of which is expected to have a material adverse effect on the financialcondition or results of operations of the Company.

**ITEM2. Management’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, 2005. Accordingly, footnotedisclosures which would substantially duplicate the disclosures contained inthe December 31, 2005 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 its 

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subsidiary, HYPRWare, Inc.(“HYPRWare”), (collectively, the “Company”) to differ materially from thoseexpressed or implied by such forward-looking statements. All statements otherthan statements of historical fact are statements that could be deemedforward-looking statements, including any statements of the plans, strategiesand objectives of management for future operations; any statements regardingfuture economic conditions or performance; any statement of expectation orbelief; and any statements of assumptions underlying any of the foregoing. Therisks, uncertainties, and assumptions referred to above include risks related tothe possibility of requiring additional financing; the possible issuance ofadditional shares and significant dilution of our stockholders’ ownershippercentage associated with our secured convertible note payable; the executionof our business plan; the fluctuations in our financial results; our history ofoperating losses; attracting and retaining qualified management and keyemployees; the timely development and introduction of new product and serviceinitiatives at competitive prices and performance levels; pending or futurelegal proceedings; the effect of economic and business conditions generally;and risks that are otherwise described in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2005 and from time to time in the Company’sother reports and registration statements filed with the Securities andExchange Commission.

OVERVIEW

The Company has sustainedsignificant losses in recent years and in the first quarter of 2006. Inparticular, we incurred a net loss of $4.7 million for the first quarter of2006 compared to a net loss of $2.0 million for the same period in 2005, and anoverall net loss of $9.5 million for the fiscal year ended December 31,2005. Included in the net loss of $4.7 million for the first quarter of 2006 is$2.2 million of non-cash interest expense related to the beneficial conversionfeature of the Secured Convertible Promissory Note (the “2006 Convertible Note”)issued by the Company to PICOHoldings Inc. (“PICO”) in the first quarter of 2006 described in Note 6of the Notes to Unaudited Interim Consolidated Financial Statements.Additionally, the Company’s negative cash flows from operating activitiesincreased to $2.4 million for the three months ended March 31, 2006compared to $0.5 million for the three months ended March 31, 2005. Therecurring losses and negative cash flows may raise substantial doubt about theCompany’s ability to continue as a going concern. Total revenue for the firstquarter of 2006 increased 12.3% to $1.0 million compared with $0.9 million forthe same period in 2005.

TheCompany currently believes, although there can be no assurances in this regard,that its existing and anticipated capital resources, including cash and cashequivalents, accounts receivable, assets related to discontinued operations,cash expected to be received from holdbacks associated with the sale of itsinstitutional consolidated market data feed business, and potentialcapital from financing sources,including PICO, will be sufficient to fund its operations over the next twelvemonths.

In the first quarter of2006, the Company issued the 2006 Convertible Note to PICO for $10.0 million, payable twoyears from issuance, as described in Note6 of the Notes to Unaudited Interim Consolidated Financial Statements. However, the Company may not have sufficientcapital resources to repay or refinance the 2006 Convertible Note when it comesdue in March 2008. In the event that PICO chooses not to convert the 2006Convertible Note and the Company is unable to repay or refinance the 2006Convertible Note at such time, PICO will also have the right to declare the2006 Convertible Note in default and may, at its option, pursue any otherremedies available to it. If the Company requires additional capital resources,there can be no assurances that such capital will be available or that suchcapital will be available on terms satisfactory to the Company. If the Companydoes not obtain such capital, it may not have sufficient capital resources tofund continuing operations.

The Company derivesrevenue from software licensing, maintenance, and consulting fees. In general,the Company expects that its licensing fees will be structured as a one timefee with a recurring maintenance fee, a recurring monthly fee, based upon thenature, size, and scope of the licensee, or a monthly fee, based upon thenumber of end users that rely upon the products and services offered by thelicensee. Consulting fees charged to customers are expected to vary based uponthe nature, size, and scope of the projects undertaken.

The Company’s directcosts of revenue are composed largely of software development amortizationcosts, royalty fees and labor associated with consulting services.

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RESULTS OF OPERATIONS FORTHE THREE MONTHS ENDED MARCH 31, 2006 AND 2005

**Revenue**

Total revenue for thethree months ended March 31, 2006 increased 12.3% to $1.0 million comparedwith $0.9 million for the three months ended March 31, 2005. WhileHyperFeed’s revenue increased for the three months ended March 31, 2006compared to the same period in 2005, HYPRWare revenue decreased for the samecomparable periods.

