**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

| **(Mark one)**                                          |
|---------------------------------------------------------|
| **ý**                                              | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|                                                    |   |   |
| **For the quarterly period ended:  June 30, 2004** |
|                                                    |   |   |
| **OR**                                                  |
|                                                    |   |   |
| **o**                                                   | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |

 

**For the transition period from             to            **

 

**Commission file number 0-13093**

 

----

 

**HYPERFEED TECHNOLOGIES, INC.**

(Exact name of registrant as specified in itscharter)

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

 

----

 

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

 

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

 

The number of shares of common stock outstanding as of August 4,2004 was 3,061,733 shares.

 

 

----

 

HYPERFEEDTECHNOLOGIES, INC.

 

INDEX

 
| PART I.  | Financial Information                                                                                                     |   |   |
|----------|---------------------------------------------------------------------------------------------------------------------------|--------|--------|
|     |                                                                                                                      |   |   |
| Item 1.  | Consolidated Balance Sheets as of June 30, 2004 and  December 31, 2003 (unaudited)                              |   |   |
|     |                                                                                                                      |   |   |
|     | Consolidated Statements of Operations for  the three and six month periods ended  June 30, 2004 and 2003 (unaudited) |   |   |
|     |                                                                                                                      |   |   |
|     | Consolidated Statements of Cash Flows for  the six month periods ended  June 30, 2004 and 2003 (unaudited)           |   |   |
|     |                                                                                                                      |   |   |
|     | Notes to Unaudited Interim Consolidated  Financial Statements                                                             |   |   |
|     |                                                                                                                      |   |   |
| Item 2.  | Management’s Discussion and Analysis of Financial Condition and  Results of Operations                               |   |   |
|     |                                                                                                                      |   |   |
| Item 3.  | Quantitative and Qualitative Disclosures about Market Risk                                                                |   |   |
|     |                                                                                                                      |   |   |
| Item 4.  | Controls and Procedures                                                                                                   |   |   |
|     |                                                                                                                      |   |   |
| PART II. | Other Information                                                                                                         |   |   |
|     |                                                                                                                      |   |   |
| Item 4.  | Submission of Matters to a Vote of Security  Holders                                                                      |   |   |
|     |                                                                                                                      |   |   |
| Item 6.  | Exhibits and Reports on Form 8-K                                                                                          |   |   |
|     |                                                                                                                      |   |   |
|     | Company’s  Signature Page                                                                                            |   |   |

 

2

----

 

**PART I**

 

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

 

HYPERFEED TECHNOLOGIES, INC. ANDSUBSIDIARY

Consolidated Balance Sheets(Unaudited)

