**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

**(Markone)**
| **ý** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|------------|------------|---------------------------------------------------------------------------------------------------------|

 

**Forthe quarterly period ended: September 30, 2005**

 

**OR**

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

 

**Forthe transition period from               to               **

 

**Commissionfile number 0-13093**

 

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**HYPERFEED TECHNOLOGIES, INC.**

(Exact name of registrant asspecified in its charter)

 
| **Delaware**                                               | ** ** | **36-3131704**       |
|------------------------------------------------------------|------------|----------------------|
| (State or  Other Jurisdiction of                           |       | (I.R.S.  Employer    |
| Incorporation  or Organization)                            |       | 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 check mark whether the registrant (1) has filed allreports to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes ý  No o

 

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

 

Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the Act) Yes o  No ý

 

The number of shares of common stockoutstanding as of November 3, 2005 was 7,640,805 shares.

 

 

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**HYPERFEEDTECHNOLOGIES, INC.**

 

INDEX

 
| PART I.  | Financial Information                                                                                                          |   |
|---------------|--------------------------------------------------------------------------------------------------------------------------------|--------|
|          |                                                                                                                           |   |
| Item 1.       | Consolidated Balance Sheets as of  September 30, 2005 and December 31, 2004 (unaudited)                              |   |
|          |                                                                                                                           |   |
|          | Consolidated Statements of Operations for the three and nine month  periods ended September 30, 2005 and 2004 (unaudited) |   |
|          |                                                                                                                           |   |
|          | Consolidated Statements of Cash Flows for the nine month periods  ended September 30, 2005 and 2004 (unaudited)           |   |
|          |                                                                                                                           |   |
|          | Notes to Unaudited Interim Consolidated  Financial Statements                                                                  |   |
|          |                                                                                                                           |   |
| Item 2.       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                    |   |
|          |                                                                                                                           |   |
| Item  3.      | Quantitative and Qualitative Disclosures  about Market Risk                                                                    |   |
|          |                                                                                                                           |   |
| Item 4.       | Controls and Procedures                                                                                                        |   |
|          |                                                                                                                           |   |
| PART II. | Other Information                                                                                                              |   |
|          |                                                                                                                           |   |
| Item 1.       | Legal Proceedings                                                                                                              |   |
|          |                                                                                                                           |   |
| Item  2.      | Unregistered Sales of Equity Securities and  Use of Proceeds                                                                   |   |
|          |                                                                                                                           |   |
| 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)

 
| ** **                                                                                                                                                                       | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                                                                                       | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **Current Assets**                                                                                                                                                               |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                                                                                        |       | $                            | 19,903     |                        | $          | 193,702 |   |
| Accounts receivable, less allowance for  doubtful accounts of: 2005: $51,441; 2004: $34,031                                                                                      |       | 346,779                      |       | 576,092                     |       |
| Notes receivable, less allowance for  doubtful accounts of: 2005: $10,830; 2004: $60,830                                                                                         |       | 90,493                       |       | 93,798                      |       |
| Prepaid expenses and other current assets                                                                                                                                        |       | 248,829                      |       | 125,890                     |       |
| Assets related to discontinued operations                                                                                                                                        |       | 55,593                       |       | 72,270                      |       |
| **Total Current Assets**                                                                                                                                                         |       | 761,597                      |       | 1,061,752                   |       |
|                                                                                                                                                                             |       |                         |       |                        |       |
| Property and equipment                                                                                                                                                           |       |                         |       |                        |       |
| Computer equipment                                                                                                                                                               |       | 1,414,485                    |       | 1,627,021                   |       |
| Communication equipment                                                                                                                                                          |       | 783,430                      |       | 1,031,370                   |       |
| Furniture and fixtures                                                                                                                                                           |       | 88,389                       |       | 106,559                     |       |
| Leasehold improvements                                                                                                                                                           |       | 9,260                        |       | 531,809                     |       |
|                                                                                                                                                                             |       | 2,295,564                    |       | 3,296,759                   |       |
| Less: Accumulated depreciation and  amortization                                                                                                                                 |       | (1,732,701                   | )          | (2,457,645                  | )          |
| Property and equipment, net                                                                                                                                                      |       | 562,863                      |       | 839,114                     |       |
| Intangible assets, net of accumulated  amortization of: 2005: $392,083; 2004: $229,167                                                                                           |       | 265,417                      |       | 78,333                      |       |
| Licensed and developed software costs, net  of accumulated amortization of:  2005:  $2,355,842; 2004: $3,016,799                                                            |       | 2,994,764                    |       | 1,686,975                   |       |
| Deposits and other assets                                                                                                                                                        |       | 47,124                       |       | 46,472                      |       |
| **Total Assets**                                                                                                                                                                 |       | $                            | 4,631,765  |                        | $          | 3,712,646 |   |
|                                                                                                                                                                             |       |                         |       |                        |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                    |       |                         |       |                        |       |
| **Current Liabilities**                                                                                                                                                          |       |                         |       |                        |       |
| Convertible note payable to affiliate                                                                                                                                            |       | $                            | 4,595,000  |                        | $          | — |   |
| Line of credit                                                                                                                                                                   |       | 500,000                      |       | 465,000                     |       |
| Accounts payable                                                                                                                                                                 |       | 1,175,036                    |       | 634,299                     |       |
| Accrued expenses                                                                                                                                                                 |       | 746,211                      |       | 170,547                     |       |
| Accrued professional fees                                                                                                                                                        |       | 145,500                      |       | 158,225                     |       |
| Accrued compensation                                                                                                                                                             |       | 98,935                       |       | 77,763                      |       |
| Income taxes payable                                                                                                                                                             |       | 27,270                       |       | 27,270                      |       |
| Unearned revenue                                                                                                                                                                 |       | 217,139                      |       | 268,042                     |       |
| Liabilities related to discontinued  operations                                                                                                                                  |       | 228,928                      |       | 849,172                     |       |
| **Total Current Liabilities**                                                                                                                                                    |       | 7,734,019                    |       | 2,650,318                   |       |
|                                                                                                                                                                             |       |                         |       |                        |       |
| Accrued expenses, less current portion                                                                                                                                           |       | 1,059,669                    |       | 297,164                     |       |
| **Total Noncurrent Liabilities**                                                                                                                                                 |       | 1,059,669                    |       | 297,164                     |       |
| **Total Liabilities**                                                                                                                                                            |       | 8,793,688                    |       | 2,947,482                   |       |
|                                                                                                                                                                             |       |                         |       |                        |       |
| **Stockholders’ Equity**                                                                                                                                                    |       |                         |       |                        |       |
| Preferred stock, $.001 par value;  authorized 5,000,000 shares; none issued and outstanding                                                                                      |       | —                       |       | —                      |       |
| Common stock, $.001 par value; authorized  50,000,000 shares; issued and outstanding 3,094,326 shares at  September 30, 2005 and 3,064,493 shares at December 31, 2004 |       | 3,094                        |       | 3,065                       |       |
| Additional paid-in capital                                                                                                                                                       |       | 47,824,294                   |       | 46,111,516                  |       |
| Accumulated deficit                                                                                                                                                              |       | (51,989,311                  | )          | (45,349,417                 | )          |
| **Total Stockholders’ Equity**                                                                                                                                              |       | (4,161,923                   | )          | 765,164                     |       |
| **Total Liabilities and Stockholders’ Equity**                                                                                                                              |       | $                            | 4,631,765  |                        | $          | 3,712,646 |   |

 

See Notes to Unaudited Interim ConsolidatedFinancial Statements.

 

3

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HYPERFEED TECHNOLOGIES, INC.AND SUBSIDIARY

ConsolidatedStatements of Operations (Unaudited)

 
| ** **                                                              | ** ** | **For The Three Months Ended  September 30,** | ** ** | **For The Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                              | ** ** | **2005**                                           | ** ** | **2004**                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Revenue**                                                             |       |                                               |       |                                              |       |   |   |   |   |
| HyperFeed                                                               |       | $                                                  | 1,317,862  |                                              | $          | 1,953,808 |   | $ | 3,069,787 |   | $ | 3,820,986 |   |
| HYPRWare                                                                |       | 88,982                                             |       | 107,512                                           |       | 270,640 |   | 348,063 |   |
| **Total Revenue**                                                       |       | 1,406,844                                          |       | 2,061,320                                         |       | 3,340,427 |   | 4,169,049 |   |
|                                                                    |       |                                               |       |                                              |       |   |   |   |   |
| **Direct Costs of Revenue**                                             |       | 440,053                                            |       | 372,017                                           |       | 1,002,050 |   | 1,293,482 |   |
|                                                                    |       |                                               |       |                                              |       |   |   |   |   |
| **Gross Margin**                                                        |       | 966,791                                            |       | 1,689,303                                         |       | 2,338,377 |   | 2,875,567 |   |
|                                                                    |       |                                               |       |                                              |       |   |   |   |   |
| **Operating Expenses**                                                  |       |                                               |       |                                              |       |   |   |   |   |
| Sales and marketing                                                     |       | 454,864                                            |       | 473,572                                           |       | 1,303,635 |   | 1,452,313 |   |
| General and administrative                                              |       | 833,772                                            |       | 656,513                                           |       | 2,371,655 |   | 2,341,509 |   |
| Research and development                                                |       | 462,713                                            |       | 378,357                                           |       | 1,194,118 |   | 1,121,883 |   |
| Operations                                                              |       | 841,444                                            |       | 528,858                                           |       | 1,886,692 |   | 1,809,538 |   |
| Depreciation and amortization                                           |       | 179,739                                            |       | 253,256                                           |       | 588,595 |   | 668,564 |   |
| **Total Operating Expenses**                                            |       | 2,772,532                                          |       | 2,290,556                                         |       | 7,344,695 |   | 7,393,807 |   |
|                                                                    |       |                                               |       |                                              |       |   |   |   |   |
| **Loss from Operations**                                                |       | (1,805,741                                         | )          | (601,253                                          | )          | (5,006,318 | ) | (4,518,240 | ) |
|                                                                    |       |                                               |       |                                              |       |   |   |   |   |
| **Other Income (Expense)**                                              |       |                                               |       |                                              |       |   |   |   |   |
| Interest income                                                         |       | 70                                                 |       | 1,204                                             |       | 152 |   | 9,411 |   |
| Interest expense                                                        |       | (923,634                                           | )          | (790                                              | )          | (1,716,811 | ) | (1,057 | ) |
| **Other Income (Expense), Net**                                         |       | (923,564                                           | )          | 414                                               |       | (1,716,659 | ) | 8,354 |   |
|                                                                    |       |                                               |       |                                              |       |   |   |   |   |
| **Loss from Continuing Operations Before  Income Taxes**                |       | (2,729,305                                         | )          | (600,839                                          | )          | (6,722,977 | ) | (4,509,886 | ) |
| Income tax benefit (expense)                                            |       | 47,000                                             |       | (23,000                                           | )          | 47,000 |   | (17,000 | ) |
| **Loss from Continuing Operations**                                     |       | (2,682,305                                         | )          | (623,839                                          | )          | (6,675,977 | ) | (4,526,886 | ) |
|                                                                    |       |                                               |       |                                              |       |   |   |   |   |
| **Discontinued Operations**                                             |       |                                               |       |                                              |       |   |   |   |   |
| Loss from discontinued operations                                       |       | (2,268                                             | )          | (62,181                                           | )          | (41,917 | ) | (422,703 | ) |
| Income tax benefit from discontinued  operations                        |       | 1,000                                              |       | 23,000                                            |       | 1,000 |   | 161,000 |   |
| Gain on disposition of discontinued  operations                         |       | 125,000                                            |       | —                                            |       | 125,000 |   | 375,000 |   |
| Income tax expense from gain on disposition  of discontinued operations |       | (48,000                                            | )          | —                                            |       | (48,000 | ) | (144,000 | ) |
| **Income (Loss) from Discontinued Operations**                          |       | 75,732                                             |       | (39,181                                           | )          | 36,083 |   | (30,703 | ) |
|                                                                    |       |                                               |       |                                              |       |   |   |   |   |
| **Net Loss**                                                            |       | $                                                  | (2,606,573 | )                                                 | $          | (663,020 | ) | $ | (6,639,894 | ) | $ | (4,557,589 | ) |
|                                                                    |       |                                               |       |                                              |       |   |   |   |   |
| Basic and diluted net income (loss) per  share:                         |       |                                               |       |                                              |       |   |   |   |   |
| Continuing operations                                                   |       | $                                                  | (0.87      | )                                                 | $          | (0.21 | ) | $ | (2.16 | ) | $ | (1.48 | ) |
| Discontinued operations                                                 |       | 0.03                                               |       | (0.01                                             | )          | 0.01 |   | (0.01 | ) |
| Basic and diluted net loss per share                                    |       | $                                                  | (0.84      | )                                                 | $          | (0.22 | ) | $ | (2.15 | ) | $ | (1.49 | ) |
|                                                                    |       |                                               |       |                                              |       |   |   |   |   |
| Basic and diluted weighted-average common  shares outstanding           |       | 3,090,900                                          |       | 3,061,733                                         |       | 3,086,584 |   | 3,057,858 |   |

 

See Notes to Unaudited Interim Consolidated Financial Statements.