HyperFeed revenueincreased 16.0% to $0.9 million for the three months ended March 31, 2006compared with $0.8 million for the three months ended March 31, 2005. Theincrease is due to an increase in the number of new customers quarter overquarter. HyperFeed revenue is derived from HTPX and HBOX software and tickerplant technologies and includes license and consulting revenue, includingrevenue from multi-year contracts with Chicago Board Options Exchange,Philadelphia Stock Exchange, ComStock, Inc., Susquehanna InternationalGroup, LLP, and The Nasdaq Stock Market, Inc. There was no HMDP revenuefor the three months ended March 31, 2006 and 2005.

HYPRWare revenuedecreased 18.2% to $77,573 for the three months ended March 31, 2006compared with $94,873 for the three months ended March 31, 2005. HYPRWarederives revenue from royalties related to license fees for customers itreferred 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. TheCompany currently expects that any future revenue recognized by HYPRWare willbe derived exclusively from royalties from the licensing agreement withTownsend.

**TotalExpenses**

Total expenses (includingdirect costs of revenue, operating expenses, other expenses, and expenses indiscontinued operations) increased 103.6% to $5.8 million for the three monthsended March 31, 2006 compared with $2.9 million for the three months endedMarch 31, 2005. The increase was principally due to the non-cash interestexpenses of $2.2 million incurred in connection with the beneficial conversionfeature related to the 2006Convertible Note issued by the Company to PICO described in Note 6 of the Notes to Unaudited InterimConsolidated Financial Statements. The $5.8 million of total expense for thethree months ended March 31, 2006 consists of $5.3 million for HTPX and$0.5 million for HMDP. There were no expenses related to HMDP for the threemonths ended March 31, 2005.

**DirectCosts of Revenue**

Total direct costs ofrevenue increased 57.7% to $0.4 million for the three months ended March 31,2006 compared with $0.3 million for the three months ended March 31, 2005.The principal component of this increase for the three months was $0.1 millionfor license fees related to the provision of third party data. Amortization ofsoftware development costs remained relatively unchanged at $0.3 million forthe three months ended March 31, 2006 and 2005. Direct costs of revenueassociated with HTPX for the three months ended March 31, 2006 were $0.4million and direct costs of revenue associated with HMDP were $0.1 million forthe three months ended March 31, 2006. There were no direct costs ofrevenue related to HMPD for the three months ended March 31, 2005. Thereare no direct costs of revenue related to HYPRWare service revenue as suchamounts consist solely of royalty income. Gross margin remained unchanged at$0.6 million for the three months ended March 31, 2006 compared with thethree months ended March 31, 2005. Direct costs as a percentage of totalrevenue increased to 44.7% for the three months ended March 31, 2006compared with 31.9% for the three months ended March 31, 2005. Theincrease in the proportion of direct costs of revenue to total revenue for thethree months ended March 31, 2006 compared to the three months ended March 31,2005 was due to an overall increase in direct costs of revenue.

**OperatingExpenses**

Total operating expensesincreased 38.5% to $3.1 million for the three months ended March 31, 2006compared with $2.3 million for the three months ended March 31, 2005.Increases were experienced in sales and marketing costs, research anddevelopment costs, and operations costs while general and administrative costsand depreciation and amortization costs remained relatively unchanged. The $3.1million of total operating expenses for the three months ended March 31,2006 consists of $2.6 million for HTPX and $0.5 million for HMDP. There were nooperating expenses related to HMDP for the three months ended March 31,2005. Total operating expenses as a percentage of total revenue increased to312.7% for the three months ended March 31, 2006 compared to 253.6% forthe three months ended March 31, 2005. The increase in the proportion oftotal operating expenses to total revenue for the three months ended March 31,2006 compared to the three months ended March 31, 2005 was due to anoverall increase in total operating expenses.

