** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

**FORM 10-Q**

**(Mark one)**
| **ý**                                                                                                                                                                                                                               |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**        |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                     |   |                                                                                                |   |
| **For the quarterly period ended: March 31,  2004**                                                                                                                                                                                      |   |
|                                                                                                                                                                                                                                     |   |
| **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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**HYPERFEEDTECHNOLOGIES, INC.**

(Exact name of registrant as specified in itscharter)

 

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

 

Securities registered pursuant toSection 12(b) of the Act:

**None**

 

Securities registered pursuant toSection 12(g) of the Act:**Common stock, par value $.001 per share**

 

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

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Act) Yes o  No ý

 

Thenumber of shares of common stock outstanding as of May 5, 2004 was 3,056,238shares.

 

 

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HYPERFEEDTECHNOLOGIES, INC.

 

INDEX

 
| PART I.   | Financial  Information                                                                                        |   |   |
|-----------|---------------------------------------------------------------------------------------------------------------|--------|--------|
|      |                                                                                                          |   |   |
| Item 1.   | Consolidated  Balance Sheets as of March 31, 2004 and December 31, 2003 (unaudited)                           |   |   |
|      |                                                                                                          |   |   |
|      | Consolidated  Statements of Operations for the three month periods ended March 31, 2004 and  2003 (unaudited) |   |   |
|      |                                                                                                          |   |   |
|      | Consolidated Statements of Cash Flows for  the three month periods ended March 31, 2004 and 2003 (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 6.   | Exhibits  and Reports on Form 8-K                                                                             |   |   |
|      |                                                                                                          |   |   |
|      | Company’s  Signature Page                                                                                |   |   |

 

2

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**PART I**

**ITEM 1****. Financial Statements**

HYPERFEED TECHNOLOGIES, INC. AND SUBSIDIARY

Consolidated Balance Sheets (Unaudited)

March 31, 2004 and December 31, 2003

 
|                                                                                                                                                                      |   | **March 31,  2004** |      | **December  31,  2003** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|-----------|-------------------------|--------|
| **Assets**                                                                                                                                                                |   |                |      |                    |   |
| **Current Assets**                                                                                                                                                        |   |                |      |                    |   |
| Cash and cash equivalents                                                                                                                                                 |   | $                   | 1,160,396 |                    | $      | 4,668,038 |   |
| Accounts receivable, less allowance for  doubtful accounts of: 2004: $4,998; 2003: $0                                                                                     |   | 1,442,828           |      | 797,048                 |   |
| Notes receivable, less allowance for  doubtful accounts of: 2004: $50,000; 2003: $50,000                                                                                  |   | 142,131             |      | 150,465                 |   |
| Prepaid expenses and other current assets                                                                                                                                 |   | 234,343             |      | 173,816                 |   |
| Assets related to discontinued operations                                                                                                                                 |   | 626,965             |      | 811,878                 |   |
| **Total Current Assets**                                                                                                                                                  |   | 3,606,663           |      | 6,601,245               |   |
|                                                                                                                                                                      |   |                |      |                    |   |
| Property and equipment                                                                                                                                                    |   |                |      |                    |   |
| Computer equipment                                                                                                                                                        |   | 1,534,482           |      | 2,343,853               |   |
| Communication equipment                                                                                                                                                   |   | 1,031,370           |      | 1,296,550               |   |
| Furniture and fixtures                                                                                                                                                    |   | 104,830             |      | 82,839                  |   |
| Leasehold improvements                                                                                                                                                    |   | 531,809             |      | 531,809                 |   |
|                                                                                                                                                                      |   | 3,202,491           |      | 4,255,051               |   |
| Less: Accumulated depreciation and  amortization                                                                                                                          |   | (2,019,441          | )         | (3,019,964              | )      |
|                                                                                                                                                                      |   | 1,183,050           |      | 1,235,087               |   |
| Intangible assets, net of accumulated  amortization of:  2004: $85,000; 2003: $70,000                                                                                     |   | 95,000              |      | 110,000                 |   |
| Software development costs, net of  accumulated amortization of:  2004: $2,160,819; 2003: $2,733,126                                                                      |   | 1,727,720           |      | 1,732,721               |   |
| Deposits and other assets                                                                                                                                                 |   | 35,205              |      | 35,205                  |   |
| **Total Assets**                                                                                                                                                          |   | $                   | 6,647,638 |                    | $      | 9,714,258 |   |
|                                                                                                                                                                      |   |                |      |                    |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                             |   |                |      |                    |   |
| **Current Liabilities**                                                                                                                                                   |   |                |      |                    |   |
| Accunts payable                                                                                                                                                           |   | $                   | 570,125   |                    | $      | 605,644 |   |
| Accrued expenses                                                                                                                                                          |   | 674,049             |      | 587,193                 |   |
| Accrued compensation                                                                                                                                                      |   | 79,968              |      | 73,157                  |   |
| Income taxes payable                                                                                                                                                      |   | 40,000              |      | 40,000                  |   |
| Unearned revenue                                                                                                                                                          |   | 460,000             |      | 15,000                  |   |
| Liabilities related to discontinued  operations                                                                                                                           |   | 1,051,120           |      | 2,419,879               |   |
| **Total Current Liabilities**                                                                                                                                             |   | 2,875,262           |      | 3,740,873               |   |
|                                                                                                                                                                      |   |                |      |                    |   |
| Accrued expenses, less current portion                                                                                                                                    |   | 294,142             |      | 292,676                 |   |
| **Total Noncurrent Liabilities**                                                                                                                                          |   | 294,142             |      | 292,676                 |   |
| **Total Liabilities**                                                                                                                                                     |   | 3,169,404           |      | 4,033,549               |   |
|                                                                                                                                                                      |   |                |      |                    |   |
| **Stockholders’ Equity**                                                                                                                                             |   |                |      |                    |   |
| Preferred stock, $.001 par value;  authorized 5,000,000 shares; none issued and outstanding                                                                               |   | —              |      | —                  |   |
| Common stock, $.001 par value; authorized  50,000,000 shares; issued and outstanding   3,056,421 shares at March 31, 2004 and 3,051,989 shares at December  31, 2003 |   | 3,056               |      | 3,052                   |   |
| Additional paid-in capital                                                                                                                                                |   | 46,090,770          |      | 46,070,113              |   |
| Accumulated deficit                                                                                                                                                       |   | (42,615,592         | )         | (40,392,456             | )      |
| **Total Stockholders’ Equity**                                                                                                                                       |   | 3,478,234           |      | 5,680,709               |   |
| **Total Liabilities and Stockholders’ Equity**                                                                                                                       |   | $                   | 6,647,638 |                    | $      | 9,714,258 |   |

 

See Notes to Unaudited Interim Consolidated Financial Statements.