 

4

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HYPERFEED TECHNOLOGIES, INC. ANDSUBSIDIARY

ConsolidatedStatements of Cash Flows (Unaudited)

 
| ** **                                                                                                  | ** ** | **For The Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                  | ** ** | **2005**                                          | ** ** | **2004** | ** ** |
| **Cash Flows from Operating Activities:**                                                                   |       |                                              |       |   |   |
| Net loss                                                                                                    |       | $                                                 | (6,639,894 | ) | $ | (4,557,589 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities:                  |       |                                              |       |   |   |
| Depreciation and amortization                                                                               |       | 588,595                                           |       | 668,564 |   |
| Amortization of licensed and developed  software costs                                                      |       | 848,798                                           |       | 985,798 |   |
| Provision for doubtful accounts                                                                             |       | 27,693                                            |       | 49,762 |   |
| Gain on sale of equipment                                                                                   |       | —                                            |       | (6,708 | ) |
| Interest and other expense related to  convertible note payable to affiliate                                |       | 1,553,165                                         |       | — |   |
| Changes in assets and liabilities, net of  effects from dispositions:                                       |       |                                              |       |   |   |
| Accounts receivable                                                                                         |       | 201,620                                           |       | (22,765 | ) |
| Prepaid expenses and other current assets                                                                   |       | 29,069                                            |       | (74,536 | ) |
| Deposits and other assets                                                                                   |       | (652                                              | )          | 390 |   |
| Accounts payable                                                                                            |       | 540,737                                           |       | 130,720 |   |
| Accrued expenses                                                                                            |       | 346,616                                           |       | (100,998 | ) |
| Unearned revenue                                                                                            |       | (50,903                                           | )          | 337,712 |   |
| Net cash used in continuing operations                                                                      |       | (2,555,156                                        | )          | (2,589,650 | ) |
| Net cash used in discontinued operations                                                                    |       | (603,567                                          | )          | (955,019 | ) |
| **Net Cash Used In Operating Activities**                                                                   |       | (3,158,723                                        | )          | (3,544,669 | ) |
|                                                                                                        |       |                                              |       |   |   |
| **Cash Flows from Investing Activities:**                                                                   |       |                                              |       |   |   |
| Purchase of property and equipment                                                                          |       | (149,428                                          | )          | (204,526 | ) |
| Licensed and developed software costs  capitalized                                                          |       | (1,156,587                                        | )          | (955,330 | ) |
| Proceeds from disposal of equipment                                                                         |       | —                                            |       | 32,698 |   |
| Purchase of intangible asset                                                                                |       | (350,000                                          | )          | (127,500 | ) |
| Provision for doubtful notes receivable                                                                     |       | —                                            |       | 10,830 |   |
| Repayment of note receivable                                                                                |       | 3,305                                             |       | 33,336 |   |
| **Net Cash Used In Investing Activities**                                                                   |       | (1,652,710                                        | )          | (1,210,492 | ) |
|                                                                                                        |       |                                              |       |   |   |
| **Cash Flows from Financing Activities:**                                                                   |       |                                              |       |   |   |
| Proceeds from issuance of common stock                                                                      |       | 7,634                                             |       | 38,212 |   |
| Proceeds from convertible note payable to  affiliate                                                        |       | 4,595,000                                         |       | — |   |
| Net borrowings under line of credit                                                                         |       | 35,000                                            |       | 195,000 |   |
| **Net Cash Provided By Financing Activities**                                                               |       | 4,637,634                                         |       | 233,212 |   |
|                                                                                                        |       |                                              |       |   |   |
| **Net decrease in cash and cash equivalents**                                                               |       |                                              |       |   |   |
| Cash and cash equivalents:                                                                                  |       | (173,799                                          | )          | (4,521,949 | ) |
| Beginning of the period                                                                                     |       | 193,702                                           |       | 4,668,038 |   |
| ** **                                                                                                  |       |                                              |       |   |   |
| **End of the period**                                                                                       |       | $                                                 | 19,903     |   | $ | 146,089 |   |
|                                                                                                        |       |                                              |       |   |   |
| **Supplemental disclosures of noncash  operating activities:**                                              |       |                                              |       |   |   |
| Beneficial conversion feature and  commitment fee related to convertible note payable to affiliate (Note 5) |       | $                                                 | 1,705,173  |   | $ | — |   |
|                                                                                                        |       |                                              |       |   |   |
| **Supplemental disclosures of noncash  investing and financing activities:**                                |       |                                              |       |   |   |
| Acquisition of licensed software utilizing  long-term commitment (Note 4)                                   |       | $                                                 | 1,000,000  |   | $ | — |   |

 

See Notes to Unaudited Interim Consolidated Financial Statements.

 

5

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HYPERFEED TECHNOLOGIES, INC.AND SUBSIDIARY

NOTES TO UNAUDITED INTERIM CONSOLIDATEDFINANCIAL STATEMENTS

 

(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

 

HyperFeed Technologies, Inc. (“HyperFeed” or the “Company”) is aprovider of enterprise-wide ticker plant, data platform, and transactiontechnology software and services to exchanges, financial institutions, contentproviders, channel partners, and value-added resellers. HyperFeed’s advancedsoftware technology serves as a corporate-wide ticker plant, enabling firms inthe financial services industry with the flexibility and agility to controltheir own data sources and data content in a cost-effective manner.

 

The Company has over twenty years experience designing, building, andrunning ticker plants for the North American financial marketplace. The Company’ssoftware technology, including the Company’s HTPX product, is currently beingused by over forty customers, including exchanges, large financialinstitutions, and customers of the Company’s Data Delivery Utility product.Additionally, the Company has deployed more than 1,500 of HyperFeed’s highperformance single server HBOX products at customer sites. The Company alsooffers its HyperFeed Market Data Platform (“HMDP”) product, which is based onTelerate’s TRS technology, and its Open Collaborative Container (“OCC”) productto work with HMDP, which is based on Telerate’s Active8 technology. HyperFeed’stechnology supports many firms demanding transaction and order routing systems.

 

The Company principally derives revenue from licensing technology andproviding management and maintenance services of HMDP, OCC, HTPX, and HBOXsoftware, ticker plant and data platform technologies, and managed services.Additionally, the Company derives revenue from the development of customizedsoftware.

 

HYPRWare, Inc. (“HYPRWare”) is a majority-owned subsidiary ofHyperFeed that receives royalties for former customers currently serviced by achannel partner.

 

CURRENT OPERATIONS:  The Companyhas sustained significant losses in recent years and in the first nine monthsof 2005. In particular, the Company incurred a net loss of $6.6 million for thefirst nine months of 2005, compared to a net loss of $4.6 million for the sameperiod in 2004, and an overall net loss of $5.0 million for the fiscal yearended December 31, 2004. Included in the net losses for the nine monthsended September 30, 2005 and 2004, respectively, are $1.5 million and zeronon-cash interest expense related to the intrinsic conversion value of theSecond Restated Convertible Note issued by the Company to PICO Holdings Inc. (“PICO”) describedin Note 5 of the Notes to Unaudited Interim Consolidated Financial Statements.The recurring losses may raise substantial doubt about the Company’s ability tocontinue as a going concern. Total revenue for the nine months ended September 30,2005 decreased 19.9% to $3.3 million compared with $4.2 million for the sameperiod in 2004 and, for the three months ended September 30, 2005, totalrevenue decreased 31.8% to $1.4 million compared with $2.1 million for the sameperiod in 2004. Total revenue for the three and nine months ended September 30,2004 included $1.3 million and $2.6 million, respectively, from Telerate. Dueto the termination of the agreements between Telerate and HyperFeed in November 2004,the Company did not recognize revenue from Telerate in 2005. The number ofcustomers using HyperFeed’s technology has doubled during the nine months endedSeptember 30, 2005. Additionally, cash used for continuing operationsduring the nine months ended September 30, 2005 remained unchanged at $2.6million compared to the same period in 2004. Although there can be no assurancesin this regard, the Company believes that the increase in its customer base andthe equivalent amount of cash used in continuing operations in the comparableperiods, among other things, will assist it in achieving profitability. However, the Company may not have sufficientcapital resources to fund continuing operations.

 

In the third quarter of 2005, the Company secured an additional $2.0million of available credit from PICO, the Company’s majority stockholder. SeeNotes 5 and 9 of the Notes to Unaudited Interim Consolidated FinancialStatements.  The Company currently believes, although therecan be no assurances in this regard, that its existing and anticipated capitalresources, including cash and cash equivalents, accounts receivable, assetsrelated to discontinued operations, cash expected to be received from holdbacksassociated with the sale of its institutional consolidated market data feedbusiness, and potential capital fromfinancing sources, including PICO, will be sufficient to fund its operationsover the next twelve months. 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, then the Company will be able to fundits operations for a shorter period of time.

 

Following the sale of its institutional consolidated market data feedbusiness in late 2003, HyperFeed has completed two years of operations underits current business model; that is, a business model built on providing tickerplant technologies and related consulting services directly and through saleschannels in the financial services industry, rather than principally using itsticker plant technology internally as part of a consolidated market data feedbusiness to service customers. In addition, the Company announced in the firstquarter of 2005 its acquisition of the assets of Focus Technology Group LLC,including its Smart Order Routing Technology 

 

6

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for Traders (“SORTT”). SORTT features the ability to ensure RegulationNMS compliance as well as to break apart an electronic order and send it tomultiple execution venues to gain price improvement.

 

In the second quarter of 2005, the Company entered into an exclusivelicense agreement to license globally in perpetuity the source code forTelerate’s Trading Room System (“TRS”) and Active8 technology from ReutersLimited and Moneyline Telerate. Under the terms of the license, the Company isentitled to use and further develop the TRS technology and the Active8technology to offer its own market data platform and associated data displayworkstation worldwide. Based on the TRS technology, HyperFeed launched its HMDPproduct. HMDP integrates market data from many sources into many types ofdisplay or application software - transactional, web distribution, riskmanagement, or other mid- and back-office system. Based on the Active8technology, HyperFeed launched its OCC product to work with HMDP. OCC isintended to provide a professional financial desktop that is fully customizablefor various classes of end users. HMDP and OCC expand the Company’s productline and the Company intends to market them globally.