June 30, 2004 andDecember 31, 2003

 
| ** **                                                                                                                                                                  | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                                                                                  |       |                    |       |                        |       |
| **Current Assets**                                                                                                                                                          |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                                                                                   |       | $                       | 363,029    |                        | $          | 4,668,038 |   |
| Accounts receivable, less allowance for  doubtful accounts of: 2004: $9,996; 2003: $0                                                                                       |       | 1,818,681               |       | 797,048                     |       |
| Notes receivable, less allowance for  doubtful accounts of: 2004: $50,000; 2003: $50,000                                                                                    |       | 129,630                 |       | 150,465                     |       |
| Prepaid expenses and other current assets                                                                                                                                   |       | 290,066                 |       | 173,816                     |       |
| Assets related to discontinued operations                                                                                                                                   |       | 462,217                 |       | 811,878                     |       |
| **Total Current  Assets**                                                                                                                                                   |       | 3,063,623               |       | 6,601,245                   |       |
|                                                                                                                                                                        |       |                    |       |                        |       |
| Property and equipment                                                                                                                                                      |       |                    |       |                        |       |
| Computer equipment                                                                                                                                                          |       | 1,539,092               |       | 2,343,853                   |       |
| Communication equipment                                                                                                                                                     |       | 1,031,370               |       | 1,296,550                   |       |
| Furniture and fixtures                                                                                                                                                      |       | 107,429                 |       | 82,839                      |       |
| Leasehold improvements                                                                                                                                                      |       | 531,809                 |       | 531,809                     |       |
|                                                                                                                                                                        |       | 3,209,700               |       | 4,255,051                   |       |
| Less: Accumulated depreciation and  amortization                                                                                                                            |       | (2,190,615              | )          | (3,019,964                  | )          |
|                                                                                                                                                                        |       | 1,019,085               |       | 1,235,087                   |       |
| Intangible assets, net of accumulated  amortization of:  2004: $100,000; 2003: $70,000                                                                                      |       | 80,000                  |       | 110,000                     |       |
| Software development costs, net of  accumulated amortization of:  2004: $2,480,239; 2003: $2,733,126                                                                        |       | 1,750,047               |       | 1,732,721                   |       |
| Deposits and other assets                                                                                                                                                   |       | 35,205                  |       | 35,205                      |       |
| **Total Assets**                                                                                                                                                            |       | $                       | 5,947,960  |                        | $          | 9,714,258 |   |
|                                                                                                                                                                        |       |                    |       |                        |       |
| **Liabilities and  Stockholders’ Equity**                                                                                                                              |       |                    |       |                        |       |
| **Current Liabilities**                                                                                                                                                     |       |                    |       |                        |       |
| Notes payable                                                                                                                                                               |       | $                       | 200,000    |                        | $          | — |   |
| Accounts payable                                                                                                                                                            |       | 794,924                 |       | 605,644                     |       |
| Accrued expenses                                                                                                                                                            |       | 572,715                 |       | 587,193                     |       |
| Accrued compensation                                                                                                                                                        |       | 107,424                 |       | 73,157                      |       |
| Income taxes payable                                                                                                                                                        |       | 40,000                  |       | 40,000                      |       |
| Unearned revenue                                                                                                                                                            |       | 903,710                 |       | 15,000                      |       |
| Liabilities related to discontinued  operations                                                                                                                             |       | 1,212,424               |       | 2,419,879                   |       |
| **Total Current  Liabilities**                                                                                                                                              |       | 3,831,197               |       | 3,740,873                   |       |
|                                                                                                                                                                        |       |                    |       |                        |       |
| Accrued expenses, less current portion                                                                                                                                      |       | 295,609                 |       | 292,676                     |       |
| **Total Noncurrent  Liabilities**                                                                                                                                           |       | 295,609                 |       | 292,676                     |       |
| **Total Liabilities**                                                                                                                                                       |       | 4,126,806               |       | 4,033,549                   |       |
|                                                                                                                                                                        |       |                    |       |                        |       |
| **Stockholders’  Equity**                                                                                                                                              |       |                    |       |                        |       |
| Preferred stock, $.001 par value;  authorized 5,000,000 shares; none issued and outstanding                                                                                 |       | —                  |       | —                      |       |
| Common stock, $.001 par value; authorized  50,000,000 shares; issued and outstanding 3,061,733 shares at June 30,  2004 and 3,051,989 shares at December 31, 2003 |       | 3,062                   |       | 3,052                       |       |
| Additional paid-in capital                                                                                                                                                  |       | 46,105,117              |       | 46,070,113                  |       |
| Accumulated deficit                                                                                                                                                         |       | (44,287,025             | )          | (40,392,456                 | )          |
| **Total Stockholders’  Equity**                                                                                                                                        |       | 1,821,154               |       | 5,680,709                   |       |
| **Total Liabilities  and Stockholders’ Equity**                                                                                                                        |       | $                       | 5,947,960  |                        | $          | 9,714,258 |   |

 

See Notes to Unaudited Interim ConsolidatedFinancial Statements.

 

3

----

 

HYPERFEED TECHNOLOGIES, INC. ANDSUBSIDIARY

Consolidated Statements of Operations(Unaudited)