Sales and marketing costsincreased 54.6% to $0.5 million for the three months ended March 31, 2006compared with $0.3 million for the three months ended March 31, 2005. Theincrease for the three-month period primarily resulted from $0.1 million ofcosts associated with selling the HMDP product, which the Company acquired inthe second quarter of 2005, and $0.1 million of additional 

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labor costs due to growthin the Company’s sales force. The $0.5 million of sales and marketing costs forthe three months ended March 31, 2006 consist of $0.3 million for HTPX and$0.2 million for HMDP. There were no sales and marketing costs related to HMDPfor the three months ended March 31, 2005. Sales costs as a percentage oftotal revenue were 53.1% for the three months ended March 31, 2006compared to 38.6% for the three months ended March 31, 2005. The increasein the proportion of sales and marketing costs to total revenue for the threemonths ended March 31, 2006 compared to the three months ended March 31,2005 was due to an overall increase in sales and marketing costs.

General andadministrative costs remained unchanged at $0.8 million for the three monthsended March 31, 2006 and March 31, 2005. The $0.8 million of generaland administrative costs for the three months ended March 31, 2006consists of $0.7 million for HTPX and $0.1 million for HMDP. There were no generaland administrative costs related to HMDP for the three months ended March 31,2005. General and administrative costs as a percentage of total revenuedecreased to 78.8% for the three months ended March 31, 2006 compared to90.0% for the three months ended March 31, 2005. The decrease in theproportion of general and administrative costs to total revenue for the threemonths ended March 31, 2006 compared to the three months ended March 31,2005 was due to an increase in total revenue.

Research and developmentcosts increased 55.4% to $0.6 million for the three months ended March 31,2006 compared with $0.4 million for the three months ended March 31, 2005.The increase for the three-month period resulted from $0.1 million inadditional labor costs and $0.1 million for the outsourcing of labor, incurredin each case to enhance HyperFeed’s product line. The $0.6 million of researchand development costs for the three months ended March 31, 2006 consistsof $0.5 million for HTPX and $0.1 million for HMDP. There were no research anddevelopment costs related to HMDP for the three months ended March 31,2005. Research and development costs as a percentage of total revenue increasedto 61.5% for the three months ended March 31, 2006 compared to 44.4% forthe three months ended March 31, 2005. The increase in the proportion ofresearch and development costs to total revenue for the three months ended March 31,2006 compared to the three months ended March 31, 2005 was due to anoverall increase in research and development costs.

Operations costsincreased 104.6% to $1.0 million for the three months ended March 31, 2006compared with $0.5 million for the three months ended March 31, 2005. Theincrease resulted from $0.1 million for communication costs and $0.3 million inlabor costs relating tothe end of the transition service agreement period related to the saleof HyperFeed’s institutional consolidated market data feed business and $0.1million for data acquisition costs that the Company did not incur in the first quarterof 2005. Operations costs consist of technical support, data maintenance, dataaccess, and communications costs. The $1.0 million for the three months ended March 31,2006 consists of $0.9 million for HTPX and $45,393 for HMDP. There were nooperations costs related to HMDP for the three months ended March 31,2005. Operations costs as a percentage of total revenue were 103.0% for thethree months ended March 31, 2006 compared to 56.6% for the three monthsended March 31, 2005. The increase in the proportion of operations coststo total revenue for the three months ended March 31, 2006 compared to thethree months ended March 31, 2005 was due to an overall increase inoperations costs.

Depreciation andamortization remained unchanged at $0.2 million for the three months ended March 31,2006 and March 31, 2005. The $0.2 million of depreciation and amortizationcosts for the three months ended March 31, 2006 consist of $0.2 millionfor HTPX and $2,442 for HMDP. There were no depreciation and amortization costsrelated to HMDP for the three months ended March 31, 2005. Depreciationand amortization as a percentage of total revenue decreased to 16.2% for thethree months ended March 31, 2006 compared to 24.0% for the three monthsended March 31, 2005. The decrease in the proportion of depreciation andamortization costs to total revenue for the three months ended March 31,2006 compared to the three months ended March 31, 2005 was due to anincrease in total revenue.

Interest expense increased 655.5% to $2.2 million for the three monthsended March 31, 2006 compared with $0.3 million for the three months endedMarch 31, 2005. The increase principally resulted from non-cash interestexpense of $2.2 million recorded in the first quarter of 2006 related to the beneficialconversion feature of the 2006 Convertible Note compared to non-cash interestexpenses of $0.3 million recorded in the first quarter of 2005 related to thebeneficial conversion feature of an amended and restated Secured ConvertiblePromissory Note issued by the Company to PICO in the first quarter of 2005 (the“Restated Convertible Note”). Additionally, the Company recorded accruedinterest of $0.1 million for the three months ended March 31, 2006 onborrowings against the 2006 Convertible Note compared to $8,556 of accruedinterest and a commitment fee of $9,143 for the three months ended March 31,2005 against the borrowings under the Restated Convertible Note. HTPX absorbed100.0% of the interest expense for the three months ended March 31, 2006and 2006.