 

3

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HYPERFEED TECHNOLOGIES, INC. ANDSUBSIDIARY

Consolidated Statements of Operations (Unaudited)

 

 
|                                                                                                     |   | **For The  Three Months Ended  March 31,** |       |
|----------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|------------|
|                                                                                                     |   | **2004**                                   |       | **2003** |   |
| **Revenue**                                                                                              |   |                                       |       |   |   |
| HyperFeed                                                                                                |   | $                                          | 649,010    |   | $ | — |   |
| HYPRWare                                                                                                 |   | 126,301                                    |       | 175,029 |   |
| **Total Revenue**                                                                                        |   | 775,311                                    |       | 175,029 |   |
|                                                                                                     |   |                                       |       |   |   |
| **Direct Costs of Revenue**                                                                              |   | 463,668                                    |       | 336,744 |   |
|                                                                                                     |   |                                       |       |   |   |
| **Gross Margin**                                                                                         |   | 311,643                                    |       | (161,715 | ) |
|                                                                                                     |   |                                       |       |   |   |
| **Operating Expenses**                                                                                   |   |                                       |       |   |   |
| Sales and marketing                                                                                      |   | 487,847                                    |       | — |   |
| General and administrative                                                                               |   | 1,022,088                                  |       | 579,703 |   |
| Research and development                                                                                 |   | 323,753                                    |       | 422,500 |   |
| Operations                                                                                               |   | 678,094                                    |       | — |   |
| Depreciation and amortization                                                                            |   | 214,068                                    |       | 270,765 |   |
| **Total Operating Expenses**                                                                             |   | 2,725,850                                  |       | 1,272,968 |   |
|                                                                                                     |   |                                       |       |   |   |
| **Loss from Operations**                                                                                 |   | (2,414,207                                 | )          | (1,434,683 | ) |
|                                                                                                     |   |                                       |       |   |   |
| **Other Income**                                                                                         |   |                                       |       |   |   |
| Interest income                                                                                          |   | 6,764                                      |       | 2,873 |   |
| **Net Other Income**                                                                                     |   | 6,764                                      |       | 2,873 |   |
|                                                                                                     |   |                                       |       |   |   |
| **Loss from Continuing Operations Before  Income Taxes**                                                 |   | (2,407,443                                 | )          | (1,431,810 | ) |
| Income tax benefit                                                                                       |   | 71,000                                     |       | 252,000 |   |
| **Loss from Continuing Operations**                                                                      |   | (2,336,443                                 | )          | (1,179,810 | ) |
|                                                                                                     |   |                                       |       |   |   |
| **Discontinued Operations**                                                                              |   |                                       |       |   |   |
| Income (loss) from discontinued operations,  net of taxes (benefit) of:  2004: $(73,000); 2003: $252,000 |   | (117,693                                   | )          | 404,922 |   |
| Gain on disposition of discontinued  operations, net of taxes of:  2004: $144,000                        |   | 231,000                                    |       | — |   |
| **Income from Discontinued Operations**                                                                  |   | 113,307                                    |       | 404,922 |   |
|                                                                                                     |   |                                       |       |   |   |
| **Net Loss**                                                                                             |   | $                                          | (2,223,136 | ) | $ | (774,888 | ) |
|                                                                                                     |   |                                       |       |   |   |
| Basic and diluted net income (loss) per  share:                                                          |   |                                       |       |   |   |
| Continuing operations                                                                                    |   | $                                          | (0.77      | ) | $ | (0.47 | ) |
| Discontinued operations                                                                                  |   | 0.04                                       |       | 0.16 |   |
| Basic and diluted net loss per share                                                                     |   | $                                          | (0.73      | ) | $ | (0.31 | ) |
|                                                                                                     |   |                                       |       |   |   |
| Basic and diluted weighted-average common  shares outstanding                                            |   | 3,052,906                                  |       | 2,503,069 |   |

 

See Notes to Unaudited InterimConsolidated Financial Statements.

 

4

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HYPERFEED TECHNOLOGIES, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows(Unaudited)

 
|                                                                                       |   | **For The  Three Months Ended  March 31,** |       |
|--------------------------------------------------------------------------------------------|--------|--------------------------------------------|------------|
|                                                                                       |   | **2004**                                   |       | **2003** |   |
| **Cash Flows from Operating Activities:**                                                  |   |                                       |       |   |   |
| Net loss                                                                                   |   | $                                          | (2,223,136 | ) | $ | (774,888 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |   |                                       |       |   |   |
| Depreciation and amortization                                                              |   | 214,068                                    |       | 270,765 |   |
| Amortization of software development costs                                                 |   | 339,490                                    |       | 336,744 |   |
| Provision for doubtful accounts                                                            |   | 4,998                                      |       | — |   |
| Changes in assets and liabilities, net of  effects from dispositions:                      |   |                                       |       |   |   |
| Accounts receivable                                                                        |   | (650,778                                   | )          | (30,512 | ) |
| Prepaid expenses and other current assets                                                  |   | (60,527                                    | )          | (73,097 | ) |
| Deposits and other assets                                                                  |   | —                                     |       | 1,502 |   |
| Accounts payable                                                                           |   | (35,519                                    | )          | 231,931 |   |
| Accrued expenses                                                                           |   | 95,133                                     |       | 218,213 |   |
| Unearned revenue                                                                           |   | 445,000                                    |       | — |   |
| Net cash provided by (used in) continuing  operations                                      |   | (1,871,271                                 | )          | 180,658 |   |
| Net cash used in discontinued operations                                                   |   | (1,183,846                                 | )          | (353,760 | ) |
| **Net Cash Used In Operating Activities**                                                  |   | (3,055,117                                 | )          | (173,102 | ) |
|                                                                                       |   |                                       |       |   |   |
| **Cash Flows from Investing Activities:**                                                  |   |                                       |       |   |   |
| Purchase of property and equipment                                                         |   | (147,031                                   | )          | (150,046 | ) |
| Software development costs capitalized                                                     |   | (334,489                                   | )          | (262,855 | ) |
| Repayment of note receivable                                                               |   | 8,334                                      |       | — |   |
| **Net Cash Used In Investing Activities**                                                  |   | (473,186                                   | )          | (412,901 | ) |
|                                                                                       |   |                                       |       |   |   |
| **Cash Flows from Financing Activities:**                                                  |   |                                       |       |   |   |
| Proceeds from issuance of common stock                                                     |   | 20,661                                     |       | 15,178 |   |
| **Net Cash Provided By Financing Activities**                                              |   | 20,661                                     |       | 15,178 |   |
|                                                                                       |   |                                       |       |   |   |
| **Net decrease in cash and cash equivalents**                                              |   | (3,507,642                                 | )          | (570,825 | ) |
| Cash and cash equivalents:  Beginning of the period                                        |   | 4,668,038                                  |       | 1,096,711 |   |
|                                                                                       |   |                                       |       |   |   |
| **End of the period**                                                                      |   | $                                          | 1,160,396  |   | $ | 525,886 |   |

 

SeeNotes to Unaudited Interim Consolidated Financial Statements.