 
| ** **                                                              | ** ** | **For The Three Months  Ended  June 30,** | ** ** | **For The Six Months  Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                              | ** ** | **2004**                                       | ** ** | **2003**                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Revenue**                                                             |       |                                           |       |                                         |       |   |   |   |   |
| HyperFeed                                                               |       | $                                              | 1,218,168  |                                         | $          | — |   | $ | 1,867,178 |   | $ | — |   |
| HYPRWare                                                                |       | 114,250                                        |       | 166,000                                      |       | 240,551 |   | 341,029 |   |
| **Total Revenue**                                                       |       | 1,332,418                                      |       | 166,000                                      |       | 2,107,729 |   | 341,029 |   |
|                                                                    |       |                                           |       |                                         |       |   |   |   |   |
| **Direct Costs of  Revenue**                                            |       | 457,797                                        |       | 339,641                                      |       | 921,465 |   | 676,385 |   |
|                                                                    |       |                                           |       |                                         |       |   |   |   |   |
| **Gross Margin**                                                        |       | 874,621                                        |       | (173,641                                     | )          | 1,186,264 |   | (335,356 | ) |
|                                                                    |       |                                           |       |                                         |       |   |   |   |   |
| **Operating Expenses**                                                  |       |                                           |       |                                         |       |   |   |   |   |
| Sales and marketing                                                     |       | 490,894                                        |       | 142,975                                      |       | 978,741 |   | 142,975 |   |
| General and administrative                                              |       | 662,908                                        |       | 655,337                                      |       | 1,684,996 |   | 1,235,040 |   |
| Research and development                                                |       | 419,773                                        |       | 432,248                                      |       | 743,526 |   | 854,748 |   |
| Operations                                                              |       | 602,586                                        |       | —                                       |       | 1,280,680 |   | — |   |
| Depreciation and amortization                                           |       | 201,240                                        |       | 268,671                                      |       | 415,308 |   | 539,436 |   |
| **Total Operating  Expenses**                                           |       | 2,377,401                                      |       | 1,499,231                                    |       | 5,103,251 |   | 2,772,199 |   |
|                                                                    |       |                                           |       |                                         |       |   |   |   |   |
| **Loss from  Operations**                                               |       | (1,502,780                                     | )          | (1,672,872                                   | )          | (3,916,987 | ) | (3,107,555 | ) |
|                                                                    |       |                                           |       |                                         |       |   |   |   |   |
| **Other Income  (Expense)**                                             |       |                                           |       |                                         |       |   |   |   |   |
| Interest income                                                         |       | 1,443                                          |       | 3,205                                        |       | 8,207 |   | 6,078 |   |
| Interest expense                                                        |       | (267                                           | )          | (312                                         | )          | (267 | ) | (312 | ) |
| **Other Income, Net**                                                   |       | 1,176                                          |       | 2,893                                        |       | 7,940 |   | 5,766 |   |
|                                                                    |       |                                           |       |                                         |       |   |   |   |   |
| **Loss from  Continuing Operations Before Income Taxes**                |       | (1,501,604                                     | )          | (1,669,979                                   | )          | (3,909,047 | ) | (3,101,789 | ) |
| Income tax benefit (expense)                                            |       | (65,000                                        | )          | 277,000                                      |       | 6,000 |   | 529,000 |   |
| **Loss from  Continuing Operations**                                    |       | (1,566,604                                     | )          | (1,392,979                                   | )          | (3,903,047 | ) | (2,572,789 | ) |
|                                                                    |       |                                           |       |                                         |       |   |   |   |   |
| **Discontinued  Operations**                                            |       |                                           |       |                                         |       |   |   |   |   |
| Income (loss) from discontinued operations                              |       | (169,829                                       | )          | 587,287                                      |       | (360,522 | ) | 1,244,209 |   |
| Income tax benefit (expense) from  discontinued operations              |       | 65,000                                         |       | (138,000                                     | )          | 138,000 |   | (390,000 | ) |
| Gain on disposition of discontinued  operations                         |       | —                                         |       | 362,189                                      |       | 375,000 |   | 362,189 |   |
| Income tax expense from gain on disposition  of discontinued operations |       | —                                         |       | (139,000                                     | )          | (144,000 | ) | (139,000 | ) |
| **Income from Discontinued Operations**                                 |       | (104,829                                       | )          | 672,476                                      |       | 8,478 |   | 1,077,398 |   |
|                                                                    |       |                                           |       |                                         |       |   |   |   |   |
| **Net Loss**                                                            |       | $                                              | (1,671,433 | )                                            | $          | (720,503 | ) | $ | (3,894,569 | ) | $ | (1,495,391 | ) |
|                                                                    |       |                                           |       |                                         |       |   |   |   |   |
| Basic and diluted net income (loss) per  share:                         |       |                                           |       |                                         |       |   |   |   |   |
| Continuing operations                                                   |       | $                                              | (0.52      | )                                            | $          | (0.50 | ) | $ | (1.28 | ) | $ | (0.98 | ) |
| Discontinued operations                                                 |       | (0.03                                          | )          | 0.24                                         |       | 0.01 |   | 0.41 |   |
| Basic and diluted net loss per share                                    |       | $                                              | (0.55      | )                                            | $          | (0.26 | ) | $ | (1.27 | ) | $ | (0.57 | ) |
|                                                                    |       |                                           |       |                                         |       |   |   |   |   |
| Basic and diluted weighted-average common  shares outstanding           |       | 3,058,892                                      |       | 2,776,121                                    |       | 3,055,900 |   | 2,640,349 |   |

 

See Notes to Unaudited Interim ConsolidatedFinancial Statements.