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**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. Due to the completionof it obligations under the transition service agreement entered into inconnection with the sale of its consolidated market data feed business in thesecond quarter of 2005, the Company did not record any income or expense relatedto discontinued operations for the three months ended March 31, 2006compared with a net loss from discontinued operations of $22,599, unadjustedfor tax, for the three months ended March 31, 2005. The net loss for thethree months ended March 31, 2005 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 $0.1 million, net of tax expense of$0.1 million, as a gain on disposition of discontinued operations during thefirst quarter of 2006 related to holdbacks from the sale of its institutionalconsolidated market data feed business. The Company had no comparable gain thefirst quarter of 2005.

As of March 31,2006, assets related to discontinued operations consist of accounts receivable,net of allowance, prior to November 1, 2003. Liabilities related todiscontinued operations consist of (1) accounts payables related to asales tax settlement and (2) accrued expenses related to a potential taxliability. See Note 7 of the Notes to Unaudited Interim Consolidated FinancialStatements. The Company expects the assets and liabilities related to thediscontinued operations to be completely settled during 2008.

LIQUIDITY AND CAPITALRESOURCES

Net cash and cashequivalents decreased to $0.2 million at March 31, 2006 from $0.3 millionat December 31, 2005.

Operating activities usednet cash of $2.4 million for the three months ended March 31, 2006 comparedto net cash used of $0.5 million for the three months ended March 31,2005. The net loss for the three months ended March 31, 2006 of $4.7millions was offset in part by non-cash items, including $2.2 million ofinterest expense related to the beneficial conversion feature of the 2006Convertible Note, $0.5 million of depreciation and amortization of long-livedassets, and $0.1 million of stock based compensation expense. The net loss forthe three months ended March 31, 2005 of $2.0 million was offset bynon-cash items of $0.5 million, such as depreciation and amortization oflong-lived assets.

Investing activities usednet cash of $0.6 million for the three months ended March 31, 2006compared to net cash used of $0.8 million for the three months ended March 31,2005. During the three months ended March 31, 2006, the Company invested$0.2 million in equipment and $0.4 million in its licensed and developedtechnology. Additionally, the Company established a $0.1 million certificatedof deposit during the first quarter of 2006. The Company collected  $0.1 million that is applied to a notereceivable from Money.net. During the three months ended March 31, 2005,the Company invested $0.1 million in equipment and $0.3 million in itsdeveloped technology. Additionally, in the first quarter of 2005, the Companyacquired the assets of Focus Technology Group LLC for $0.4 million, asdescribed in Note 4 ofthe Notes to Unaudited Interim Consolidated Financial Statements.

Financing activitiesprovided net cash of $2.9 million for the three months ended March 31,2006 compared to net cash provided of $1.1 million for the three months ended March 31,2005.

On December 20,2005, the Company issued a Promissory Note to PICO in the amount of $0.8million at an interest rate of 7.0% per annum. The entire unpaid principalbalance and related interest under the December 20, 2005 Promissory Notewas due and payable not later than January 31, 2006.

On January 23, 2006,the Company issued a Promissory Note to PICO in the amount of $1.5 million atan interest rate of 7.0% per annum. The entire unpaid principal balance andrelated interest under the January 23, 2006 Promissory Note was due andpayable not later than February 28, 2006. The Company paid off a $0.5million line of credit with the borrowings from the January 23 PromissoryNote and cancelled the line of credit.

On February 15,2006, the Company issued a Promissory Note to PICO in the amount of $3.3million at an interest rate of 7.0% per annum. The Company borrowed anadditional $1.0 million under the February 15, 2006 Promissory Note. Theprincipal sum borrowed under the December 20, 2005 Promissory Note, the January 23,2006 Promissory Note, and the February 15, 2006 Promissory Note totaled$3.3 million. In connection with this issuance, the December 20, 2005Promissory Note and the January 23, 2006 Promissory Note were cancelled.The entire unpaid principal balance and related interest under the February 15,2006 Promissory Note was due and payable not later than March 31, 2006.