 

5

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HYPERFEED TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIALSTATEMENTS

 

 

(1)BASIS OF PRESENTATION

 

PRINCIPLESOF CONSOLIDATION:  The accompanyingunaudited interim consolidated financial statements include the accounts ofHyperFeed Technologies, Inc. and its subsidiary, HYPRWare, Inc. (collectively,“HyperFeed” or the “Company”), and have been prepared in accordance withaccounting principles generally accepted in the United States of America forinterim financial information and in conjunction with the rules and regulationsof the Securities and Exchange Commission. Accordingly, they do not include allof the information and footnotes required by accounting principles generallyaccepted in the United States of America for complete financial statements. Theconsolidated interim financial statements include all adjustments, includingthe elimination of all significant intercompany transactions in consolidation, which,in the opinion of management, are necessary in order to make the financialstatements not misleading. For further information, refer to the consolidatedfinancial statements and footnotes included in the Company’s annual report onForm 10-K for the year ended December 31, 2003.

 

SOFTWAREDEVELOPMENT COSTS:  On October 31, 2003,the Company sold its consolidated market data feed business. Following the saleof its consolidated market data feed business, HyperFeed’s continuinginvestment in software development related primarily to developing enhancementsto its MEPS and H.Box software products. Prior to the sale of its consolidatedmarket data feed business, HyperFeed also invested in enhancements to itsWindows-based market data distribution platform and direct exchange servicessoftware, and the development of new data analysis software and programmertools and the application of new technology to increase the data volume anddelivery speed of the Company’s market data distribution system.

 

Softwaredevelopment costs are accounted for in accordance with SFAS No. 86, “Accountingfor the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.”Costs associated 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.

 

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 accumulatedamortization and related software development costs are removed from therespective accounts effective in the year following full amortization.

 

TheCompany’s policy is to amortize capitalized software costs by the greater of(a) the ratio that current gross revenue for a product bear to the total ofcurrent and anticipated future gross revenue for that product or (b) thestraight line method over three years, the remaining estimated economic life ofthe product including the period being reported. The Company assesses therecoverability of its software development costs against estimated futureundiscounted cash flows. Given the highly competitive environment andtechnological changes, it is reasonably possible that those estimates ofanticipated future gross revenue, the remaining estimated economic life of theproduct, or both may be reduced significantly.

 

FINANCIALINSTRUMENTS:  The Company’s financialinstruments include accounts receivable, notes receivable, accounts payable,and accrued expenses. The Company has no financial instruments for which thecarrying value materially differs from fair value.

 

INCOMETAXES:  Deferred taxes are accounted forunder the asset and liability method whereby deferred tax assets are recognizedfor deductible temporary differences and operating loss and tax creditcarryforwards and deferred tax liabilities are recognized for taxable temporarydifferences. Temporary differences are the differences between the reportedamounts of assets and liabilities and their tax bases. Deferred tax assets arereduced by a valuation allowance when, in the opinion of management, it is morelikely than not that some portion or all of the deferred tax assets will not berealized. Deferred tax assets and liabilities are adjusted for the effects ofchanges in tax laws and rates on the date of enactment.

 

6

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STOCKBASED COMPENSATION:  At March 31, 2004,the Company had one stock-based employee compensation plan. The plan isaccounted for under the recognition and measurement principles of AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees,”and related Interpretations. No stock-based employee compensation is reflectedin net income (loss), as all options granted under the plan had an exerciseprice equal to the market value of the underlying common stock on the date ofgrant. The following table illustrates the effect on net loss and earnings pershare if the Company had applied the fair value recognition provisions ofStatement of Financial Accounting Standards No. 123, “Accounting forStock-Based Compensation,” to stock-based employee compensation for the threemonths ended March 31, 2004 and 2003:

 
|                                                   |   | **Three  months ended  March 31,** |       |
|--------------------------------------------------------|--------|------------------------------------|------------|
|                                                   |   | **2004**                           |       | **2003** |   |
| Net loss, as reported                                  |   | $                                  | (2,223,136 | ) | $ | (774,888 | ) |
| Compensation expense related to stock  options granted |   | (65,579                            | )          | (53,126 | ) |
| Pro forma net loss                                     |   | $                                  | (2,288,715 | ) | $ | (828,014 |   |
|                                                   |   |                               |       |   |   |
| Basic and diluted net loss per share, as  reported     |   | $                                  | (0.73      | ) | $ | (0.31 | ) |
| Pro forma basic and diluted net loss per  share        |   | $                                  | (0.75      | ) | $ | (0.33 | ) |

 

EARNINGS PER SHARE:  Basicearnings per share (“EPS”) is based on the weighted-average number of sharesoutstanding and excludes the dilutive effect of unexercised common stockequivalents. Diluted earnings per share includes the dilutive effect ofunexercised common stock equivalents. The Company had equity securities that,if exercised, would have had a dilutive effect on EPS had the Company generatedincome during the three months ended March 31, 2004. The Company had anadditional 60,702 weighted-average shares outstanding during the three monthsended March 31, 2004, which would have had a dilutive effect on EPS had theCompany generated income during the three months ended March 31, 2004. TheCompany did not have any equity securities that, if exercised, would have had adilutive effect on EPS had the Company generated income during the three monthsended March 31, 2003. For the three months ended March 31, 2004 and 2003,weighted-average equity securities totaling 493,958 and 671,659, respectively,were excluded from the EPS calculations as their effect was anti-dilutive dueto such securities having exercise prices in excess of the weighted-averagefair value of the Company’s common stock during such three month periods.

 

REVENUERECOGNITION:  HyperFeed revenue is principallyderived from licensing technology and providing management and maintenanceservices of MEPS and H.Box software, ticker plant technologies, and managedservices. Additionally, HyperFeed derives revenue from the development ofcustomized software. Revenue is recognized (1) ratably over the term of theagreement for MEPS and H.Box and (2) based on the application of contractaccounting for the development of customized software.