 

In the third quarter of 2005, the Company entered into an exclusive,multi-year distributor agreement with MarketXS, a leading European provider ofreal-time market data technology and trading solutions, that gives MarketXS theright to license, distribute, and support HyperFeed’s HMDP and OCC products inEurope, the Middle East, and Africa. HyperFeed plans to provide softwareupgrades, maintenance and second level support, while MarketXS is expected toprovide European development, technical sales, and first level maintenancesupport. The term of the distributor agreement varies, with certain elementsextending through January 2015. Additionally, in the third quarter of2005, the Company expanded its HTPX technology by leveraging the Chicago BoardOptions Exchange’s TickerXpress offering to include Remote TickerXpress, whichcombines an ultra-low-latency datafeed with HyperFeed’s ticker planttechnology.

 

PRINCIPLES OF CONSOLIDATION:  Theaccompanying unaudited interim consolidated financial statements include theaccounts of HyperFeed and its subsidiary HYPRWare and have been prepared inaccordance with accounting principles generally accepted in the United Statesof America for 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 alladjustments, including the elimination of all significant intercompanytransactions in consolidation, which, in the opinion of management, arenecessary in order to make the financial statements not misleading. For furtherinformation, refer to the consolidated financial statements and footnotesincluded in the Company’s annual report on Form 10-K for the year ended December 31,2004.

 

REVENUE RECOGNITION:  The Companyprincipally derives revenue from licensing technology and providing managementand maintenance services of HMDP, OCC, HTPX, and HBOX software, ticker plantand data platform technologies, and managed services. Additionally, the Companyderives revenue from the development of customized software.

 

Revenue is recognized from the licensing of HMDP, OCC, HTPX, and HBOX (1) aspayments from customers become due when the fee is not fixed or determinable atthe outset of the arrangement or (2) ratably over the term of theagreement when post-contract customer support (“PCS”) has a duration of oneyear or less. PCS is recognized ratably over the term. Revenue for thedevelopment of customized software, consulting, and implementation services isrecognized based on time and materials from the application of contract accountingfor the development of customized software, or based on an hourly rate when itis not a fixed fee arrangement. For licensing of the Company’s software throughits sales channels, revenue is recognized as payments from the reseller becomedue and generally commences after the software is installed at the reseller’scustomer site.

 

The Company applies the provisions of AICPA Statement of Position (“SOP”)97-2, “Software Revenue Recognition,” as amended, which specifies the followingfour criteria that must be met prior to recognizing revenue: (1) persuasiveevidence of the existence of an arrangement; (2) delivery; (3) fixedor determinable fee; and (4) probable collection. In addition, revenueearned on software arrangements involving multiple elements is allocated toeach element based on the relative fair values of the elements. Whenapplicable, revenue allocated to HyperFeed’s software products (includingspecified upgrades/enhancements) is recognized upon delivery of the products.If the fee is considered fixed and determinable, it is recognized as revenuewhen the sale is effected. If the fee is not considered fixed and determinable,it is recognized as revenue as payments from customers become due. Revenueallocated to PCS is recognized ratably over the term of the support and revenueallocated to service elements (such as training) is recognized as the servicesare performed.

 

In accordance with SOP 97-2, revenue from contracts that do not requiresignificant production, modification, or customization of software isrecognized when the above criteria are met. Revenue from contracts that requiresignificant production, modification, or customization of software is accountedfor in conformity with the provisions of Accounting Research Bulletin No. 45,“Long-Term Construction Contracts,” using the relevant guidance therein, andSOP 81-1, “Accounting for Performance of Construction-Type and CertainProduction-Type Contracts.” SOP 81-1 provides for revenue recognition under the“percentage-of-completion” or “completed contract” method depending on thefacts and circumstances of contracts entered into and management’s ability toreasonably estimate its progress toward completion. Contract losses, if any,are provided for in their entirety in the period they become known, without 

 

7

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regard to the percentage-of-completion. For those contracts for whichthe Company cannot reasonably estimate progress toward completion, the Companyemploys the completed contract method of accounting. Revenue from arrangementsaccounted for under contract accounting are allocated among licensedtechnologies, managed services, and consulting fees based on the contractualterms of the arrangements.

 

The use of contract accounting inherently includes the use of estimatesof progress toward completion. Such estimates are subject to periodic revisionsand, as a result, the financial statements could be materially impacted.

 

The Company applies the provisions of Emerging Issues Task Force (“EITF”)Issue No. 00-21, “Accounting for Revenue Arrangements with MultipleDeliverables.” EITF 00-21 addresses certain aspects of the accounting by avendor for arrangements under which it will perform multiple revenue-generatingactivities. Specifically, EITF 00-21 addresses how to determine whether anarrangement involving multiple deliverables contains more than one earningsprocess and, if it does, how to divide the arrangement into separate units ofaccounting consistent with the identified earnings processes for revenuerecognition purposes. EITF 00-21 also addresses how arrangement considerationshould be measured and allocated to the separate units of accounting in thearrangement.

 

HYPRWare derives revenue from royalties related to license fees forcustomers it referred to Townsend Analytics, Ltd. (“Townsend”) prior to December 31,2002. Revenue is recorded as royalties are reported from Townsend.

 

LICENSED AND DEVELOPED SOFTWARE COSTS: Licensed and developed software costs are accounted for in accordancewith Statement of Financial Accounting Standards (“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. In accordance with SFAS No. 86, the Company hascapitalized licensed software for which the Company believes technologicalfeasibility has been established.

 

Amortization commences at the time of capitalization or, in the case ofa new service offering, at the time the service becomes available for use.Unamortized capitalized costs determined to be in excess of the net realizablevalue of the product are expensed at the date of such determination. Theaccumulated amortization and related licensed and developed software costs areremoved from the respective accounts effective in the year following fullamortization.

 

The Company’s policy is to amortize capitalized software costs by thegreater of (1) the ratio that current gross revenue for a product bear tothe total of current and anticipated future gross revenue for that product or (2) thestraight line method over three to five years, which is the remaining estimatedeconomic life of the product including the period being reported. The Companyassesses the recoverability of its licensed and developed software costsagainst estimated future undiscounted cash flows. Given the highly competitiveenvironment in which the Company operates and rapid 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 BASED COMPENSATION:  At September 30,2005, the Company had one stock-based employee compensation plan as describedin Note 4 of the Notes to Consolidated Financial Statements in the Company’sannual report on Form 10-K for the year ended December 31, 2004. Theplan is accounted for under the recognition and measurement principles ofAccounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees,” and related Interpretations. No stock-based employee compensationis reflected in net income (loss), as all options granted under the plan had anexercise price equal to the market value of the underlying common stock on thedate of grant. The following table illustrates the effect on net loss andearnings per share if the Company had applied the fair value recognitionprovisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” tostock-based employee compensation for the three and nine months ended September 30,2005 and 2004:

 

8

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| ** **                                                                                                                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                 | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net loss, as reported                                                                                                      |       | $                                          | (2,606,573 | )                                         | $          | (663,020 | ) | $ | (6,639,894 | ) | $ | (4,557,589 | ) |
| Compensation benefit (expense) related to  stock options granted and employee stock purchase plan issuances, net of  taxes |       | (40,668                                    | )          | (21,403                                   | )          | (140,951 | ) | (28,543 | ) |
| Pro forma net loss                                                                                                         |       | $                                          | (2,647,241 | )                                         | $          | (684,423 | ) | $ | (6,780,845 | ) | $ | (4,586,132 | ) |
|                                                                                                                       |       |                                       |       |                                      |       |   |   |   |   |
| Basic and diluted net loss per share, as  reported                                                                         |       | $                                          | (0.84      | )                                         | $          | (0.22 | ) | $ | (2.15 | ) | $ | (1.49 | ) |
| Pro forma basic and diluted net loss per  share                                                                            |       | $                                          | (0.86      | )                                         | $          | (0.22 | ) | $ | (2.20 | ) | $ | (1.50 | ) |

 

ACCOUNTS RECEIVABLE: Included in the Company’s accounts receivablebalances in the Consolidated Balance Sheets are unbilled receivables of zero atDecember 31, 2004 and $20,636 at September 30, 2005.

 

SOFTWARE LICENSE INDEMNIFICATIONS: In November 2002, the FinancialAccounting Standards Board (“FASB”) issued FASB Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires that theCompany recognize the fair value for certain guarantee and indemnificationarrangements issued or modified by the Company after December 31, 2002. Inaddition, the Company must continue to monitor the conditions that are subjectto the guarantees and indemnifications, as required under previously existinggenerally accepted accounting principles, in order to identify if a loss hasoccurred. If the Company determines that a loss is probable, the estimated lossmust be recognized as it relates to applicable guarantees and indemnifications.Some of the software licenses granted by the Company contain provisions thatindemnify customers of the Company’s software from damages and costs resultingfrom claims alleging that the Company’s software infringes on the intellectualproperty rights of a third party. Historically, the Company has not beenrequired to pay material amounts in connection with claims asserted under theseprovisions and, accordingly, the Company has not recorded a liability relatingto these indemnification provisions.

 

(2) SEGMENT INFORMATION

 

While the Company operates in one industry, financial services, inapplying SFAS No. 131, “Disclosures about Segments of an Enterprise andRelated Information,” the Company has identified two segments within which itoperates. HyperFeed derives revenue principally by providing ticker plant anddata platform technologies and related consulting services, and HYPRWarederives revenue from royalties related to license fees collected by Townsendfrom subscribers to Townsend’s service over the Internet who had been referredthrough HYPRWare. The accounting policies of the reportable segments are thesame as those described in Note 1. Financial information relating to industrysegments were as follows for the three and nine months ended September 30,2005 and September 30, 2004:

 

9

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| ** **                                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                              | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Sales to unaffiliated customers**                     |       |                                       |       |                                      |       |   |   |   |   |
| HyperFeed                                               |       | $                                          | 1,317,862  |                                      | $          | 1,953,808 |   | $ | 3,069,787 |   | $ | 3,820,986 |   |
| HYPRWare                                                |       | 88,982                                     |       | 107,512                                   |       | 270,640 |   | 348,063 |   |
| Total revenue                                           |       | $                                          | 1,406,844  |                                      | $          | 2,061,320 |   | $ | 3,340,427 |   | $ | 4,169,049 |   |
|                                                    |       |                                       |       |                                      |       |   |   |   |   |
| HyperFeed                                               |       | 93.7                                       | %          | 94.8                                      | %          | 91.9 | % | 91.7 | % |
| HYPRWare                                                |       | 6.3                                        | %          | 5.2                                       | %          | 8.1 | % | 8.3 | % |
| Total revenue                                           |       | 100.0                                      | %          | 100.0                                     | %          | 100.0 | % | 100.0 | % |
|                                                    |       |                                       |       |                                      |       |   |   |   |   |
| **Operating income (loss) from continuing  operations** |       |                                       |       |                                      |       |   |   |   |   |
| HyperFeed                                               |       | $                                          | (1,893,085 | )                                         | $          | (691,773 | ) | $ | (5,271,209 | ) | $ | (4,827,032 | ) |
| HYPRWare                                                |       | 87,344                                     |       | 90,520                                    |       | 264,891 |   | 308,792 |   |
| Total operating loss from continuing  operations        |       | $                                          | (1,805,741 | )                                         | $          | (601,253 | ) | $ | (5,006,318 | ) | $ | (4,518,240 | ) |
|                                                    |       |                                       |       |                                      |       |   |   |   |   |
| HyperFeed                                               |       |                                       | *          |                                      | *          |   | * |   | * |
| HYPRWare                                                |       |                                       | *          |                                      | *          |   | * |   | * |
| Total operating loss from continuing  operations        |       |                                       | *          |                                      | *          |   | * |   | * |
|                                                    |       |                                       |       |                                      |       |   |   |   |   |
| **Identifiable assets**                                 |       |                                       |       |                                      |       |   |   |   |   |
| HyperFeed                                               |       | $                                          | 4,493,900  |                                      | $          | 4,215,624 |   | $ | 4,493,900 |   | $ | 4,215,624 |   |
| HYPRWare                                                |       | 137,865                                    |       | 154,943                                   |       | 137,865 |   | 154,943 |   |
| Total identifiable assets                               |       | $                                          | 4,631,765  |                                      | $          | 4,370,567 |   | $ | 4,631,765 |   | $ | 4,370,567 |   |
|                                                    |       |                                       |       |                                      |       |   |   |   |   |
| HyperFeed                                               |       | 97.0                                       | %          | 96.5                                      | %          | 97.0 | % | 96.5 | % |
| HYPRWare                                                |       | 3.0                                        | %          | 3.5                                       | %          | 3.0 | % | 3.5 | % |
| Total identifiable assets                               |       | 100.0                                      | %          | 100.0                                     | %          | 100.0 | % | 100.0 | % |

 

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* percentages not meaningful

 

(3) INTANGIBLES

 

On September 23, 2004, HyperFeed repurchased a customer contractthat had been sold by HyperFeed to Interactive Data Corporation (“IDC”) as partof the sale of HyperFeed’s institutional consolidated market data feed businessin October 2003. As a result of this repurchase, the Company recorded anintangible asset of $127,500. At September 30, 2005, the intangible assetwas fully amortized.