 

4

----

 

HYPERFEED TECHNOLOGIES, INC. ANDSUBSIDIARY

Consolidated Statements of Cash Flows(Unaudited)

 
| ** **                                                                                 | ** ** | **For The Six Months  Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2004**                                     | ** ** | **2003** | ** ** |
| **Cash Flows from  Operating Activities:**                                                 |       |                                         |       |   |   |
| Net loss                                                                                   |       | $                                            | (3,894,569 | ) | $ | (1,495,391 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |       |                                         |       |   |   |
| Depreciation and amortization                                                              |       | 415,308                                      |       | 539,436 |   |
| Amortization of software development costs                                                 |       | 658,910                                      |       | 676,385 |   |
| Provision for doubtful accounts                                                            |       | 9,996                                        |       | — |   |
| Gain on sale of equipment                                                                  |       | (4,888                                       | )          | — |   |
| Changes in assets and liabilities, net of  effects from dispositions:                      |       |                                         |       |   |   |
| Accounts receivable                                                                        |       | (1,031,629                                   | )          | (66,508 | ) |
| Prepaid expenses and other current assets                                                  |       | (116,250                                     | )          | (67,181 | ) |
| Deposits and other assets                                                                  |       | —                                       |       | 20,366 |   |
| Accounts payable                                                                           |       | 189,280                                      |       | 257,853 |   |
| Accrued expenses                                                                           |       | 22,722                                       |       | 158,275 |   |
| Unearned revenue                                                                           |       | 888,710                                      |       | — |   |
| Net cash provided by (used in) continuing  operations                                      |       | (2,862,410                                   | )          | 23,235 |   |
| Net cash used in discontinued operations                                                   |       | (857,794                                     | )          | (600,215 | ) |
| **Net Cash Used In  Operating Activities**                                                 |       | (3,720,204                                   | )          | (576,980 | ) |
|                                                                                       |       |                                         |       |   |   |
| **Cash Flows from  Investing Activities:**                                                 |       |                                         |       |   |   |
| Purchase of property and equipment                                                         |       | (190,418                                     | )          | (347,402 | ) |
| Software development costs capitalized                                                     |       | (676,236                                     | )          | (597,168 | ) |
| Proceeds from sale of equipment                                                            |       | 26,000                                       |       | — |   |
| Repayment (issuance) of note receivable                                                    |       | 20,835                                       |       | (150,000 | ) |
| **Net Cash Used In  Investing Activities**                                                 |       | (819,819                                     | )          | (1,094,570 | ) |
|                                                                                       |       |                                         |       |   |   |
| **Cash Flows from  Financing Activities:**                                                 |       |                                         |       |   |   |
| Proceeds from issuance of common stock                                                     |       | 35,014                                       |       | 1,454,253 |   |
| Issuance of notes payable                                                                  |       | 200,000                                      |       | 67,115 |   |
| **Net Cash Provided  By Financing Activities**                                             |       | 235,014                                      |       | 1,521,368 |   |
|                                                                                       |       |                                         |       |   |   |
| **Net decrease in  cash and cash equivalents**                                             |       | (4,305,009                                   | )          | (150,182 | ) |
| Cash and cash equivalents:                                                                 |       |                                         |       |   |   |
| Beginning of the period                                                                    |       | 4,668,038                                    |       | 1,096,711 |   |
|                                                                                       |       |                                         |       |   |   |
| **End of the period**                                                                      |       | $                                            | 363,029    |   | $ | 946,529 |   |

 

See Notes to Unaudited Interim ConsolidatedFinancial Statements.

 

5

----

 

HYPERFEED TECHNOLOGIES, INC. ANDSUBSIDIARY

NOTES TO UNAUDITED INTERIM CONSOLIDATEDFINANCIAL STATEMENTS

 

(1) BASIS OF PRESENTATION

 

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

 

SOFTWARE DEVELOPMENT COSTS:  On October 31, 2003, the Company soldits consolidated market data feed business. Following the sale of itsconsolidated market data feed business, HyperFeed’s continuing investment insoftware development related primarily to developing enhancements to its HTPXand HBox software products. Prior to the sale of its consolidated market datafeed business, HyperFeed also invested in enhancements to its Windows-basedmarket data distribution platform and direct exchange services software, andthe development of new data analysis software and programmer tools and the applicationof new technology to increase the data volume and delivery speed of theCompany’s market data distribution system.

 

Software development costs are accounted forin accordance with 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 softwaredevelopment including coding, testing, and product quality assurance are capitalized.