 

OnOctober 31, 2003, the Company sold its consolidated market data feed business.Revenue recognized prior to October 31, 2003, related to the assets sold andincluded in discontinued operations was principally derived from servicecontracts for the provision of market data only and service contracts for theprovision of market data together with analytical software. HyperFeed primarilyserviced the business-to-business marketplace. Revenue from service contractswas recognized ratably over the contract term as the contracted services wererendered. HyperFeed customers were generally billed one month in advance with30-day payment terms. Payments received prior to services being rendered andcustomers’ deposits on service contracts are classified on the balance sheet asliabilities related to discontinued operations.

 

TheCompany applies the provisions of the American Institute of Certified PublicAccountants’ (“AICPA”) Statement of Position 97-2, “Software RevenueRecognition” (“SOP 97-2”), and related interpretations, which specifies thefollowing four criteria that must be met prior to recognizing revenue: (1)persuasive evidence of the existence of an arrangement, (2) delivery, (3) fixedor determinable fee, and (4) probable collection. In addition, revenue earnedon software arrangements involving multiple elements is allocated to eachelement based on the relative fair value of the elements. When applicable,revenue allocated to the Company’s software products (including specifiedupgrades/enhancements) is recognized upon delivery of the products. Revenueallocated to post contract customer support is recognized ratably over the termof the support and revenue allocated to service elements (such as training) isrecognized as the services are performed.

 

7

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UnderSOP 97-2, revenue from contracts that do not require significant production,modification, or customization of software may be recognized when the abovecriteria are met. If the fee is considered fixed and determinable, it should berecognized as revenue when the sale is effected. If the fee is not consideredfixed and determinable, it should be recognized as revenue as payments fromcustomers become due. Revenue from contracts that require significantproduction, modification, or customization of software must be accounted for inconformity with the provisions of Accounting Research Bulletin No. 45,“Long-Term Construction Contracts,” using the relevant guidance therein, andAICPA Statement of Position 81-1, “Accounting for Performance ofConstruction-Type and Certain Production-Type Contracts” (“SOP 81-1”). SOP 81-1provides 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.

 

HyperFeedsigned a contract in March 2004 with Telerate (formerly known as MoneyLineTelerate) to license HyperFeed’s H.Box and MEPS technology to Telerate andprovide related maintenance. The Company will recognize revenue from thiscontract as payments from the customer become due. The amount of fees from theTelerate contract included in revenue for the quarter ended March 31, 2004 was$0.2 million.

 

OnJune 2, 2003, the Company sold certain assets of HYPRWare, consisting of itsretail investor unit and Web site. Revenue recognized prior to June 2, 2003related to the HYPRWare assets sold was primarily derived from analyticsservice, powered by the HyperFeed data feed, for Internet users in the consumermarketplace and from the sale of advertising on its Web site. Revenue from thesale of advertising was recognized as the advertising was displayed on the Website.

 

HYPRWarederives revenue from royalties related to license fees for customers itreferred to Townsend Analytics, Ltd. prior to December 31, 2002.  Revenue is recorded as royalties arereported from Townsend.

 

(2)RECLASSIFICATIONS

 

Certainreclassifications have been made to the consolidated financial statements forthe prior year to reflect the sale on October 31, 2003 of the consolidatedmarket data feed service contracts and the sale on June 2, 2003 of theindividual retail investor unit and related assets, both of which have beenaccounted for as discontinued operations. Certain costs formerly reported as acomponent of data feed operations in direct costs of revenue are now reportedas operating expenses consistent with the current business model. Additionally,the Company has refined its method of tax allocation to quarterly periods andthe prior year amounts reflect this change.

 

(3)INCOME TAXES

 

AtDecember 31, 2003, the Company had net operating loss carryforwards ofapproximately $23.8 million for Federal income tax purposes and approximately$23.8 million for the alternative minimum tax. In 2003, the Company utilizedFederal income tax net operating loss carryforwards of approximately $0.5million and alternative minimum tax net operating loss carryforwards ofapproximately $0.1 million. Approximately $1.1 million of these net operatinglosses relates to exercise of incentive employee stock options and are expectedto be credited directly to stockholders’ equity when realized. The Company alsohad research and development credits of $0.1 million that will all expire by2011 if not previously utilized. The Company’s net operating loss carryforwardsare limited to $10.1 million for 2003 and an additional $1.2 million for eachsubsequent year thereafter. The net operating loss carryforwards expire through2023. The Company has not recorded any tax benefits related to these netoperating loss carryforwards.

 

(4)SEGMENT INFORMATION

 

While the Company operatesin one industry, financial services, in applying SFAS No. 131, “Disclosuresabout Segments of an Enterprise and Related Information,” the Company hasidentified two segments within which it operates. HyperFeed derives revenueprincipally in the business-to-business sector and HYPRWare derives revenuefrom royalties related to license fees collected by Townsend from subscriberswho had been referred through HYPRWare. The accounting policies of thereportable segments are the same as those described in Note 1. Financialinformation relating to industry segments were as follows for the three monthsended March 31, 2004 and March 31, 2003:

 

8

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|                                                   |   | **Three  Months Ended  March 31,** |       |
|--------------------------------------------------------|--------|------------------------------------|------------|
|                                                   |   | **2004**                           |       | **2003** |   |
| **Sales to unaffiliated customers**                    |   |                               |       |   |   |
| HyperFeed                                              |   | $                                  | 649,010    |   | $ | — |   |
| HYPRWare                                               |   | 126,301                            |       | 175,029 |   |
| Total revenue                                          |   | $                                  | 775,311    |   | $ | 175,029 |   |
|                                                   |   |                               |       |   |   |
| HyperFeed                                              |   | 83.7                               | %          | — | % |
| HYPRWare                                               |   | 16.3                               | %          | 100.0 | % |
| Total revenue                                          |   | 100.0                              | %          | 100.0 | % |
|                                                   |   |                               |       |   |   |
| **Operating income (loss) from continuing operations** |   |                               |       |   |   |
| HyperFeed                                              |   | $                                  | (2,527,089 | ) | $ | (1,576,160 | ) |
| HYPRWare                                               |   | 112,882                            |       | 141,477 |   |
| Total operating loss from continuing  operations       |   | $                                  | (2,414,207 | ) | $ | (1,434,683 | ) |
|                                                   |   |                               |       |   |   |
| HyperFeed                                              |   |                               | *          |   | * |
| HYPRWare                                               |   |                               | *          |   | * |
| Total operating loss from continuing  operations       |   |                               | *          |   | * |
|                                                   |   |                               |       |   |   |
| **Identifiable assets**                                |   |                               |       |   |   |
| HyperFeed                                              |   | $                                  | 6,291,331  |   | $ | 5,149,176 |   |
| HYPRWare                                               |   | 356,307                            |       | 327,804 |   |
| Total identifiable assets                              |   | $                                  | 6,647,638  |   | $ | 5,476,980 |   |
|                                                   |   |                               |       |   |   |
| HyperFeed                                              |   | 94.6                               | %          | 94.0 | % |
| HYPRWare                                               |   | 5.4                                | %          | 6.0 | % |
| Total identifiable assets                              |   | 100.0                              | %          | 100.0 | % |