 

On February 16, 2005, the Company acquired Focus Technology GroupLLC (“Focus”), a Delaware limited liability company, developer of SORTT. TheCompany purchased substantially all of the assets of Focus, which primarilyconsisted of developed technology, a customer contract and relationships. Theacquisition of Focus was considered to be an acquisition of a development stageenterprise, as defined under SFAS No. 141, “Business Combinations,” andwas not considered a business combination. As a result, the transaction wasaccounted for under SFAS No. 142, “Goodwill and Other Intangible Assets.”The guaranteed portion of the purchase price was $350,000, with $250,000 paidat closing and $100,000 due on the first anniversary following closing, and wasallocated to the identifiable intangible assets on the basis of their estimatedfair values on the acquisition date. The Company allocated $250,000 todeveloped technology, $80,000 to non-compete agreements, and $20,000 tocustomer contracts, with amortization periods of three years, two years, andone year, respectively. The purchase price also included a contingent portiondependent upon the achievement of certain growth targets for license andmaintenance revenues from the SORTT applications through February 2008,not to exceed $3.4 million in the aggregate. As of September 30, 2005, theCompany did not have any contingent payments due.

 

10

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Intangible asset data is as follows as of September 30, 2005:

 
| ** **                                  | ** ** | **Gross   Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|-------------------------------|------------|
| Amortized  intangibles                      |       |                         |       |                          |       |
| Developed technology                        |       | $                            | 430,000    |                          | $          | (227,083 | ) |
| Non-compete agreements                      |       | 80,000                       |       | (25,000                       | )          |
| Acquired customer contract                  |       | 147,500                      |       | (140,000                      | )          |
| Total                                       |       | $                            | 657,500    |                          | $          | (392,083 | ) |
|                                        |       |                         |       |                          |       |
| Estimated  amortization, for the year ended |       |                         |       |                          |       |
| December 31, 2005                      |       | $                            | 203,750    |                          |       |   |
| December 31, 2006                      |       | 125,833                      |       |                          |       |
| December 31, 2007                      |       | 88,333                       |       |                          |       |
| December 31, 2008                      |       | 10,417                       |       |                          |       |

 

The net amortized intangibles at September 30, 2005 are $265,417.The weighted average amortization period is 2.53 years in total.

 

(4) LICENSED SOFTWARE

 

On May 20, 2005, the Company entered into an exclusive licenseagreement with Reuters Limited, a corporation organized under the laws ofEngland and Wales (“Reuters”), and Moneyline Telerate, a Delaware corporation (“Telerate”),to license globally in perpetuity the source code for both Telerate’s Trading Room System(“TRS”) and Telerate’s Active8 technology. In accordance with SFAS No. 86,the Company has recorded the $1.0 million license fee as an asset underlicensed and developed software costs with the corresponding liability recordedunder accrued expenses. The license fee is due in two installments with 25%payable January 15, 2006 and the remainder payable January 15, 2007.The licensed software has an estimated useful life of five years andamortization began in the third quarter of 2005.

 

In August 2005, the Company entered into an exclusive, multi-yeardistributor agreement with MarketXS, a leading European provider of real-timemarket data technology and trading solutions, that gives MarketXS the right tolicense, distribute, and support HyperFeed’s HMDP and OCC products in Europe,the Middle East, and Africa. HyperFeed plans to provide software upgrades,maintenance and second level support, while MarketXS is expected to provideEuropean development, technical sales, and first level maintenance support. Theterm of the distributor agreement varies, with certain elements extendingthrough January 2015.

 

(5) LINE OF CREDIT AND RESTATED CONVERTIBLE NOTE

 

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

 

OnNovember 2, 2004, the Company issued to PICO a Secured ConvertiblePromissory Note (the “Convertible Note”). Under the terms of the ConvertibleNote, the Company could borrow up to $1.5 million from PICO, at an interestrate of 8%. In connection with issuing the Convertible Note and concurrent withthe first draw, the Company recorded a commitment fee by issuing to PICO 25,000shares of common stock of the Company with a fair value of $75,000 in the firstquarter of 2005. As a result, the Company recorded a prepaid asset of$75,000. At September 30, 2005, the prepaid asset was $32,929, net ofamortization of $42,071. On March 28, 2005, the Company and PICO amendedand restated the Convertible Note (the “First Restated Convertible Note”) suchthat the Company could borrow up to $4.0 million at an interest rate of primeplus 2.75%.

 

On August 26, 2005, the Company and PICO amended and restated theFirst Restated Convertible Note (the “Second Restated Convertible Note”). Underthe terms of the Second Restated Convertible Note, the Company may borrow up to$6.0 million at an interest rate of prime plus 2.75%. The Company is obligatedto repay all outstanding principal and accrued interest under the SecondRestated Convertible Note on March 28, 2006. The Second RestatedConvertible Note, which is convertible by PICO at any time, provides that thenumber of shares that PICO would receive in connection with a conversion of anyamounts outstanding under the Second Restated Convertible Note would bedetermined by dividing the total outstanding amount to be converted by thelesser of $1.36 per share and 80% of the five-day moving average per shareprice of the Company’s common stock on the date of conversion. The number ofshares of the Company’s common stock issuable upon conversion of the SecondRestated Convertible Note is not subject to a cap. In addition, in connectionwith issuing the Second Restated Convertible Note, the Company issued to PICO awarrant 

 

11

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to purchase 125,000 shares of HyperFeed’s common stock, at an exerciseprice of $1.70 per share. The warrant expires on August 26, 2008.

 

The Second Restated Convertible Note contains a beneficial conversionfeature and, as a result, the Company recorded additional paid in capital andinterest expense of $0.8 million and $1.5 million for the three and nine monthsended September 30, 2005, respectively, in accordance with EITF Issue No. 00-27,“Application of EITF Issue No. 98-5, “Accounting for ConvertibleSecurities with Beneficial Conversion Features or Contingently AdjustableConversion Ratios,” to Certain Convertible Instruments.” The Second RestatedConvertible Note is secured by the assets of the Company, subordinate to thesecurity interest granted under the line of credit, and contains customary representations,warranties, covenants, and events of default. As of September 30, 2005, the Company had borrowed $4.6 millionunder the terms of the Second Restated Convertible Note and recorded accruedinterest of $0.1 million.

 

The fair value assigned to the warrants was $0.1 million, which will beamortized as interest expense over the life of the Second Restated ConvertibleNote. As of September 30, 2005 the Company had recorded non-cash interestexpense of $24,477 in connection with the warrants.

 

On November 1, 2005, PICO elected to convert all of theoutstanding principal and accrued interest under the Second RestatedConvertible Note into shares of the Company’s common stock. See Note 9 of the Notes to UnauditedInterim Consolidated Financial Statements.

 

(6) DISCONTINUED OPERATIONS

 

On October 31, 2003, the Company sold its institutionalconsolidated market data feed business to IDC for $8.5 million. The saleallowed HyperFeed to focus on its business model as a utility provider oftechnology, software, and managed services for financial institutions. The saleprice of $8.5 million included (1) an initial payment of $7.0 million cashpaid on October 31, 2003, (2) $625,000 in holdbacks payable uponcompletion of custom software and the fulfillment of certain transitionservices and (3) an $875,000 indemnification holdback. The Company alsoentered into a transition services agreement whereby IDC reimburses HyperFeedon a monthly basis for direct costs relative to the purchased business. Thesecosts include costs associated with resources dedicated to the transition,communications expenses, and other related costs. Of the $625,000 in holdbacksrelated to completion of customer software and fulfillment of certaintransition services, the Company received $375,000 and waived $125,000 duringthe first quarter of 2004 and received the final $125,000 during the thirdquarter of 2005. As of September 30, 2005, the Company remains eligible toreceive $660,000 from the indemnification holdbacks, subject to satisfaction ofcertain conditions, which was previously reduced by $90,000 attributable to thecustomer contract repurchased from IDC in September 2004 and $125,000received in the fourth quarter of 2004.

 

On June 2, 2003, the Company sold the individual retail investor unitand related assets of its subsidiary, PCQuote.com, Inc., to Money.net, Inc.The sale was part of the Company’s strategy to reduce its dependence on revenuefrom the individual investor and replace and grow that revenue with revenuefrom HTPX technology licensing sales. The sale price consisted of (1) $150,000cash received in June 2003, (2) $70,000 cash received in July 2003,and (3) a $150,000 promissory note due in twelve equal monthlyinstallments commencing on July 15, 2003 with an interest rate of 8.0% perannum. At September 30, 2005, the principal balance remaining on thepromissory note was $90,493 (all of which is past due), net of an allowance of$10,830. HyperFeed is pursuing collection of this promissory note. See alsoNote 8 of the Notesto Unaudited Interim Consolidated Financial Statements.

 

The dispositions have been accounted for as discontinued operations inaccordance with SFAS No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets” and, accordingly, amounts in the consolidated statementsof operations for all periods shown have been reclassified to reflect thedispositions as discontinued operations. The results of operations for thediscontinued businesses are as follows:

 

Operating expenses from discontinued operations were $40,917, net of a$1,000 tax benefit, and $261,703, net of a $161,000 tax benefit, for the ninemonths ended September 30, 2005 and 2004, respectively. Operating expensesfrom discontinued operations were $1,268, net of a $1,000 tax benefit, and $39,181,net of a $23,000 tax benefit, for the three months ended September 30,2005 and 2004, respectively. There were no revenue or direct costs of revenuefrom discontinued operations for the three and nine months ended September 30,2005 and 2004.