 

Amortization commences at the time ofcapitalization or, in the case of a new service offering, at the time theservice becomes available for use. Unamortized capitalized costs determined tobe in excess of the net realizable value of the product are expensed at thedate of such determination. The accumulated amortization and related softwaredevelopment costs are removed from the respective accounts effective in theyear following full amortization.

 

The Company’s policy is to amortize capitalizedsoftware costs by the greater of (a) the ratio that current gross revenue for aproduct bear to the total of current and anticipated future gross revenue forthat product or (b) the straight line method over three years, the remainingestimated economic life of the product including the period being reported. TheCompany assesses the recoverability of its software development costs againstestimated future undiscounted cash flows. Given the highly competitiveenvironment and technological changes, it is reasonably possible that thoseestimates of anticipated future gross revenue, the remaining estimated economiclife of the product, or both may be reduced significantly.

 

6

----

 

STOCK BASED COMPENSATION:  At June 30, 2004, the Company had onestock-based employee compensation plan. The plan is accounted for under therecognition and measurement principles of Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees,” and related Interpretations.No stock-based employee compensation is reflected in net income (loss), as alloptions granted under the plan had an exercise price equal to the market valueof the underlying common stock on the date of grant. The following tableillustrates the effect on net loss and earnings per share if the Company hadapplied the fair value recognition provisions of Statement of FinancialAccounting Standards No. 123, “Accounting for Stock-Based Compensation,” tostock-based employee compensation for the three and six months endedJune 30, 2004 and 2003:

 
| ** **                                             | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                             | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net loss, as reported                                  |       | $                                     | (1,671,433 | )                                   | $          | (720,503 | ) | $ | (3,894,569 | ) | $ | (1,495,391 | ) |
| Compensation benefit related to stock  options granted |       | 72,812                                |       | 73,828                              |       | 7,233 |   | 20,702 |   |
| Pro forma net loss                                     |       | $                                     | (1,598,621 | )                                   | $          | (646,675 | ) | $ | (3,887,336 | ) | $ | (1,474,689 | ) |
|                                                   |       |                                  |       |                                |       |   |   |   |   |
| Basic and diluted net loss per share, as  reported     |       | $                                     | (0.55      | )                                   | $          | (0.26 | ) | $ | (1.27 | ) | $ | (0.57 | ) |
| Pro forma basic and diluted net loss per  share        |       | $                                     | (0.52      | )                                   | $          | (0.23 | ) | $ | (1.27 | ) | $ | (0.56 | ) |

 

The compensation benefit related to stockoptions granted resulted from the cancellation during the second quarters of2003 and 2004 of certain options that had not become fully vested at the timeof cancellation.

 

ACCOUNTS RECEIVABLE: Included in theCompany’s accounts receivable balances in the Consolidated Balance Sheets areunbilled receivables of $337,000 and $356,000 at June 30, 2004 andDecember 31, 2003, respectively.

 

SOFTWARE LICENSE INDEMNIFICATIONS: InNovember 2002, the Financial Accounting Standards Board (“FASB”) issuedFASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN45”). FIN 45 requires that the Company recognize the fair value for certainguarantee and indemnification arrangements issued or modified by the Companyafter December 31, 2002. In addition, the Company must continue to monitorthe conditions that are subject to the guarantees and indemnifications, asrequired under previously existing generally accepted accounting principles, inorder to identify if a loss has occurred. If the Company determines that a lossis probable, the estimated loss must be recognized as it relates to applicableguarantees and indemnifications. Some of the software licenses granted by theCompany contain provisions that indemnify customers of the Company’s softwarefrom damages and costs resulting from claims alleging that the Company’ssoftware infringes on the intellectual property rights of a third party.Historically, the Company has not been required to pay material amounts inconnection with claims asserted under these provisions and, accordingly, theCompany has not recorded a liability relating to these indemnificationprovisions.

 

(2) RECLASSIFICATIONS

 

Certain reclassifications have been made tothe consolidated financial statements for the prior year to reflect the sale onOctober 31, 2003 of the consolidated market data feed service contractsand the sale on June 2, 2003 of the individual retail investor unit andrelated assets, both of which have been accounted for as discontinuedoperations. Certain costs formerly reported as a component of data feedoperations in direct costs of revenue are now reported as operating expensesconsistent with the current business model.

 

The Company has modified its method of taxallocation between quarterly periods. As a result, the amounts reported forquarterly loss from continuing operations in unaudited Footnote 16 of theCompany’s annual report on Form 10-K for the year ended December 31, 2003have been adjusted from $(881,810), $(1,019,979), $(894,461), and $(1,259,120)to $(1,203,810), $(1,368,979), $(1,364,461), and $(118,120), respectively.