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On March 15, 2006,the Company issued a Promissory Note to PICO in the amount of $4.2 million atan interest rate of 7.0% per annum. The Company borrowed an additional $0.9million under the March 15, 2006 Promissory Note. The principal sumborrowed under the February 15, 2006 Promissory Note and the March 15,2006 Promissory Note totaled $4.2 million. In connection with this issuance,the February 15, 2006 Promissory Note was cancelled. The entire unpaidprincipal balance and related interest under the March 15, 2006 PromissoryNote was due and payable not later than April 30, 2006.

OnMarch 30, 2006, the Company issued to PICO the 2006 Convertible Note whichreplaced the March 15, 2006 Promissory Note. Under the terms of the 2006Convertible Note, the Company may borrow up to $10.0 million at an interestrate of prime plus 2.75%. The Company is obligated to repay all outstandingprincipal and accrued interest under the 2006 Convertible Note two years fromissuance. The 2006 Convertible Note, which is convertible by PICO at any timeinto HyperFeed’s common stock, provides that the number of shares that PICOwould receive in connection with a conversion of any amounts outstanding underthe 2006 Convertible Note would be determined by dividing the total outstandingamount to be converted by the lesser of (i) 80% of the five-day movingaverage per share price of HyperFeed’s common stock on the date of conversionor (ii) 80% of $1.05 per share. The number of shares of HyperFeed’s commonstock issuable upon conversion of the 2006 Convertible Note is not subject to acap. In addition, in connection with issuing the 2006 Convertible Note, theCompany issued to PICO a warrant to purchase 125,000 shares of HyperFeed’scommon stock, at an exercise price of $1.05 per share. The warrant expires on March 30,2009.

The 2006 Convertible Notecontains a beneficial conversion feature and, as a result, the Company recorded$2.2 million of additional paid-in-capital and interest expense at March 31,2006. The 2006 Convertible Note is secured by all of the assets of the Company and contains customary representations,warranties, covenants, and events of default. As of March 31, 2006, the Company had borrowed $4.2 million underthe terms of the 2006 Convertible Note and recorded accrued interest of $0.1million.

The Company has sustainedsignificant losses in recent years and in the first quarter of 2006. Inparticular, the Company incurred a net loss of $4.7 million for the firstquarter of 2006, compared to a net loss of $2.0 million for the same period in2005, and an overall net loss of $9.5 million for the fiscal year ended December 31,2005. Included in the net loss of $4.7 million for the first quarter of 2006 is$2.2 million of non-cash interest expense related to the beneficial conversionfeature of the 2006 Convertible Note. Additionally, the Company’s negative cashflows from operating activities increased to $2.4 million for the three monthsended March 31, 2006 compared to $0.5 million for the three months ended March 31,2005. The recurring losses and negative cash flows may raise substantial doubtabout the Company’s ability to continue as a going concern. Total revenue forthe first quarter of 2006 increased 12.3% to $1.0 million compared with $0.9million for the same period in 2005.

Althoughthere can be no assurances in this regard, the Company currently believes thatits existing and anticipated capital resources, including cash and cashequivalents, accounts receivable, assets related to discontinued operations,cash expected to be received from holdbacks associated with the sale of itsinstitutional consolidated market data feed business, and available creditunder the 2006 Convertible Note are sufficient to fund its operations over thenext twelve months. However, the Company may not have sufficient capitalresources to repay or refinance the 2006 Convertible Note when it comes due in March 2008.In the event that PICO chooses not to convert the 2006 Convertible Note and theCompany is unable to repay or refinance the 2006 Convertible Note at such time,PICO will also have the right to declare the 2006 Convertible Note in defaultand may, at its option, pursue any other remedies available to it. If theCompany requires additional capital resources, there can be no assurances thatsuch capital will be available or available on terms satisfactory to theCompany. If the Company does not obtain such capital, it may not havesufficient capital resources to fund continuing operations.

The Company has consideredand 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.

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 States of America. Thepreparation of these financial statements requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities andthe disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenue and expenses duringthe reporting period.

On an on-going 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 formaking judgments about the carrying values of assets and liabilities that arenot readily 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.

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**RevenueRecognition**: The Company principally derives revenue fromlicensing technology and providing management and maintenance services of HTPX,HBOX, HMDP, and OCC software, ticker plant and data platform technologies, andmanaged services. Additionally, the Company derives revenue from thedevelopment of customized software.