 

----

* not meaningful

 

(5) DISCONTINUED OPERATIONS

 

OnOctober 31, 2003, the Company sold its consolidated market data feed businessto Interactive Data Corporation (“IDC”), for $8.5 million. The sale allowed HyperFeed to focus on its businessmodel as a utility provider of technology, software, and managed services forfinancial institutions. The sale price of $8.5 million included (1) an initialpayment of $7.0 million cash paid on October 31, 2003, (2) $625,000 inholdbacks payable upon completion of custom software and the fulfillment ofcertain transition services  and (3) an$875,000 indemnification holdback. The Company also entered into a transitionservices agreement whereby IDC reimburses HyperFeed on a monthly basis fordirect costs relative to the purchased business. These costs include costsassociated with resources dedicated to the transition, communications expenses,and related other costs. The Company recorded $375,000 of the $625,000 inholdbacks related to completion of customer software and fulfillment of certaintransition services during the first quarter of 2004 and incurred inboundcommunications costs associated with its obligations under the transitionservices agreement of $282,000 in the first quarter of 2004. However, both  the inbound communications costs incurredand the $375,000 of holdback recorded are reflected in discontinued operations.

 

OnJune 2, 2003, the Company sold the individual retail investor unit and relatedassets of its subsidiary, PCQuote.com, Inc., to Money.net, Inc. The sale waspart of the Company’s strategy to reduce its dependence on revenue from theindividual investor and replace and grow that revenue with revenue from MEPStechnology licensing sales. The sale price consisted of (1) $150,000 cashreceived in June 2003, (2) $70,000 cash received in July 2003, and (3) a$150,000 promissory note due in twelve equal installments commencing on July15, 2003 with an interest rate of 8.0% per annum.

 

Thedispositions have been accounted for as discontinued operations in accordancewith SFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets” and, accordingly, amounts in the consolidated statements of operationsfor all periods shown have been reclassified to reflect the dispositions asdiscontinued operations. The results of operations for the discontinuedbusinesses are as follows:

 

9

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|                                                               |   | **Three  Months EndedMarch 31,** |     |
|--------------------------------------------------------------------|--------|----------------------------------|----------|
|                                                               |   | **2004**                         |     | **2003** |   |
| **Revenue**                                                        |   |                             |     |   |   |
| HyperFeed                                                          |   | $                                | —   |   | $ | 3,034,173 |   |
| HYPRWare                                                           |   | —                           |     | 443,464 |   |
| **Total Revenue**                                                  |   | —                           |     | 3,477,637 |   |
|                                                               |   |                             |     |   |   |
| **Direct Costs of Revenue**                                        |   |                             |     |   |   |
| HyperFeed                                                          |   | —                           |     | 1,749,543 |   |
| HYPRWare                                                           |   | —                           |     | 261,510 |   |
| **Total Direct Costs of Revenue**                                  |   | —                           |     | 2,011,053 |   |
|                                                               |   |                             |     |   |   |
| **Gross Margin**                                                   |   | —                           |     | 1,466,584 |   |
|                                                               |   |                             |     |   |   |
| Operating Expenses                                                 |   | 190,693                          |     | 809,662 |   |
|                                                               |   |                             |     |   |   |
| **Income (loss) from discontinued operations before income taxes** |   | (190,693                         | )        | 656,922 |   |
|                                                               |   |                             |     |   |   |
| Income tax expense (benefit)                                       |   | (73,000                          | )        | 252,000 |   |
|                                                               |   |                             |     |   |
| **Income (loss) from discontinued operations**                     |   | $                                | (117,693 | ) | $ | 404,922 |   |
|                                                                    |        |                                  |          |  |  |  |  |  |  |

 

Assets and liabilitiesrelated to discontinued operations consist of the following:

 
|                                                                                           |   | **March 31,  2004** |      | **December  31,  2003** |   |
|------------------------------------------------------------------------------------------------|--------|---------------------|-----------|-------------------------|--------|
| **Assets Related to Discontinued Operations**                                                  |   |                |      |                    |   |
| Accounts receivable, net of allowance for  doubtful accounts of 2004: $189,400; 2003: $153,625 |   | $                   | 568,080   |                    | $      | 645,322 |   |
| Prepaid expenses and other current assets                                                      |   | 30,434              |      | 138,105                 |   |
| Deposits and other assets                                                                      |   | 28,451              |      | 28,451                  |   |
| **Total Assets Related to Discontinued  Operations**                                           |   | $                   | 626,965   |                    | $      | 811,878 |   |
|                                                                                           |   |                |      |                    |   |
| **Liabilities Related to Discontinued  Operations**                                            |   |                |      |                    |   |
| Accounts payable                                                                               |   | $                   | 818,300   |                    | $      | 2,016,425 |   |
| Accrued expenses                                                                               |   | 173,114             |      | 313,840                 |   |
| Accrued compensation                                                                           |   | 10,566              |      | 40,474                  |   |
| Unearned revenue                                                                               |   | 49,140              |      | 49,140                  |   |
| **Total Liabilities Related to Discontinued  Operations**                                      |   | $                   | 1,051,120 |                    | $      | 2,419,879 |   |

 

(6) SUBSEQUENT EVENTS

 

HyperFeed restructured itsoperations in April 2004, which included as part of such restructuring areduction in staff equal to 17% of HyperFeed’s labor costs.

 

10

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**ITEM 2****Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

This Quarterly Report on Form 10-Q contains forward-looking statementsthat involve risks and uncertainties, as well as assumptions that, if theynever materialize or prove incorrect, could cause the results of HyperFeedTechnologies, Inc. (“HyperFeed”) and its 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 the performanceof contracts by suppliers, customers, and partners; the variability inquarterly operating results; the funding of current and future businessstrategies either through continuing operations or external financing;attracting and retaining qualified management and key employees; the timelydevelopment and introduction of new product and service initiatives atcompetitive prices and performance levels; pending or future legal proceedings;the effect of economic and business conditions generally; and risks that areotherwise described in the Company’s annual report on Form 10-K for the yearended December 31, 2003 and from time to time in the Company’s other reportsand registration statements filed with the Securities and Exchange Commission.