 

7

----

 

(3) SEGMENT INFORMATION

 

While the Company operates in one industry, financial services, inapplying SFAS No. 131, “Disclosures about Segments of an Enterprise and RelatedInformation,” the Company has identified two segments within which it operates.HyperFeed derives revenue principally in the business-to-business sector andHYPRWare derives revenue from royalties related to license fees collected byTownsend from subscribers to Townsend’s service over the Internet who had beenreferred through HYPRWare. The accounting policies of the reportable segmentsare the same as those described in Note 1. Financial information relating toindustry segments were as follows for the three and six months endedJune 30, 2004 and June 30, 2003:

 
| ** **                                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                              | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Sales to  unaffiliated customers**                    |       |                                  |       |                                |       |   |   |   |   |
| HyperFeed                                               |       | $                                     | 1,218,168  |                                | $          | — |   | $ | 1,867,178 |   | $ | — |   |
| HYPRWare                                                |       | 114,250                               |       | 166,000                             |       | 240,551 |   | 341,029 |   |
| Total revenue                                           |       | $                                     | 1,332,418  |                                | $          | 166,000 |   | $ | 2,107,729 |   | $ | 341,029 |   |
|                                                    |       |                                  |       |                                |       |   |   |   |   |
| HyperFeed                                               |       | 91.4                                  | %          | —                              | %          | 88.6 | % | — | % |
| HYPRWare                                                |       | 8.6                                   | %          | 100.0                               | %          | 11.4 | % | 100.0 | % |
| Total revenue                                           |       | 100.0                                 | %          | 100.0                               | %          | 100.0 | % | 100.0 | % |
|                                                    |       |                                  |       |                                |       |   |   |   |   |
| **Operating  income (loss) from continuing operations** |       |                                  |       |                                |       |   |   |   |   |
| HyperFeed                                               |       | $                                     | (1,608,670 | )                                   | $          | (1,809,744 | ) | $ | (4,135,759 | ) | $ | (3,385,904 | ) |
| HYPRWare                                                |       | 105,890                               |       | 136,872                             |       | 218,772 |   | 278,349 |   |
| Total operating loss from continuing  operations        |       | $                                     | (1,502,780 | )                                   | $          | (1,672,872 | ) | $ | (3,916,987 | ) | $ | (3,107,555 | ) |
|                                                    |       |                                  |       |                                |       |   |   |   |   |
| HyperFeed                                               |       | *                                     |       | *                                   |       | * |   | * |   |
| HYPRWare                                                |       | *                                     |       | *                                   |       | * |   | * |   |
| Total operating loss from continuing  operations        |       | *                                     |       | *                                   |       | * |   | * |   |
|                                                    |       |                                  |       |                                |       |   |   |   |   |
| **Identifiable  assets**                                |       |                                  |       |                                |       |   |   |   |   |
| HyperFeed                                               |       | $                                     | 5,290,393  |                                | $          | 4,645,970 |   | $ | 5,290,393 |   | $ | 4,645,970 |   |
| HYPRWare                                                |       | 195,350                               |       | 387,857                             |       | 195,350 |   | 387,857 |   |
| Total identifiable assets                               |       | $                                     | 5,485,743  |                                | $          | 5,033,827 |   | $ | 5,485,743 |   | $ | 5,033,827 |   |
|                                                    |       |                                  |       |                                |       |   |   |   |   |
| HyperFeed                                               |       | 96.4                                  | %          | 92.3                                | %          | 96.4 | % | 92.3 | % |
| HYPRWare                                                |       | 3.6                                   | %          | 7.7                                 | %          | 3.6 | % | 7.7 | % |
| Total identifiable assets                               |       | 100.0                                 | %          | 100.0                               | %          | 100.0 | % | 100.0 | % |

 

----

* not meaningful

 

(4) DISCONTINUED OPERATIONS

 

On October 31, 2003, the Company sold its consolidated market datafeed business to Interactive Data Corporation (“IDC”), for $8.5 million. Thesale allowed 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 cash paidon October 31, 2003, (2) $625,000 in holdbacks payable upon completion ofcustom software and the fulfillment of certain transition services and (3) an$875,000 indemnification holdback. The Company also entered into a transitionservices agreement whereby IDC reimburses HyperFeed on a monthly basis fordirect costs relative to the purchased business. These costs include costsassociated with resources dedicated to the transition, communications expenses,and other related costs. The Company received $375,000 of the $625,000 in holdbacksrelated to completion of customer software and fulfillment of certaintransition services during the first quarter of 2004. The Company incurredinbound communications costs associated with its obligations under thetransition services agreement of $282,000 in the first quarter of 2004 and$165,000 in the second quarter of 2004. Both the inbound communications costsincurred and the $375,000 of holdback recorded are reflected in discontinuedoperations.