Revenue is recognizedfrom the licensing of HTPX, HBOX, HMDP, and OCC (1) as payments fromcustomers become due when the fee is not fixed or determinable at the outset ofthe arrangement or (2) ratably over the term of the agreement when postcontract customer support (“PCS”) has a duration of one year or less. PCS isrecognized ratably over the term. Revenue for the development of customizedsoftware, consulting, and implementation services is recognized based on timeand materials from the application of contract accounting for the developmentof customized software, or based on an hourly rate when it is not a fixed feearrangement. For licensing of the Company’s software through its saleschannels, revenue is recognized as payments from the reseller become due andgenerally commences after the software is installed at the reseller’s customersite.

The Company applies theprovisions of AICPA 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 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.

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 Software Development Costs**: TheCompany 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 software development costs against estimatedfuture revenue over the estimated remaining economic life of the software.

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**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’spolicy is to amortize capitalized software costs by the straight-line methodover three to five 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.

RECENT ACCOUNTINGPRONOUNCEMENTS

In February 2006,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 155, “Accountingfor Certain Hybrid Financial Instruments,” which eliminates the exemption fromapplying SFAS No.133 to interests in securitized financial assets so thatsimilar instruments are accounted for similarly regardless of the form of theinstruments. SFAS No. 155 also allows the election of fair valuemeasurement at acquisition, at issuance, or when a previously recognizedfinancial instrument is subject to a remeasurement event. Adoption is effectivefor all financial instruments acquired or issued after the beginning of thefirst fiscal year that begins after September 15, 2006. Early adoption ispermitted. The adoption of SFAS No. 155 is not expected to have a materialeffect on the Company’s consolidated financial position, results of operations,or cash flows.

In March 2006, theFASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets,”which requires all separately recognized servicing assets and servicingliabilities be initially measured at fair value. SFAS No. 156 permits, butdoes not require, the subsequent measurement of servicing assets and servicingliabilities at fair value. Adoption is required as of the beginning of thefirst fiscal year that begins after September 15, 2006. Early adoption ispermitted. The adoption of SFAS No. 156 is not expected to have a materialeffect on the Company’s consolidated financial position, results of operations,or cash flows.

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CONTRACTUAL OBLIGATIONSAND OFF-BALANCE SHEET ARRANGEMENTS

To facilitate anunderstanding of our contractual obligations and off-balance sheetarrangements, the following data is provided:

**ContractualObligations**
| ** **                     | ** ** | ** ** | ** ** | **Payments Due by Period** | ** ** |
|--------------------------------|------------|------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | ** ** | ** ** | **Within**                                | ** ** | ** ** | ** ** | ** ** | ** ** | **After** | ** ** |
| ** **                     | ** ** | **Total**  | ** ** | **1 Year**                           | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **5 Years** | ** ** |
| Long-term debt  (1)            |       | $          | 4,160,000  |                                      | $          | — |   | $ | 4,160,000 |   | $ | — |   | $ | — |   |
| Operating leases               |       | 1,313,754  |       | 497,522                                   |       | 615,568 |   | 200,664 |   | — |   |
| Total contractual  obligations |       | $          | 5,473,754  |                                      | $          | 497,522 |   | $ | 4,775,568 |   | $ | 200,664 |   | $ | — |   |

 

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(1) Long-term debtdoes not include future interest payments.

The Company has nomaterial unconditional purchase obligations as defined by SFAS No. 47, “Disclosureof Long-Term Purchase Obligations”.

**OffBalance Sheet Arrangements**

The Company is nota party to any off-balance sheet arrangements that have, or are reasonably likelyto have, a current or future material effect on its financial condition,revenues, expenses, results of operations, liquidity, capital expenditures orcapital resources.

**ITEM3. Quantitative and Qualitative Disclosures About Market Risk**

As of March 31,2006, the Company had excess cash invested in a money market account. TheCompany does not expect any material loss, if at all, on these investments.

In connection withissuing the 2006 Convertible Note, the Company issued to PICO a warrant topurchase 125,000 shares of HyperFeed’s common stock, at an exercise price of$1.05 per share. The warrant expires on March 30, 2009. All else remainingconstant, for every $0.10 per share increase over $1.05 per share price ofHyperFeed’s common stock, the Company would incur interest expense ofapproximately $7,700 in connection with the fair value of the warrants. Allelse remaining constant, for every 1.0% increase in the discount rate, theCompany would incur interest expense of approximately $800 in connection withthe fair value of the warrants.