 

12

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Assets and liabilities related to discontinued operations consist ofthe following:

 
| ** **                                                                                     | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **Assets Related to Discontinued Operations**                                                  |       |                         |       |                        |       |
| Accounts receivable, net of allowance for  doubtful accounts of 2005: $209,948; 2004: $219,848 |       | $                            | 55,593     |                        | $          | 57,090 |   |
| Prepaid expenses and other current assets                                                      |       | —                       |       | 15,180                      |       |
| **Total Assets Related to Discontinued  Operations**                                           |       | $                            | 55,593     |                        | $          | 72,270 |   |
|                                                                                           |       |                         |       |                        |       |
| **Liabilities Related to Discontinued  Operations**                                            |       |                         |       |                        |       |
| Accounts payable                                                                               |       | $                            | 216,928    |                        | $          | 771,390 |   |
| Accrued expenses                                                                               |       | 12,000                       |       | 56,711                      |       |
| Accrued compensation                                                                           |       | —                       |       | 10,631                      |       |
| Unearned revenue                                                                               |       | —                       |       | 10,440                      |       |
| **Total Liabilities Related to Discontinued  Operations**                                      |       | $                            | 228,928    |                        | $          | 849,172 |   |

 

(7) SIGNIFICANT CUSTOMERS

 

Between June 2003 and May 2004, HyperFeedsigned contracts with Telerate (formerly known as MoneyLine Telerate) tolicense HyperFeed’s HBOX and HTPX technology to Telerate, provide relatedmaintenance and develop customized software. As a result of the sale of Telerate to Reuters, on November 19,2004, Telerate elected to exercise its contractual right to terminate theagreements between HyperFeed and Telerate. Telerate accounted for approximately0% and 62.4% of the Company’s consolidated revenue for the nine months ended September 30,2005 and 2004, respectively, and approximately 0% and 63.4% of the Company’sconsolidated revenue for the three months ended September 30, 2005 and2004, respectively. Bloomberg LP accounted for approximately 15.1% and 6.4% ofthe Company’s consolidated revenue for the three and nine months ended September 30,2005, respectively, and approximately 0% for the same periods in 2004. ComStockaccounted for approximately 17.7% and 11.8% of the Company’s consolidatedrevenue for the nine months ended September 30, 2005 and 2004,respectively, and approximately 15.9% and 8.2% of the Company’s consolidatedrevenue for the three months ended September 30, 2005 and 2004,respectively. Susquehanna International Group, LLP accounted for approximately10.9% and 2.7% of the Company’s consolidated revenue for the nine months ended September 30,2005 and 2004, respectively, and approximately 8.7% and 5.5% of the Company’sconsolidated revenue for the three months ended September 30, 2005 and2004, respectively.

 

(8) LITIGATION

 

On June 2, 2003, the Company sold the individual retail investorunit and related assets of its subsidiary, PCQuote.com, Inc., to Money.net, Inc.On August 24, 2004, the Company filed a six-count complaint for breach ofcontract and amounts due in the Circuit Court of Cook County, Illinois againstMoney.net. The amounts sought in the complaint are $131,155 for a promissorynote, including interest, $31,920 from a datafeed license agreement, and $63,917related to a transition services agreement. On November 17, 2004,Money.net filed a motion to dismiss and, as a result, the Company filed anamended complaint on December 7, 2004. On January 7, 2005, Money.netfiled answers to the amended complaint and a counterclaim. On February 3,2005, the Company answered Money.net’s counterclaim, which included sevenaffirmative defenses. On July 5, 2005, Money.net’s counterclaim wasstricken. On July 19, 2005, the Company filed a motion for summaryjudgment. On October 18, 2005, the Circuit Court of Cook County entered asummary judgment against Money.net in the amount of $226,992. A hearing forfinal judgment has been set for November 9, 2005. Additionally, a hearingfor the Company’s petition for legal fees has been set for December 20,2005. The Company will continue to aggressively pursue collection fromMoney.net. As of September 30, 2005, the Company had a promissory note andaccounts receivable, net of allowances, of $151,122 due from Money.net,excluding default interest on the promissory note.

 

(9) SUBSEQUENT EVENTS

 

The Company borrowed the remaining $1.4million available under the Second Restated Convertible Note in October 2005.On November 1, 2005, PICO elected to convert the $6.0 million borrowedunder the terms of Second Restated Convertible Note and accrued interest of$0.2 million into 4,546,479 shares of the Company’s common stock at aconversion rate of $1.36 per share. As a result of the conversion, PICO owns80.1% of the Company’s common stock. If PICO had elected to convert the $4.6million outstanding under the Second Restated Convertible Note and accruedinterest on September 30, 2005, the Company’s total liabilities would havebeen $4.1 million and stockholders’ equity would have been $0.6 million.

 

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On November 4, 2005, the Company’sBoard of Directors approved the establishment a long-term incentive plan (the “Plan”),pending shareholder approval. The purpose of the Plan is to attract and retainthe best qualified personnel to perform services for the Company and motivatesuch persons to contribute to the growth and profitability of the Company. Themaximum aggregate number of shares of the Company’s common stock that may beissued under the Plan is 646,120. On November 4, 2005, the Board ofDirectors granted stock appreciation rights for 335,494 shares of the Company’scommon stock to certain employees of the Company, subject to shareholderapproval which the Company plans to solicit at its Annual Meeting in May 2006.

 

**ITEM 2 Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

The unaudited consolidated financial statements herein have beenprepared by the Company pursuant to the rules and regulations of the Securitiesand Exchange Commission. The accompanying interim consolidated financialstatements have been prepared under the presumption that users of the interimfinancial information have either read or have access to the audited financialstatements for the latest fiscal year ended December 31, 2004.Accordingly, footnote disclosures which would substantially duplicate thedisclosures contained in the December 31, 2004 audited consolidatedfinancial statements have been omitted from these interim consolidatedfinancial statements. Certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with accountingprinciples generally accepted in the United States of America have beencondensed or omitted pursuant to such rules and regulations. In ouropinion, the accompanying unaudited consolidated financial statements containall 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.

 

This Quarterly Report on Form 10-Q contains forward-lookingstatements that involve risks and uncertainties, as well as assumptions that,if they never materialize or prove incorrect, could cause the results ofHyperFeed Technologies, 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 risks relatedto the 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, 2004 and from time to time in the Company’sother reports and registration statements filed with the Securities andExchange Commission.

 

OVERVIEW

 

We believe that the first nine months of 2005 have been an importantperiod for us. In particular, we completed two years of operations under ourcurrent business model; that is, a business model built on providing tickerplant technologies and related consulting services directly and through saleschannels in the financial services industry, rather than principally using ourticker plant technology internally as part of a consolidated market data feedbusiness to service customers. Additionally, in the first quarter of 2005, weannounced our acquisition of the assets of Focus Technology Group LLC,including its Smart Order Routing Technology for Traders (“SORTT”). SORTTfeatures the ability to ensure Regulation NMS compliance as well as to breakapart an electronic order and send it to multiple execution venues to gainprice improvement.

 

In the second quarter of 2005, we entered into an exclusive licenseagreement to license globally in perpetuity the source code for Telerate’sTrading Room System (“TRS”) and Active8 technology from Reuters Limitedand Moneyline Telerate. Under the terms of the license, we are entitled to useand further develop the TRS technology and the Active8 technology to offer ourown market data platform and associated data display workstation worldwide.Based on the TRS technology, we launched the HyperFeed Market Data Platform (“HMDP”)product. HMDP integrates market data from many sources into many types ofdisplay or application software - transactional, web distribution, riskmanagement, or other mid- and back-office system. Based on the Active8technology, we launched the Open Collaborative Container (“OCC”) product towork with HMDP. OCC is intended to provide a professional financial desktopthat is fully customizable for various classes of end users. HMDP and OCCexpand our product line and we intend to market them globally. The Company hasrecorded the $1.0 million license fee as an asset under licensed and developedsoftware costs with the corresponding liability recorded under accruedexpenses. The license fee is due in two installments with 25% payable January 15,2006 and the remainder payable January 15, 2007.

 

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In the third quarter of 2005, the Company entered into an exclusive,multi-year distributor agreement with MarketXS, a leading European provider ofreal-time market data technology and trading solutions, that gives MarketXS theright to license, distribute, and support HyperFeed’s HMDP and OCC products inEurope, the Middle East, and Africa. HyperFeed plans to provide softwareupgrades, maintenance and second level support, while MarketXS is expected toprovide European development, technical sales, and first level maintenancesupport. The term of the distributor agreement varies, with certain elementsextending through January 2015. Additionally, in the third quarter of2005, the Company expanded its HTPX technology by leveraging the Chicago BoardOptions Exchange’s TickerXpress offering to include Remote TickerXpress, whichcombines an ultra-low-latency datafeed with HyperFeed’s ticker planttechnology.

 

Total revenue for the nine months ended September 30, 2005decreased 19.9% to $3.3 million compared with $4.2 million for the same periodin 2004 and, for the three months ended September 30, 2005, total revenuedecreased 31.8% to $1.4 million compared with $2.1 million for the same periodin 2004. However, total revenue for the three and nine months ended September 30,2004 included $1.3 million and $2.6 million, respectively, from Telerate. Dueto the termination of the agreements between Telerate and HyperFeed in November 2004,the Company did not recognize revenue from Telerate in 2005. During the thirdquarter of 2005, HyperFeed entered into thirteen agreements, directly andthrough channel partners, from which HyperFeed expects to recognize $2.9million in revenue principally over the next two to three years. In the thirdquarter of 2004, HyperFeed entered into two agreements from which the Companyexpects to recognize $1.3 million in revenue over two to three years. To date,HyperFeed has recognized $0.3 million from the agreements entered into in thethird quarter of 2004 and $0.3 million from the agreements entered into in thethird quarter of 2005. Although the Company expects to fully recognize allrevenue from these agreements, there can be no assurances that the Company willbe able to do so. Additionally, cash used for continuing operations during thenine months ended September 30, 2005 remained unchanged at $2.6 millioncompared to the same period in 2004. Although there can be no assurances inthis regard, the Company believes that the increase in its customer base andthe equivalent amount of cash used in continuing operations in the comparableperiods, among other things, will assist it in achieving profitability. However, the Company may not have sufficientcapital resources to fund continuing operations.

 

Under our current business model, we derive our revenues from softwarelicensing, maintenance, and consulting fees. In general, we expect that ourlicensing fees will be structured as one time fee with a recurring maintenancefee, a recurring monthly fee, based upon the nature, size, and scope of thelicensee, or a monthly fee, based upon the number of end users that rely uponthe products and services offered by the licensee. Consulting fees charged tocustomers are expected to vary based upon the nature, size, and scope of theprojects undertaken.

 

Our direct costs of revenue are composed largely of amortization oflicensed and developed software costs, royalty and license fees and laborassociated with consulting services.

 

Our ability to successfully execute our business model will bedependent on our ability to maintain and develop advanced ticker plant and dataplatform technologies in a cost effective manner and aggressively license suchtechnologies to the financial services industry.

 

During the third quarter of 2005, we amended and restated an existingConvertible Note (the “Second Restated Convertible Note”) with PICO Holdings Inc. (“PICO”), our majoritystockholder, increasing the amount available for borrowing from $4.0million up to $6.0 million. In October 2005, we borrowed the remainingamount available under the Second Restated Convertible Note, and on November 1,2005, PICO elected to convert all of the outstanding principal and accruedinterest under the Second Restated Convertible Note into shares of the Company’scommon stock. See Notes 5 and 9 of the Notesto Unaudited Interim Consolidated Financial Statements.

 

RESULTS OF OPERATIONS: FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,2005 AND 2004

 

**Revenue**

 

Total revenue for the nine months ended September 30,2005 decreased 19.9% to $3.3 million compared with $4.2 million for the ninemonths ended September 30, 2004. Total revenue for the three months ended September 30,2005 decreased 31.8% to $1.4 million compared with $2.1 million for the threemonths ended September 30, 2004. Both HyperFeed and HYPRWare revenuedecreased for the three and nine months ended September 30, 2005 comparedto the same periods in 2004.