 

On June 2, 2003, the Company sold the individual retail investorunit and 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 onrevenue from the

 

8

----

 

individual investor and replace and grow that revenue with revenue fromHTPX technology licensing sales. The sale price consisted of (1) $150,000 cashreceived in June 2003, (2) $70,000 cash received in July 2003, and(3) a $150,000 promissory note due in twelve equal installments commencing onJuly 15, 2003 with an interest rate of 8.0% per annum. At June 30,2004, the balance remaining on the promissory note was $101,323. HyperFeed ispursuing collection of this promissory note.

 

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

 
| ** **                                                          | ** ** | **Three Months Ended****June 30,** | ** ** | **Six Months Ended****June 30,** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
| ** **                                                          | ** ** | **2004**                                | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Revenue**                                                         |       |                                    |       |                                  |       |   |   |   |   |
| HyperFeed                                                           |       | $                                       | —     |                                  | $          | 2,850,989 |   | $ | — |   | $ | 5,885,162 |   |
| HYPRWare                                                            |       | —                                  |       | 317,596                               |       | — |   | 761,060 |   |
| **Total  Revenue**                                                  |       | —                                  |       | 3,168,585                             |       | — |   | 6,646,222 |   |
|                                                                |       |                                    |       |                                  |       |   |   |   |   |
| **Direct  Costs of Revenue**                                        |       |                                    |       |                                  |       |   |   |   |   |
| HyperFeed                                                           |       | —                                  |       | 1,735,683                             |       | — |   | 3,485,226 |   |
| HYPRWare                                                            |       | —                                  |       | 177,820                               |       | — |   | 439,330 |   |
| **Total  Direct Costs of Revenue**                                  |       | —                                  |       | 1,913,503                             |       | — |   | 3,924,556 |   |
|                                                                |       |                                    |       |                                  |       |   |   |   |   |
| **Gross  Margin**                                                   |       | —                                  |       | 1,255,082                             |       | — |   | 2,721,666 |   |
|                                                                |       |                                    |       |                                  |       |   |   |   |   |
| Operating Expenses                                                  |       | 169,829                                 |       | 667,795                               |       | 360,522 |   | 1,477,457 |   |
|                                                                |       |                                    |       |                                  |       |   |   |   |   |
| **Income  (loss) from discontinued operations before income taxes** |       | (169,829                                | )          | 587,287                               |       | (360,522 | ) | 1,244,209 |   |
|                                                                |       |                                    |       |                                  |       |   |   |   |   |
| Income tax expense (benefit)                                        |       | 65,000                                  |       | (138,000                              | )          | 138,000 |   | (390,000 | ) |
|                                                                |       |                                    |       |                                  |       |   |   |   |   |
| **Income  (loss) from discontinued operations**                     |       | $                                       | (104,829   | )                                     | $          | 449,287 |   | $ | (222,522 | ) | $ | 854,209 |   |

 

Assets and liabilities related to discontinued operations consist of thefollowing:

 
| ** **                                                                                     | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Assets Related to  Discontinued Operations**                                                 |       |                    |       |                        |       |
| Accounts receivable, net of allowance for  doubtful accounts of 2004: $185,240; 2003: $153,625 |       | $                       | 298,439    |                        | $          | 645,322 |   |
| Prepaid expenses and other current assets                                                      |       | 135,327                 |       | 138,105                     |       |
| Deposits and other assets                                                                      |       | 28,451                  |       | 28,451                      |       |
| **Total Assets  Related to Discontinued Operations**                                           |       | $                       | 462,217    |                        | $          | 811,878 |   |
|                                                                                           |       |                    |       |                        |       |
| **Liabilities Related  to Discontinued Operations**                                            |       |                    |       |                        |       |
| Accounts payable                                                                               |       | $                       | 990,926    |                        | $          | 2,016,425 |   |
| Accrued expenses                                                                               |       | 158,831                 |       | 313,840                     |       |
| Accrued compensation                                                                           |       | 13,527                  |       | 40,474                      |       |
| Unearned revenue                                                                               |       | 49,140                  |       | 49,140                      |       |
| **Total Liabilities  Related to Discontinued Operations**                                      |       | $                       | 1,212,424  |                        | $          | 2,419,879 |   |

 

9

----

 

(5) SIGNIFICANT CUSTOMERS

 

HyperFeed signed a contract inMarch 2004 with Telerate (formerly known as MoneyLine Telerate) to licenseHyperFeed’s HBox and HTPX technology to Telerate and provide relatedmaintenance. The Company will recognize revenue from this contract as paymentsfrom the customer become due. The amount of fees from the Telerate contractincluded in revenue for the three and six months ended June 30, 2004 was$0.5 million and $0.7 million, respectively.