TheCompany is subject to variable interest rates that could fluctuate with marketconditions.

**ITEM4. Controls and Procedures**

a)              *Disclosure Controls and Procedures.* TheCompany’s management, with the participation of the Company’s Chief ExecutiveOfficer and Principal Accounting Officer, has evaluated the effectiveness ofthe Company’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 Principal Accounting 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 theCompany in the reports that the Company files or submits under the ExchangeAct.

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.

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**PART II**

**ITEM 1. Legal Proceedings**

On February 23,2006, the Company filed a two-count complaint in the Tax Court of New Jerseycontesting the determination by the New Jersey Division of Taxation thatHyperFeed had nexus with New Jersey for the purposes of (i) the New JerseyCorporation Tax and (ii) the New Jersey Sales and Use Tax for the periodbeginning January 1, 1994 and forward. On April 25, 2006, the Companyreceived notice that the New Jersey Division of Taxation has denied theallegations set forth in the two-count complaint. The Company intends toaggressively contest the determination. As of March 31, 2006, the Companyhad accrued $250,000 in potential tax liability and recorded the expense indiscontinued operations.

The Company is aparty to various other legal proceedings incidental to its business operations,none of which is expected to have a material adverse effect on the financial conditionor results of operations of the Company.

**ITEM 1A. Risk Factors**

There have been nomaterial changes from the risk factors disclosed in Item 1A - “Risk Factors” ofthe Company’s Annual Report on Form 10-K for the year ended December 31,2005.

**ITEM 2. Unregistered Sales of Equity Securities and Use ofProceeds**

Asdescribed in “Management’s Discussion and Analysis of Financial Condition andResults of Operation — Liquidity and Capital Resources” and in Note 6 of theNotes to Unaudited Interim Consolidated Financial Statements, on March 30,2006, the Company issued to PICOa Secured Convertible PromissoryNote (the “2006 Convertible Note”) that replaced a $4.2 million PromissoryNote issued to PICO on March 15, 2006. Under the terms of the 2006 Convertible Note, the Company mayborrow up to $10.0 million at an interest rate of prime plus 2.75%. The Companyis obligated to repay all outstanding principal and accrued interest under the 2006 Convertible Note two years fromissuance. The 2006 Convertible Note,which is convertible by PICO at any time into shares of HyperFeed’s commonstock, provides that the number of shares that PICO would receive in connectionwith a conversion of any amounts outstanding under the 2006 Convertible Note would be determined by dividing the totaloutstanding amount to be converted by the lesser of (i) 80% of thefive-day moving average per share price of HyperFeed’s common stock on the dateof conversion or (ii) 80% of $1.05 per share. The number of shares ofHyperFeed’s common stock issuable upon conversion of the 2006 Convertible Note is not subjectto a cap. In addition, in connection with issuing the 2006 Convertible Note, the Company issued to PICO a warrant topurchase 125,000 shares of HyperFeed’s common stock, at an exercise price of$1.05 per share. The warrant expires on March 30, 2009.

The 2006 ConvertibleNote, the warrant, and the shares of common stock to be issued in connectionwith the issuance of such note were offered and sold to PICO in reliance uponthe exemption from registration set forth in Section 4(2) of theSecurities Act of 1933, as amended.

There were no repurchasesof securities made by us in a month within the fourth quarter of our fiscalyear ended March 31, 2006.

**ITEM 6. Exhibits**

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 Principal Accounting Officer Pursuant to Rules 13a-14(a) and15d-14(a) under the Exchange Act.

Exhibit 32 — CertificationPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906of the Sarbanes-Oxley Act of 2002.

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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.

HYPERFEEDTECHNOLOGIES, INC.

 
| Date:  | May 9, 2006                      |   |
|--------|---------------------------------------|--------|
|   |                                  |   |
| By:    | /s/ Paul Pluschkell                   |   |
|   | Paul Pluschkell                       |   |
|   | President and Chief Executive Officer |   |
|   |                                  |   |
| By:    | /s/ Gemma Lahera                      |   |
|   | Gemma Lahera                          |   |
|   | Principal Accounting Officer          |   |

 

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