 

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HyperFeed revenue decreased 19.7% to $3.1 million for the nine monthsended September 30, 2005 as compared to $3.8 million for the nine monthsended September 30, 2004. HyperFeed revenue decreased 32.5% to $1.3million for the three months ended September 30, 2005 as compared to $2.0million for the comparable period in 2004. HyperFeed’s revenue from Teleratefor the three and nine months ended September 30, 2004 was $1.3 million,or 66.9%, and $2.6 million, or 68.0%, respectively. As a result of the sale ofTelerate to Reuters, in November 2004, Telerate elected to exercise itscontractual right to terminate the license agreement between HyperFeed and Telerateexecuted in 2004. The Company did not record any revenue from Telerate duringthe three and nine months ended September 30, 2005 and does not currentlyexpect future revenue from Telerate. HyperFeed revenue is derived from HMDP,OCC, HTPX, and HBOX software and ticker plant and data platform technologiesand includes software license, maintenance, and consulting revenue, includingrevenue from multi-year contracts with Chicago Board Options Exchange,Philadelphia Stock Exchange, ComStock, Susquehanna International Group, LLP,and The Nasdaq Stock Market, Inc.

 

HYPRWare revenue decreased 22.2% to $270,640 for the nine months ended September 30,2005 compared with $348,063 for the nine months ended September 30, 2004.For the three months ended September 30, 2005, HYPRWare revenue decreased17.2% to $88,982 compared with $107,512 for the three months ended September 30,2004. HYPRWare derives revenue from royalties related to license fees forcustomers it referred to Townsend Analytics, Ltd. (“Townsend”) prior to December 31,2002. The decline in HYPRWare service revenue is due to a decrease in royaltiesfrom Townsend as former HYPRWare customers serviced by Townsend decrease.HyperFeed currently expects that any future revenue recognized by HYPRWare willbe derived exclusively from royalties from the licensing agreement withTownsend.

 

**Total Expenses**

 

Total expenses (including direct costs of revenue, operating expenses,and expenses from discontinued operations) increased 11.0% to $10.1 million forthe nine months ended September 30, 2005 compared with $9.1 million forthe nine months ended September 30, 2004. Total expenses increased 51.9%to $4.1 million for the three months ended September 30, 2005 comparedwith $2.7 million for the three months ended September 30, 2004. Theincrease in total expenses for the nine months ended September 30, 2005was principally due to $1.5 million of interest expense related to theintrinsic conversion value of the Second Restated Convertible Note issued by the Companyto PICO described in Notes 5 and 9 ofthe Notes to Unaudited Interim Consolidated Financial Statements, offsetin part by expenses of $0.4 million incurred in connection with the severanceagreement entered into with the Company’s former Chief Executive Officer in thefirst quarter of 2004. The increase in total expenses for the three monthsended September 30, 2005 was due to $0.8 million of interest expenserelated to the intrinsic conversion value of the Second Restated Convertible Note issued by the Companyto PICO, $0.2 million in communicationand data costs, and $0.2 million in labor costs resulting from the end of the transitionservice agreement period related to the sale of HyperFeed’s institutionalconsolidated market data feed business to Interactive Data Corporation (“IDC”)in October 2003.

 

**Direct Costs of Revenue**

 

Total direct costs of revenue decreased22.5% to $1.0 million for the nine months ended September 30, 2005compared with $1.3 million for the nine months ended September 30, 2004.The principal component of the decrease was software development labor costsresulting from changes in the employee mix related to a shift from developmentof customer specific software for Telerate to development of capitalizedsoftware products. For the three months ended September 30, 2005, totaldirect costs of revenue increased 18.3% to $0.4 million compared with $0.4million for the three months ended September 30, 2004. The principalcomponent of the increase for the three-month period was license fees relatedto the provision of third party data. Amortization of licensed and developedsoftware costs decreased 13.9% to $0.8 million for the nine months ended September 30,2005 as compared to $1.0 million for the nine months ended September 30,2004. Amortization of licensed and developed software costs remained relativelyunchanged at $0.3 million for the three months ended September 30, 2005and 2004. The decrease in amortization of licensed and developed software costsresulted from the acceleration of amortization in 2004 of the developedsoftware used during the transition service agreement period related to thesale of HyperFeed’s institutional consolidated market data feed business. Thereare no direct costs of revenue related to HYPRWare service revenue as suchamounts consist solely of royalty income. Gross margin decreased 18.7% to $2.3million for the nine months ended September 30, 2005 compared with $2.9million for the nine months ended September 30, 2004. Gross margindecreased 42.8% to $1.0 million for the three months ended September 30,2005 compared with $1.7 million for the three months ended September 30,2004. Direct costs as a percentage of total revenue decreased to 30.0% for thenine months ended September 30, 2005 compared with 31.0% for the ninemonths ended September 30, 2004. Direct costs as a percentage of totalrevenue increased to 31.3% for the three months ended September 30, 2005compared with 18.0% for the three months ended September 30, 2004.

 

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**Operating Expenses**

 

Total operating expenses decreased 0.7%to $7.3 million for the nine months ended September 30, 2005 compared with$7.4 million for the nine months ended September 30, 2004. For the threemonths ended September 30, 2005, total operating expenses increased 21.0%to $2.8 million compared with $2.3 million for the three months ended September 30,2004. For the three and nine months ended September 30, 2005, increaseswere experienced in general and administrative expenses, research anddevelopment costs, and operations costs while decreases were experienced insales and marketing costs and in depreciation and amortization as compared tothe three and nine months ended September 30, 2004. Total operatingexpenses as a percentage of total revenue increased to 219.9% for the ninemonths ended September 30, 2005 compared to 177.3% for the nine monthsended September 30, 2004. Total operating expenses as a percentage oftotal revenue increased to 197.1% for the three months ended September 30,2005 compared to 111.1% for the three months ended September 30, 2004.

 

Sales and marketing costs decreased 10.2%to $1.3 million for the nine months ended September 30, 2005 compared with$1.5 million for the nine months ended September 30, 2004. Sales andmarketing costs remained unchanged at $0.5 million for the three months ended September 30,2005 and 2004. The decrease for the nine-month period was primarily due to areduction in labor costs of $0.2 million resulting from a reduction inpersonnel caused by attrition. Sales costs as a percentage of total revenueincreased to 39.0% for the nine months ended September 30, 2005 comparedto 34.8% for the nine months ended September 30, 2004. Sales costs as apercentage of total revenue increased to 32.3% for the three months ended September 30,2005 compared to 23.0% for the three months ended September 30, 2004,resulting from a decrease in revenue due to the termination of the agreementswith Telerate in November 2004.

 

General and administrative expenses increased 1.3% to $2.4 million forthe nine months ended September 30, 2005 compared with $2.3 million forthe nine months ended September 30, 2004. General and administrativeexpenses increased 27.0% to $0.8 million for the three months ended September 30,2005 compared with $0.7 million for the three months ended September 30,2004. The increase for the three-month period was primarily due to recruitingfees of approximately $47,000 and an accrual of approximately $60,000 for salestax expense. General and administrative expenses as a percentage of totalrevenue increased to 71.0% for the nine months ended September 30, 2005compared to 56.2% for the nine months ended September 30, 2004. Generaland administrative expenses as a percentage of total revenue increased to 59.3%for the three months ended September 30, 2005 compared to 31.8% for thethree months ended September 30, 2004.

 

Research and development costs increased6.4% to $1.2 million for the nine months ended September 30, 2005 comparedwith $1.1 million for the nine months ended September 30, 2004. Researchand development costs increased 22.3% to $0.5 million for the three monthsended September 30, 2005 compared with $0.4 million for the three monthsended September 30, 2004. The increases for the three and nine monthperiods resulted from $0.1 million in additional labor costs and $0.1 millionfor the outsourcing of labor, incurred in each case to enhance HyperFeed’sproduct line. Research and development costs as a percentage of total revenueincreased to 35.7% for the nine months ended September 30, 2005 comparedto 26.9% for the nine months ended September 30, 2004. Research anddevelopment costs as a percentage of total revenue increased to 32.9% for thethree months ended September 30, 2005 compared to 18.4% for the threemonths ended September 30, 2004.

 

Operations costs increased 4.3% to $1.9 million for the nine monthsended September 30, 2005 compared with $1.8 million for the nine monthsended September 30, 2004. Operations costs increased 59.1% to $0.8 millionfor the three months ended September 30, 2005 compared with $0.5 millionfor the three months ended September 30, 2004. The increase for the ninemonths ended September 30, 2005 is principally due to $0.1 million fordata acquisition costs. The increase for the three months ended September 30,2005 is principally due to $0.2 million for communication costs and $0.1million for labor costs resulting from the end of the transition service agreementperiod related to the sale of HyperFeed’s institutional consolidated marketdata feed business. Operations costs consist of technical support, datamaintenance, data access, and communications costs. Operations costs as apercentage of total revenue increased to 56.5% for the nine months ended September 30,2005 compared to 43.4% for the nine months ended September 30, 2004.Operations costs as a percentage of total revenue increased to 59.8% for thethree months ended September 30, 2005 compared to 25.7% for the three monthsended September 30, 2004.

 

Depreciation and amortization decreased12.0% to $0.6 million for the nine months ended September 30, 2005compared with $0.7 million for the nine months ended September 30, 2004.Depreciation and amortization decreased 29.0% to $0.2 million for the threemonths ended September 30, 2005 compared with $0.3 million for the threemonths ended September 30, 2004. The decrease is due to a reduction incapital expenditure in recent years and fixed assets becoming fullydepreciated. Depreciation and amortization as a percentage of total revenueincreased to 17.6% for the nine months ended September 30, 2005 comparedto 16.0% for the nine months ended September 30, 2004. Depreciation andamortization as a percentage of total revenue increased to 12.8% for the threemonths ended September 30, 2005 compared to 12.3% for the three monthsended September 30, 2004.

 

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**Interest Expense**

 

Interest expense increased to $1.7 million for the nine months ended September 30,2005 and $0.9 million for the three months ended September 30, 2005compared with $1,057 and $790 for the same respective periods in 2004. Theincrease is principally due to non-cash interest expense of $0.8 million and$1.5 million for the three and nine months ended September 30, 2005,respectively, related to the intrinsic conversion value of the Second RestatedConvertible Note issued by the Company to PICO described in Notes 5 and 9 of the Notes to UnauditedInterim Consolidated Financial Statements. Additionally, the Company recordedaccrued interest of $89,152 and $141,741 for the three and nine months ended September 30,2005, respectively, on borrowings against the Second Restated Convertible Note.The Company did not have any interest expense related to the Second RestatedConvertible Note in 2004.

 

**Discontinued Operations**

 

In June 2003, the Company sold the individual retail investor unitand related assets of its subsidiary, PCQuote.com, Inc., and, in October 2003,the Company sold its institutional consolidated market data feed business. TheCompany recorded a net loss from discontinued operations of $40,917, net of taxbenefit of $1,000, for the nine months ended September 30, 2005 comparedwith net loss of $0.3 million, net of tax benefit of $0.2 million, for sameperiod in 2004. The net losses 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, which ended in June 2005. The Company recorded$77,000, net of tax expense of $48,000, and $0.2 million, net of tax expense of$0.1 million, as a gain on disposition of discontinued operations during thethird quarter of 2005 and the first quarter of 2004, respectively, related toholdbacks from the sale of the consolidated market data feed business.

 

As of September 30, 2005, assets related to discontinuedoperations consist of a receivable for the reimbursement of expenses from IDCand accounts receivable, net of allowance, prior to November 1, 2003.Liabilities related to discontinued operations consist of (1) payables tocommunications vendors and (2) accruals for data costs, severance, andrent associated with discontinued properties. See Note 6 of the Notes toUnaudited Interim Consolidated Financial Statements.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Net cash and cash equivalents decreased $0.2 million to $19,903 at September 30,2005 from $0.2 million at December 31, 2004.