 

OVERVIEW

 

In the fourth quarter of2003, we completed our transition to our current business model; that is, abusiness model built on providing ticker plant technologies and relatedconsulting services directly and through sales channels in the financialservices industry. This transition began in 2002 when we recruited a newmanagement team, and began to restructure and pursue a new business strategy.We sold PCQuote.com, Inc. (“PCQuote”) to Money.net in June 2003 and sold theremainder of our consolidated market data feed business to Interactive DataCorporation (“IDC”) in October 2003. Beginning in May 2003, rather thanprincipally supplying our ticker plant technology to customers as part of ourconsolidated market data feed business, we began to provide our ticker planttechnology directly and through sales channels.

 

The execution of our newbusiness model is expected to result in there being a different set ofvariables that are necessary for an investor to appropriately understand andevaluate our Company. In particular, under our old business model, revenueswere largely derived from subscription fees from customers of our consolidatedmarket data feed products. These subscription fees were largely dependent onthe number of end users of our customers’ products and services.

 

Under our new businessmodel, we expect to derive our revenues from licensing and consulting fees. Ingeneral, we expect that our licensing fees will be structured either as areoccurring monthly fee, based upon the nature, size, and scope of thelicensee, or as a monthly fee, based upon the number of end users that relyupon the products and services offered by the licensee. Consulting fees chargedto clients are expected to vary based upon the nature, size, and scope of theprojects undertaken.

 

In addition to changes inthe variables that impact our revenues, the execution of our new business modelis expected to change the variables that impact our direct costs of revenue andgross margin. Under our old business model, our direct costs of revenue wascomposed largely of access and user fees to exchanges, royalties,communications expenses, and labor, which were, in each case, necessary tosupport our consolidated market data feed products. Under our new businessmodel, our direct costs of revenue are expected to be composed largely ofsoftware development amortization costs and labor associated with consultingservices.

 

Although we do not expectthat the variables that impact our operating expenses will change asdramatically as those that impact our revenues and direct costs of revenue, wedo expect that categories of operating expenses such as sales and marketing andresearch and development will change in response to the demands of executingour new business model.

 

The sale of PCQuote andthe remainder of our consolidated market data feed business resulted in thereclassification of the consolidated statements of operations data for allperiods to reflect such events. Both PCQuote and our consolidated market datafeed business have been accounted for as discontinued operations. Certain costsformerly reported as a component of the consolidated market data feed businessincluded in the direct costs of revenue are now reported as operating expenses.

 

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While the sale of PCQuoteand the remainder of our consolidated market data feed business improved ourcash position and overall financial strength, we expect to face many challengesin building our business around our new business model. In particular, ourability to successfully execute our new business model will be dependent on ourability to maintain and develop advanced ticker plant technologies in a costeffective manner and aggressively license such technologies to the financialservices industry.

 

RECENTDEVELOPMENTS

 

InMarch 2004, HyperFeed signed a new agreement with Telerate (formerly known asMoneyLine Telerate) to license HyperFeed’s H.Box and MEPS technology toTelerate and provide related maintenance. Under this agreement, Telerate hasbeen granted an unlimited number of licenses to use HyperFeed’s MEPS and H.Boxproducts with Telerate’s in-house ticker plant. The agreement also calls forTelerate to make payments of $7.2 million over 34 months, with $2.2 million duein the first year of the contract, $2.7 million due in the second year of thecontract, and $2.4 million in the third year of the contract. HyperFeed willrecognize revenue as payments from Telerate become due. Although the contractprovides for these payments, there can be no assurances that the Company willreceive these amounts.

 

HyperFeedrestructured its operations in April 2004, which included as part of suchrestructuring a reduction in staff equal to 17% of HyperFeed’s labor costs.This reduction in staff was completed in April 2004. The Company currentlyexpects that its labor and benefits expenses will be reduced by approximately$100,000 per month beginning in May 2004 as a result of this restructuring.

 

RESULTSOF OPERATIONS: FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003

 

TheCompany has reclassified its consolidated statements of operations data for allperiods presented to reflect the sale on October 31, 2003 of its consolidatedmarket data feed service business and the sale on June 2, 2003 of theindividual retail investor unit and related assets of its subsidiary, both ofwhich have been accounted for as discontinued operations.

 

**Revenue**

 

Total revenue for the threemonths ended March 31, 2004 increased 343.0% to $0.8 million compared with $0.2million for the three months ended March 31, 2003. HyperFeed revenue increasedfor the three months ended March 31, 2004 compared to the same period in 2003.HYPRWare revenue decreased for the first quarter ended March 31, 2004 comparedto the same period in 2003.

 

HyperFeed revenue increasedto $0.6 million for the three months ended March 31, 2004. HyperFeed had nocomparable revenue for the three months ended March 31, 2003. HyperFeed revenueis derived from MEPS and H.Box software and ticker plant technologies andincludes license and consulting revenue, including revenue from multi-yearcontracts with CBOE, Telerate, Philadelphia Stock Exchange, and ComStock. AllHyperFeed revenue associated with the consolidated market data feed servicecontracts sold to IDC has been included in discontinued operations for thethree months ended March 31, 2003. HyperFeed currently expects that futurerevenue will be derived principally from licensing and consulting fees. In thisregard, there is no assurance that the Company will be able to successfullylicense its ticker plant technologies, software, and managed services.

 

HYPRWare revenue decreased27.8% to $0.1 million for the three months ended March 31, 2004 compared with$0.2 million for the three months ended March 31, 2003. HYPRWare derivesrevenue from royalties related to license fees for customers it referred toTownsend prior to December 31, 2002. The decline in HYPRWare service revenue isdue to a decrease in royalties from Townsend. All HYPRWare revenue associatedwith the consolidated market data feed service contracts sold to IDC and toMoney.net has been included in discontinued operations for the three monthsended March 31, 2003. HyperFeed currently expects that any future revenuerecognized by HYPRWare will be derived exclusively from royalties from thelicensing agreement with Townsend.

 

12

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**Direct Costs of Revenue**

 

Total direct costs ofrevenue increased 37.7% to $0.5 million for the three months ended March 31,2004 compared with $0.3 million for the three months ended March 31, 2003. Theprincipal component of this increase was software development labor costsrelated to development of customer specific software. Amortization of softwaredevelopment costs remained unchanged at $0.3 million for the three months endedMarch 31, 2004 and 2003. There are no direct costs of revenue related toHYPRWare service revenue as such amounts consist solely of royalty income.Gross margin increased to $0.4 million for the three months ended March 31,2004 compared with a loss of $0.2 million for the three months ended March 31,2003. Direct costs as a percentage of total revenue decreased to 59.8% for thethree months ended March 31, 2004 compared with 192.4% for the three monthsended March 31, 2003.

 

**Operating Expenses**

 

Total operating expensesincreased 114.1% to  $2.7 million forthe three months ended March 31, 2004 compared with $1.3 million for the threemonths ended March 31, 2003. Increases in sales and marketing, general andadministrative, and operations were partially offset by decreases in researchand development and depreciation and amortization for the three months endedMarch 31, 2004. As a percentage of total revenue, total operating expensesdecreased to 351.6% for the three months ended March 31, 2004 compared to727.3% for the three months ended March 31, 2003.

 

Sales and marketing costswere $0.5 million for the three months ended March 31, 2004. All sales costsprior to May 2003 have been reclassified as discontinued operations. Beginningin May 2003, the Company recognized sales costs pertaining to MEPS and H.BOXlicensing as operating expenses. Sales costs as a percentage of total revenuewere 62.9% for the three months ended March 31, 2004.

 

Generaland administrative expenses increased 76.3% to $1.0 million for the threemonths ended March 31, 2004 compared with $0.6 million for the three monthsended March 31, 2003. The increase was primarily due to expenses of $0.4million incurred in connection with the severance agreement entered into withthe Company’s former Chief Executive Officer in the first quarter of 2004.General and administrative expenses as a percentage of total revenue decreasedto 131.8% for the three months ended March 31, 2004 compared to 331.2% for thethree months ended March 31, 2003.

 

Research and developmentcosts decreased 23.4% to $0.3 million for the three months ended March 31, 2004compared with $0.4 million for the three months ended March 31, 2003. Thedecrease resulted from the allocation of software development labor related todevelopment of customer specific software to direct costs of revenue. Researchand development costs as a percentage of total revenue decreased to 41.8% forthe three months ended March 31, 2004 compared to 241.4% for the three monthsended March 31, 2003.

 

Operations costs were $0.7million for the three months ended March 31, 2004. All operations costs priorto November 2003 have been reclassified as discontinued operations. Beginningin November 2003, the Company recognized operations costs pertaining to MEPSand H.BOX as operating expenses. Operations costs as a percentage of totalrevenue were 87.5% for the three months ended March 31, 2004.

 

Depreciation andamortization decreased 20.9% to $0.2 million for the three months ended March31, 2004 compared with $0.3 million for the three months ended March 31, 2003.This decrease primarily resulted from assets that became fully depreciatedduring 2003. Depreciation and amortization as a percentage of total revenuedecreased to 27.6% for the three months ended March 31, 2004 compared to 154.7%for the three months ended March 31, 2003.

 

**Discontinued Operations**

 

InOctober 2003, the Company sold its remaining consolidated market data feedbusiness and, in June 2003, the Company sold the individual retail investorunit and related assets of its subsidiary, PCQuote.com, Inc. The Companyrecorded a net loss from discontinued operations of $0.1 million, net of a taxbenefit of $0.1 million, for the three months ended March 31, 2004 comparedwith net income of $0.4 million, net of tax expense of $0.3 million, for thethree months ended March 31, 2003. The net loss for the first quarter of 2004resulted from the incurrence of inbound communications costs associated withthe Company’s obligation under a transition services agreement related to thesale of its consolidated market data feed business. The Company recorded $0.2million, net of tax expense of $0.1 million, as a gain on disposition ofdiscontinued operations during the first quarter of 2004 related to holdbacksfrom the sale of the consolidated market data feed business.

 

13

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LIQUIDITYAND CAPITAL RESOURCES

 

Netcash and cash equivalents of $1.2 million at March 31, 2004 decreased $3.5million from $4.7 million at December 31, 2003. This decrease was due to theCompany’s operating loss, an increase in accounts receivable, and a decrease inliabilities related to discontinued operations.

 

Operatingactivities used net cash of $3.1 million for the three months ended March 31,2004 compared to net cash used of $0.2 million for the three months ended March31, 2003. For the three months ended March 31, 2004 continuing operations used$1.9 million of cash compared to net cash provided of $0.2 million for thethree months ended March 31, 2003. The increase in accounts receivable for thethree months ended March 31, 2004 resulted from delayed payment by  customers. For the three months ended March31, 2004 discontinued operations used $1.2 million, resulting from a reductionin accounts payables, compared to cash used of $0.4 million.

 

Investingactivities used net cash of $0.5 million for the three months ended March 31,2004 compared to net cash used of $0.4 million for the three months ended March31, 2003. During the three months ended March 31, 2004, the Company invested$0.1 million in equipment and $0.3 million in its developed technology. Duringthe three months ended March 31, 2003, the Company invested $0.2 million inequipment and $0.3 million in its developed technology.

 

Financingactivities provided net cash of $20,661 for the three months ended March 31,2004 compared to net cash provided of $15,178 for the three months ended March31, 2003.

 

The Company has an existing line of credit for $500,000 at prime,secured by the assets of the Company. As of March 31, 2004, the Company had noborrowings against the line of credit.

 

HyperFeed restructured its operations in April 2004, which included aspart of such restructuring a reduction in staff equal to 17% of HyperFeed’slabor costs. This reduction in staff was completed in April 2004. The Companycurrently expects that its labor and benefits expenses will be reduced byapproximately $100,000 per month beginning in May 2004 as a result of thisrestructuring. The Company expects to streamline its inbound communicationscosts relating to the ticker plant operations, which the Company believes willreduce costs by approximately $45,000 per month beginning in July 2004.

 

The Company believes its existing capital resources, including cash andcash equivalents, accounts receivable, and assets related to discontinuedoperations, cash expected to be received from holdbacks associated with thesale of its consolidated market data feed business, available line of credit,and its ability to raise capital, if necessary, will be sufficient to fund itsoperations over the next twelve months.

 

Although the Company has taken actions, and intends to take furtheractions, to reduce its costs, there can be no assurances that such reductionsin costs will ensure that the Company has sufficient working capital to fundits operations over the next twelve months if one or more anticipated sourcesof working capital are not realized by the Company. In particular, theCompany's ability to fund its operations over the next twelve months will bedependent, among other things, on its ability to convert accounts receivableand assets related to discontinued operations into cash, on the receipt ofholdbacks associated with the sale of our consolidated market data feedbusiness, and on its ability to raise capital. There can be no assurances thatthe Company will realize capital from any of these sources.

 

TheCompany continues to explore multiple alternatives that may be available forthe purpose of enhancing stockholder value, including a merger, a spin-off orsale of part of its business, a strategic relationship or joint venture withanother technology or financial services firm and equity financing.