 

Operating activities used net cash of $3.2 million for the nine monthsended September 30, 2005 compared to net cash used of $3.5 million for thenine months ended September 30, 2004. For the nine months ended September 30,2005, continuing operations used $2.6 million of cash compared to net cash usedof $2.6 million for the nine months ended September 30, 2004. The changein cash used for continuing operations primarily resulted from (i) $1.6million provided from the non-cash expense related to interest and thebeneficial conversion feature of the Second Restated Convertible Note in 2005, (ii) $0.5million provided from accounts payable, (iii) $0.3 million provided fromaccrued expenses, and (iv) $0.3 million provided from the increase inunearned revenue due to advanced billings and one-time sales in 2004. For thenine months ended September 30, 2005, discontinued operations used $0.6million compared to cash used of $1.0 million for the nine months ended September 30,2004. The change in cash used for discontinued operations resulted from thefunding of discontinued operations in 2004 and the wind-down of thoseoperations in 2005.

 

Investing activities used net cash of $1.7 million for the nine monthsended September 30, 2005 compared to net cash used of $1.2 million for thenine months ended September 30, 2004. During the nine months ended September 30,2005, the Company invested $0.1 million in equipment and $1.2 million in itslicensed and developed software costs. During the nine months ended September 30,2004, the Company invested $0.2 million in equipment and $1.0 million in itslicensed and developed software costs. In the first quarter of 2005, theCompany acquired the assets of Focus Technology Group LLC for $0.4 million, asdescribed in Note 3 of the Notes to Unaudited Interim Consolidated FinancialStatements.

 

Financing activities provided net cash of $4.6 million for the ninemonths ended September 30, 2005 compared to net cash provided of $0.2million for the nine months ended September 30, 2004. The long-termcommitment related to licensed software of $1.0 million resulted from thedeferred payment of the license fee for Telerate’s Trading Room System (“TRS”)and Active8 technology, which is a noncash item for the nine months ended September 30,2005.

 

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

 

OnNovember 2, 2004, the Company issued to PICO a Secured ConvertiblePromissory Note (the “Convertible Note”). Under the terms of the Convertible Note, the Company could borrow up to$1.5 million from PICO, at an interest rate of 8%. In connection with issuingthe Convertible Note and concurrent with the first draw, the Company issued toPICO 25,000 shares of common stock of the Company with a fair value of $75,000in the first quarter of 2005. On March 28, 2005, the Company andPICO amended and restated the Convertible Note (the “First Restated ConvertibleNote”) such that the Company could borrow up to $4.0 million at an interestrate of prime plus 2.75%.

 

On August 26, 2005, the Company and PICO amended and restated theFirst Restated Convertible Note (the “Second Restated Convertible Note”). Underthe terms of the Second Restated Convertible Note, the Company may borrow up to$6.0 million at an interest rate of prime plus 2.75%. The Company is obligatedto repay all outstanding principal and accrued interest under the SecondRestated Convertible Note on March 28, 2006. The Second RestatedConvertible Note, which is convertible by PICO at any time, provides that thenumber of shares that PICO would receive in connection with a conversion of anyamounts outstanding under the Second Restated Convertible Note would bedetermined by dividing the total outstanding amount to be converted by thelesser of $1.36 per share and 80% of the five-day moving average per share priceof the Company’s common stock on the date of conversion. The number of sharesof the Company’s common stock issuable upon conversion of the Second RestatedConvertible Note is not subject to a cap. In addition, in connection withissuing the Second Restated Convertible Note, the Company issued to PICO awarrant to purchase 125,000 shares of HyperFeed’s common stock, at an exerciseprice of $1.70 per share. The warrant expires on August 26, 2008.

 

The Second Restated Convertible Note contains a beneficial conversionfeature and, as a result, the Company recorded $0.3 million of additional paidin capital and interest expense at September 30, 2005. The Second RestatedConvertible Note is secured by the assets of the Company, subordinate to thesecurity interest granted under the line of credit and contains customary representations,warranties, covenants, and events of default. As of September 30, 2005, the Company had borrowed $4.6 millionunder the terms of the Second Restated Convertible Note and recorded accruedinterest of $0.1 million.

 

The Company borrowed the remaining $1.4million available under the Second Restated Convertible Note in October 2005.On November 1, 2005, PICO elected to convert the $6.0 million borrowedunder the terms of Second Restated Convertible Note and accrued interest of$0.2 million into 4,546,479 shares of the Company’s common stock at aconversion rate of $1.36 per share. As a result of the conversion, PICO owns80.1% of the Company’s common stock. If PICO had elected to convert the $4.6million outstanding under the Second Restated Convertible Note and accruedinterest on September 30, 2005, the Company’s total liabilities would havebeen $4.1 million and stockholders’ equity would have been $0.6 million.

 

The fair value assigned to the warrants was $0.1 million, which will beamortized as interest expense over the life of the Second Restated ConvertibleNote. As of September 30, 2005 the Company had recorded non-cash interestexpense of $24,477 in connection with the warrants.

 

Total revenue for the nine months ended September 30, 2005decreased 19.9% to $3.3 million compared with $4.2 million for the same periodin 2004 and, for the three months ended September 30, 2005, total revenuedecreased 31.8% to $1.4 million compared with $2.1 million for the same periodin 2004. However, total revenue for the three and nine months ended September 30,2004 included $1.3 million and $2.6 million, respectively, from Telerate. Dueto the termination of the agreements between Telerate and HyperFeed in November 2004,the Company did not recognize revenue from Telerate in 2005. During the thirdquarter of 2005, HyperFeed entered into thirteen agreements, directly andthrough channel partners, from which HyperFeed expects to recognize $2.9 millionin revenue principally over the next two to three years. In the third quarterof 2004, HyperFeed entered into two agreements from which the Company expectsto recognize $1.3 million in revenue over two to three years. To date,HyperFeed has recognized $0.3 million from the agreements entered into in thethird quarter of 2004 and $0.3 million from the agreements entered into in thethird quarter of 2005. Although the Company expects to fully recognize allrevenue from these agreements, there can be no assurances that the Company willbe able to do so. Additionally, cash used forcontinuing operations during the nine months ended September 30, 2005remained unchanged at $2.6 million compared to the same period in 2004.Although there can be no assurances in this regard, the Company believes that theincrease in its customer base and the equivalent amount of cash used incontinuing operations in the comparable periods among other things, willassist it in achieving profitability. However, the Company may not have sufficientcapital resources to fund continuing operations.

 

The Company has sustained significant losses in recent years and in thefirst nine months of 2005. In particular, the Company incurred a net loss of$6.6 million for the first nine months of 2005, compared to a net loss of $4.6million for the same period in 2004, and an 

 

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overall net loss of $5.0 million for the fiscal year ended December 31,2004. Included in the net loss of $6.6 million of the nine months ended September 30,2005 is $1.5 million non-cash interest expense related to the Second RestatedConvertible Note issued by the Company to PICO described in Notes 5 and 9 of theNotes to Unaudited Interim Consolidated Financial Statements. The recurringlosses may raise substantial doubt about the Company’s ability to continue as agoing concern. In the third quarter of 2005, the Company secured an additional $2.0 million of available credit fromPICO, the Company’s majority stockholder. The Company currently believes,although there can be no assurances in this regard, that its existing andanticipated capital resources, including cash and cash equivalents, accountsreceivable, assets related to discontinued operations, cash expected to bereceived from holdbacks associated with the sale of its institutionalconsolidated market data feed business, and potential capital from financing sources, including PICO, willbe sufficient to fund its operations over the next twelve months. If the Companyrequires additional capital resources, there can be no assurances that suchcapital will be available or that such capital will be available on termssatisfactory to the Company; if the Company does not obtain such capital, thenthe Company will be able to fund its operations for a shorter period of time.

 

The Company has considered and is willing to consider further variousalternatives to enhancing stockholder value, including mergers and acquisitionsand other strategic transactions. In addition, the Company has explored and iswilling to explore further strategic relationships and joint ventures withother technology and financial services firms.

 

OFF BALANCE SHEET ARRANGEMENTS

 

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

 

CRITICAL ACCOUNTING POLICIES 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 the Company’s management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenue and expensesduring the reporting period.

 

On an ongoing basis, management evaluates its estimates and judgments,including those related to bad debts and intangible assets. Management basesits estimates and judgments on historical experience and on various otherfactors that are believed to be reasonable under the circumstances, the resultsof which form the basis for making judgments about the carrying values ofassets and 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 and providingmanagement and maintenance services of HMDP, OCC, HTPX, and HBOX software,ticker plant and data platform technologies, and managed services.Additionally, the Company derives revenue from the development of customizedsoftware.

 

Revenue is recognized from the licensing of HMDP, OCC, HTPX, and HBOX (1) aspayments from customers become due when the fee is not fixed or determinable atthe outset of the arrangement or (2) ratably over the term of theagreement when post-contract customer support (“PCS”) has a duration of oneyear or less. PCS is recognized ratably over the term. Revenue for thedevelopment of customized software, consulting, and implementation services isrecognized based on time and materials from the application of contractaccounting for the development of customized software, or based on an hourlyrate when it is not a fixed fee arrangement. For licensing of the Company’ssoftware through its sales channels, revenue is recognized as payments from thereseller become due and generally commences after the software is installed atthe reseller’s customer site.

 

The Company applies the provisions of AICPA Statement of Position (“SOP”)97-2, “Software Revenue Recognition,” as amended, which specifies the followingfour criteria that must be met prior to recognizing revenue: (1) persuasiveevidence of the existence of an arrangement; (2) delivery; (3) fixedor determinable fee; and (4) probable collection. In addition, revenueearned on software arrangements involving multiple elements is allocated toeach element based on the relative fair value of the elements. When applicable,revenue allocated to HyperFeed’s software products (including specifiedupgrades/enhancements) is recognized upon delivery of the products. If the feeis considered fixed and determinable, it is recognized as revenue when the saleis effected. If the fee is not considered fixed and determinable, it isrecognized as revenue as payments from customers become due. Revenue allocatedto 

 

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PCS is recognized ratably over the term of the support and revenueallocated to service elements (such as training) is recognized as the servicesare performed.

 

In accordance with SOP 97-2, revenue from contracts that do not requiresignificant production, modification, or customization of software isrecognized when the above criteria are met. Revenue from contracts that requiresignificant production, modification, or customization of software is accountedfor in conformity with the provisions of Accounting Research Bulletin No. 45,“Long-Term Construction Contracts,” using the relevant guidance therein, andSOP 81-1, “Accounting for Performance of Construction-Type and CertainProduction-Type Contracts.” SOP 81-1 provides for revenue recognition under the“percentage-of-completion” or “completed contract” method depending on thefacts and circumstances of contracts entered into and management’s ability toreasonably estimate its progress toward completion. Contract losses, if any,are provided for in their entirety in the period they become known, withoutregard to the percentage-of-completion. For those contracts for which theCompany cannot reasonably estimate progress toward completion, the Companyemploys the completed contract method of accounting. Revenue from arrangementsaccounted for under contract accounting are allocated among licensedtechnologies, managed services, and consulting fees based on the contractualterms of the arrangements.

 

The use of contract accounting inherently includes the use of estimatesof progress toward completion. Such estimates are subject to periodic revisionsand, as a result, the financial statements could be materially impacted.

 

The Company applies the provisions of Emerging Issues Task Force (“EITF”)Issue No. 00-21, “Accounting for Revenue Arrangements with MultipleDeliverables.” EITF 00-21 addresses certain aspects of the accounting by avendor for arrangements under which it will perform multiple revenue-generatingactivities. Specifically, EITF 00-21 addresses how to determine whether anarrangement involving multiple deliverables contains more than one earningsprocess and, if it does, how to divide the arrangement into separate units ofaccounting consistent with the identified earnings processes for revenuerecognition purposes. EITF 00-21 also addresses how arrangement considerationshould be measured and allocated to the separate units of accounting in thearrangement.