 

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CRITICALACCOUNTING POLICIES AND ESTIMATES

 

Management’sDiscussion and Analysis of Financial Condition and Results of Operationsdiscusses the Company’s consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States of America. The preparation of these financial statementsrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and the disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenue and expenses during the reporting period.

 

Onan on-going basis, management evaluates its estimates and judgments, includingthose related to bad debts and intangible assets. Management bases itsestimates and judgments on historical experience and on various other factorsthat are believed to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying values of assetsand liabilities that are not readily apparent from other sources. Actualresults may differ from these estimates under different assumptions orconditions. Management believes the following critical accounting policies,among others, affect its more significant judgments and estimates used in thepreparation of its consolidated financial statements.

 

**Revenue Recognition**: The Company principally derives revenue from licensing technology andproviding management and maintenance services of MEPS and H.Box software,ticker plant technologies, and managed services. Additionally, the Companyderives revenue from the development of customized software. Revenue isrecognized (1) ratably over the term of the agreement for MEPS and H.Box and(2) based on the application of contract accounting for the development ofcustomized software.

 

TheCompany applies the provisions of Statement of Position 97-2, “Software RevenueRecognition,” as amended, which specifies the following four criteria that mustbe met prior to recognizing revenue: (1) persuasive evidence of the existenceof an arrangement, (2) delivery, (3) fixed or determinable fee, and (4)probable collection. In addition, revenue earned on software arrangementsinvolving multiple elements is allocated to each element based on the relativefair value of the elements. When applicable, revenue allocated to HyperFeed’ssoftware products (including specified upgrades/enhancements) is recognizedupon delivery of the products. If the fee is considered fixed and determinable,it should be recognized as revenue when the sale is effected. If the fee is notconsidered fixed and determinable, it should be recognized as revenue aspayments from customers become due. Revenue allocated to post contract customersupport is recognized ratably over the term of the support and revenue allocatedto service elements (such as training) is recognized as the services areperformed.

 

OnOctober 31, 2003, the Company sold its consolidated market data feed business.Revenue recognized prior to October 31, 2003, related to the assets sold andincluded in discontinued operations was principally derived from servicecontracts for the provision of market data only and service contracts for theprovision of market data together with analytical software. HyperFeed primarilyserviced the business-to-business marketplace. Revenue from service contractswas recognized ratably over the contract term as the contracted services wererendered.

 

OnJune 2, 2003, the Company sold certain assets of HYPRWare, consisting of itsretail investor unit and Web site. Revenue recognized prior to June 2, 2003related to the HYPRWare assets sold was primarily derived from analyticsservice, powered by the HyperFeed data feed, for Internet users in the consumermarketplace and from the sale of advertising on its Web site. Revenue from thesale of advertising was recognized as the advertising was displayed on the Website.

 

HYPRWarederives revenue from royalties related to license fees for customers itreferred to Townsend prior to December 31, 2002.

 

**Allowance For Doubtful Accounts**: The Company maintains allowances for doubtful accounts for estimatedlosses resulting from the inability of its customers to make payments forservices or debtors to satisfy note receivable obligations. The Companyanalyzes accounts receivable, customer credit-worthiness, current economictrends and changes in its customer payment terms when evaluating the adequacyof the allowance for doubtful accounts and notes receivable. If the financialcondition of the Company’s customers or debtors deteriorates, resulting in animpairment of their ability to make payments, additional allowances may berequired.

 

15

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**Valuation of Intangible Assets and SoftwareDevelopment Costs**:  The Company assesses theimpairment of intangible assets whenever events or changes in circumstancesindicate that the carrying value may not be recoverable. Factors the Companyconsiders important which could trigger an impairment review includesignificant underperformance relative to expected historical or projectedfuture operating results, significant changes in the manner of its use of theacquired assets or the strategy for its overall business, and significantnegative industry or economic trends. The Company assesses the recoverabilityof its software development costs against estimated future revenue over theestimated remaining economic life of the software.

 

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

 

AtMarch 31, 2004, the Company had excess cash invested in a money market accountand a short-term certificate of deposit. The Company does not expect anymaterial loss, if at all, on these investments. The Company had no interestbearing debt instruments outstanding at March 31, 2004.

 

**ITEM 4.****Controls and Procedures**

 
| (a)    | *Disclosure Controls and Procedures.* The Company’s management, with the  participation of the Company’s Chief Executive Officer and Chief Financial  Officer, has evaluated the effectiveness of the Company’s disclosure controls  and procedures (as such term is defined in Rule 15d-15(e) under the  Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the  end of the period covered by this quarterly report. Based on such evaluation,  the Company’s Chief Executive Officer and Chief Financial Officer have  concluded that, as of the end of such period, the Company’s disclosure  controls and procedures are effective in recording, processing, summarizing  and reporting, on a timely basis, information required to be disclosed by us  in the reports that the Company file or submit under the Exchange Act. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (b)    | *Internal Control Over Financial Reporting.*There have not been any changes in the  Company’s internal control over financial reporting (as such term is defined  in Rule 15d-15(f) under the Exchange Act) during the fiscal quarter to which  this report relates that have materially affected, or are reasonably likely  to materially affect, the Company’s internal control over financial  reporting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

 

**Part II**

 

**ITEM 6****. Exhibits and Reports onForm 8-K**

 

(a)  Exhibits

 

Exhibit31.1 - Certification of the Chief Executive Officer Pursuant to Rules 13a-14(a)and 15d-14(a) under the Exchange Act.

 

Exhibit31.2 - Certification of the Chief Financial Officer Pursuant to Rules 13a-14(a)and 15d-14(a) under the Exchange Act.

 

Exhibit32 — Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of theUnited States Code.

 

(b)  Reports on Form 8-K

 

AForm 8-K was filed on March 17, 2004 attaching a copy of the press releasereporting the results of operations and financial condition of the Company forthe year ended December 31, 2003.

 

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SIGNATURES

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 

HYPERFEEDTECHNOLOGIES, INC.

 

 
| Date:  | May 6, 2004                                               |
|--------|-----------------------------------------------------------|
|   |                                                      |
| By:    | /s/ Paul  Pluschkell                                      |   |
|   |                                                      |   |
|   | Paul  Pluschkell                                          |   |
|   | President  and Chief Executive Officer                    |
|   |                                                      |   |
| By:    | /s/ Randall  J. Frapart                                   |   |
|   |                                                      |   |
|   | Randall J.  Frapart                                       |   |
|   | Chief  Financial Officer and Principal Accounting Officer |

 

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