 

On October 31, 2003, the Company sold its institutionalconsolidated market data feed business. Revenue recognized prior to October 31,2003, related to the assets sold and included in discontinued operations wasprincipally derived from service contracts for the provision of market dataonly and service contracts for the provision of market data together withanalytical software. HyperFeed primarily serviced the business-to-businessmarketplace. Revenue from service contracts was recognized ratably over thecontract term as the contracted services were rendered.

 

On June 2, 2003, the Company sold certain assets of HYPRWare,consisting of its retail investor unit and Web site. Revenue recognized priorto June 2, 2003 related to the HYPRWare assets sold was primarily derivedfrom analytics service, powered by the HyperFeed data feed, for Internet usersin the consumer marketplace and from the sale of advertising on its Web site.Revenue from the sale of advertising was recognized as the advertising wasdisplayed on the Web site.

 

HYPRWare derives revenue from royalties related to license fees forcustomers it referred to Townsend prior to December 31, 2002. Revenue isrecorded as royalties are reported from Townsend.

 

**Allowance For Doubtful Accounts**:The Company maintains allowances for doubtful accounts for estimated lossesresulting from the inability of its customers to make payments for services ordebtors to satisfy note receivable obligations. The Company analyzes accountsreceivable, customer credit-worthiness, current economic trends and changes inits customer payment terms when evaluating the adequacy of the allowance fordoubtful accounts and notes receivable. If the financial condition of theCompany’s customers or debtors deteriorates, resulting in an impairment oftheir ability to make payments, additional allowances may be required.

 

**Valuation of Intangible Assets and Licensedand Developed Software Costs**: The Company assesses theimpairment of intangible assets on an annual basis or whenever events orchanges in circumstances indicate that the carrying value may not be recoverable.Factors the Company considers important which could trigger an impairmentreview include significant underperformance relative to expected historical orprojected future operating results, significant changes in the manner of itsuse of the acquired assets or the strategy for its overall business, andsignificant negative industry or economic trends. The Company assesses therecoverability of its licensed and developed software costs against estimatedfuture revenue over the estimated remaining economic life of the software.

 

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**Capitalization of Licensed and DevelopedSoftware Costs**: Licensed and developed software costsare accounted for in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 86, “Accounting for the Costs of Computer Softwareto Be Sold, Leased, or Otherwise Marketed.” Costs associated with the planningand design phase of software development, including coding and testingactivities necessary to establish technological feasibility of computersoftware products to be licensed or otherwise marketed, are expensed asresearch and development costs as incurred. Once technological feasibility hasbeen determined, costs incurred in the construction phase of software developmentincluding coding, testing, and product quality assurance are capitalized. Inaccordance with SFAS No. 86, the Company has capitalized licensed softwarefor which the Company believes technological feasibility has been established.

 

Amortization commences at the time of capitalization or, in the case ofa new service offering, at the time the service becomes available for use.Unamortized capitalized costs determined to be in excess of the net realizablevalue of the product are expensed at the date of such determination. Theaccumulated amortization and related licensed and developed software costs areremoved from the respective accounts effective in the year following fullamortization.

 

The Company’s policy is to amortize capitalized software costs by thegreater of (1) the ratio that current gross revenue for a product bear tothe total of current and anticipated future gross revenue for that product or (2) thestraight line method over three to five years, the remaining estimated economiclife of the product including the period being reported. The Company assessesthe recoverability of its licensed and developed software costs againstestimated future undiscounted cash flows. Given the highly competitiveenvironment in which the Company operates and rapid 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.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

In December 2004, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 123R, “Share-Based Payment”, which is effective as of thefirst interim reporting period that begins after January 1, 2006. SFAS No. 123Reliminates the intrinsic value method under Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees,” as an alternativemethod of accounting for stock-based awards. SFAS No. 123R also revisesthe fair value-based method of accounting for share-based payment liabilities,forfeitures and modifications of stock-based awards and clarifies SFAS No. 123’sguidance in several areas, including measuring fair value, classifying an awardas equity or as a liability and attributing compensation cost to reportingperiods. In addition, SFAS No. 123R amends SFAS No. 95, “Statement ofCash Flows,” to require that excess tax benefits be reported as a financingcash inflow rather than as a reduction of taxes paid, which is included withinoperating cash flows. The Company is in the process of evaluating the impact ofSFAS No. 123R, but does not currently believe that the adoption of SFAS No. 123Rwill have a material impact on the Company’s results of operations or financialcondition.

 

In May 2005, the FASB issued SFAS No. 154, “Accounting Changesand Error Corrections.” SFAS No. 154 requires retrospective application toprior periods’ financial statements of a voluntary change in accountingprinciple and that a change in method of depreciation, amortization, ordepletion for long-lived, nonfinancial assets be accounted for as a change inaccounting estimate that is effected by a change in accounting principle. SFAS154 replaces APB Opinion 20, “Accounting Changes”, and SFAS 3, “ReportingAccounting Changes in Interim Financial Statements”. SFAS No. 154 iseffective for accounting changes and corrections of errors made in fiscal yearsbeginning after December 15, 2005. The Company does not believe theadoption of SFAS No. 154 will have a material impact on its results ofoperations or financial condition.

 

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

 

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

 

OnNovember 2, 2004, the Company issued to PICO the Convertible Note. Underthe terms of the Convertible Note, the Company could borrow up to $1.5 millionfrom PICO, at an interest rate of 8%. On March 28, 2005, theCompany and PICO amended and restated the Convertible Note (the “First RestatedConvertible Note”) such that the Company could borrow up to $4.0 million at aninterest rate of prime plus 2.75%. On August 26, 2005, the Company andPICO amended and restated the First Restated Convertible Note (the “SecondRestated Convertible Note”). Under the terms of the Second Restated ConvertibleNote, the Company may borrow up to $6.0 million at an interest rate of primeplus 2.75%. The Company is obligated to repay all outstanding principal andaccrued interest under the Second Restated Convertible Note on March 28,2006. The Second Restated Convertible Note, which is convertible by PICO at anytime, provides that the number of shares that PICO would receive in connectionwith a conversion of any amounts outstanding under the Second RestatedConvertible Note would be determined by dividing the total outstanding amountto be converted by the lesser of $1.36 per share and 80% of the five-day movingaverage per share price of the Company’s common stock on 

 

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the date of conversion. The number of shares of the Company’s commonstock issuable upon conversion of the Second Restated Convertible Note is notsubject to a cap. For every $0.10 per share increase over $1.36 per share priceof the Company’s common stock, the Company would incur interest expense of $0.3million for the intrinsic value of the beneficial conversion feature on theSecond Restated Convertible Note of $4.6 million at September 30, 2005.

 

In connection with issuing the Second Restated Convertible Note, theCompany issued to PICO a warrant to purchase 125,000 shares of HyperFeed’scommon stock, at an exercise price of $1.70 per share. The warrant expires on August 26,2008. All else remaining constant, for every $0.10 per share increase over$1.70 per share price of the Company’s common stock, the Company would incurinterest expense of approximately $10,000 in connection with the fair value ofthe warrants. All else remaining constant, for every 1.0% increase in thediscount rate, the Company would incur interest expense of approximately $1,000in connection with the fair value of the warrants.

 

Asof September 30, 2005, the Company had borrowed $4.6 million under theterms of the Second Restated Convertible Note and recorded accrued interest of$0.1 million.

 

On November 1, 2005, PICO elected to convert all of theoutstanding principal and accrued interest under the Second RestatedConvertible Note into shares of the Company’s common stock. See Note 9 of the Notes to UnauditedInterim Consolidated Financial Statements.

 

The Company is subject to variable interest rates that could fluctuatewith market conditions. A 1.0% increase in the prime rate would increase theCompany’s interest expense by $1,250 per fiscal quarter on the $500,000 line ofcredit and by approximately $11,500 per fiscal quarter on the Second RestatedConvertible Note of $4.6 million at September 30, 2005.

 

**ITEM 4. Controls and Procedures**

 

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

 

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

 

**Part II**

 

**ITEM1. Legal Proceedings**

 

On June 2, 2003, the Company sold the individual retail investorunit and related assets of its subsidiary, PCQuote.com, Inc., to Money.net, Inc.On August 24, 2004, the Company filed a six-count complaint for breach ofcontract and amounts due in the Circuit Court of Cook County, Illinois againstMoney.net. The amounts sought in the complaint are $131,155 for a promissorynote, including interest, $31,920 from a datafeed license agreement, and$63,917 related to a transition services agreement. On November 17, 2004,Money.net filed a motion to dismiss and, as a result, the Company filed anamended complaint on December 7, 2004. On January 7, 2005, Money.netfiled answers to the amended complaint and a counterclaim. On February 3,2005, the Company answered Money.net’s counterclaim, which included sevenaffirmative defenses. On July 5, 2005, Money.net’s counterclaim wasstricken. On July 19, 2005, the Company filed a motion for summaryjudgment. On October 18, 2005, the Circuit Court of Cook County entered asummary judgment against Money.net in the amount of $226,992. A hearing forfinal judgment has been set for November 9, 2005. Additionally, a hearingfor the Company’s petition for legal fees has been set for December 20,2005. The Company will continue to aggressively pursue collection fromMoney.net. As of September 30, 2005, the Company had a promissory note andaccounts receivable, net of allowances, of $151,122 due from Money.net,excluding default interest on the promissory note.

 

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**ITEM 2. Unregistered Sales of EquitySecurities and Use of Proceeds**

 

On August 26, 2005, the Company and PICO amended and restated theFirst Restated Convertible Note (the “Second Restated Convertible Note”). Underthe terms of the Second Restated Convertible Note, the Company issued to PICO awarrant to purchase 125,000 shares of HyperFeed’s common stock, at an exerciseprice of $1.70 per share. The warrant expires on August 26, 2008.

 

On November 1, 2005, PICO elected to convert all of theoutstanding principal and accrued interest under the Second RestatedConvertible Note into shares of the Company’s common stock. See Note 9 of the Notes to UnauditedInterim Consolidated Financial Statements.

 

**ITEM6. Exhibits and Reports on Form 8-K**

 

(a)  Exhibits

 

Exhibit 10 - HyperFeed Technologies, Inc. 2005 Long-TermIncentive Plan.

 

Exhibit 31.1 - Certification of the Chief Executive OfficerPursuant to Rules 13a-14(a) and 15d-14(a) under the ExchangeAct.

 

Exhibit 31.2 - Certification of the Chief Financial OfficerPursuant to Rules 13a-14(a) and 15d-14(a) under the ExchangeAct.

 

Exhibit 32 - Certification Pursuant to Section 1350 ofChapter 63 of Title 18 of the United States Code.

 

(b)  Reports on Form 8-K

 

A Form 8-K was filed on August 8, 2005 attaching a copy ofthe press release reporting the second quarter 2005 results.

 

A Form 8-K was filed on September 1, 2005 reporting that on August 26,2005 the Company amended and restated a convertible promissory note issued toPICO Holdings, Inc.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 

HYPERFEED TECHNOLOGIES, INC.

 

 
| Date:  | November 7, 2005                                     |
|--------|-----------------------------------------------------------|
|   |                                                      |
| By:    | /s/ Paul Pluschkell                                       |   |
|   |                                                      |
|   | Paul Pluschkell                                           |
|   | President and Chief Executive Officer                     |
|   |                                                      |
| By:    | /s/ Randall  J. Frapart                                   |   |
|   |                                                      |
|   | Randall J. Frapart                                        |
|   | Chief Financial Officer and Principal  Accounting Officer |

 

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