 

**ITEM 2****Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

This Quarterly Report on Form 10-Q containsforward-looking statements that involve risks and uncertainties, as well asassumptions that, if they never materialize or prove incorrect, could cause theresults of HyperFeed Technologies, Inc. (“HyperFeed”) and its subsidiary,HYPRWare, Inc. (“HYPRWare”), (collectively, the “Company”) to differ materiallyfrom those expressed or implied by such forward-looking statements. Allstatements other than statements of historical fact are statements that couldbe deemed forward-looking statements, including any statements of the plans,strategies and objectives of management for future operations; any statementsregarding future economic conditions or performance; any statement ofexpectation or belief; and any statements of assumptions underlying any of theforegoing. The risks, uncertainties, and assumptions referred to above includethe performance of contracts by suppliers, customers, and partners; thevariability in quarterly operating results; the funding of current and futurebusiness strategies either through continuing operations or external financing;attracting and retaining qualified management and key employees; the timelydevelopment and introduction of new product and service initiatives atcompetitive prices and performance levels; pending or future legal proceedings;the effect of economic and business conditions generally; and risks that areotherwise described in the Company’s annual report on Form 10-K for the yearended December 31, 2003 and from time to time in the Company’s otherreports and registration statements filed with the Securities and ExchangeCommission.

 

OVERVIEW

 

In thefourth quarter of 2003, we completed our transition to our current businessmodel; that is, a business model built on providing ticker plant technologiesand related consulting services directly and through sales channels in thefinancial services industry. This transition began in 2002 when we recruited anew management team, and began to restructure and pursue a new businessstrategy. We sold PCQuote.com, Inc. (“PCQuote”) to Money.net in June 2003and sold the remainder of our consolidated market data feed business toInteractive Data Corporation (“IDC”) in October 2003. Beginning in May2003, rather than principally supplying our ticker plant technology tocustomers as part of our consolidated market data feed business, we began toprovide our ticker plant technology directly and through sales channels.

 

Theexecution of our new business model is expected to result in there being adifferent set of variables that are necessary for an investor to appropriatelyunderstand and evaluate our Company. In particular, under our old businessmodel, revenues were largely derived from subscription fees from customers ofour consolidated market data feed products. These subscription fees werelargely dependent on the number of end users of our customers’ products andservices.

 

Under ournew business model, we expect to derive our revenues from licensing andconsulting fees. In general, we expect that our licensing fees will bestructured either as a reoccurring monthly fee, based upon the nature, size,and scope of the licensee, or as a monthly fee, based upon the number of endusers that rely upon the products and services offered by the licensee.Consulting fees charged to clients are expected to vary based upon the nature,size, and scope of the projects undertaken.

 

Inaddition to changes in the variables that impact our revenues, the execution ofour new business model is expected to change the variables that impact ourdirect costs of revenue and gross margin. Under our old business model, ourdirect costs of revenue was composed largely of access and user fees toexchanges, royalties, communications expenses, and labor, which were, in eachcase, necessary to support our consolidated market data feed products. Underour new business model, our direct costs of revenue are expected to be composedlargely of software development amortization costs and labor associated withconsulting services.

 

10

----

 

Althoughwe do not expect that the variables that impact our operating expenses willchange as dramatically as those that impact our revenues and direct costs ofrevenue, we do expect that categories of operating expenses such as sales andmarketing and research and development will change in response to the demands ofexecuting our new business model.

 

The saleof PCQuote and the remainder of our consolidated market data feed businessresulted in the reclassification of the consolidated statements of operationsdata for all periods to reflect such events. Both PCQuote and our consolidatedmarket data feed business have been accounted for as discontinued operations.Certain costs formerly reported as a component of the consolidated market datafeed business included in the direct costs of revenue are now reported as operatingexpenses.

 

While thesale of PCQuote and the remainder of our consolidated market data feed businessimproved our cash position and overall financial strength, we expect to facemany challenges in building our business around our new business model. Inparticular, our ability to successfully execute our new business model will bedependent on our ability to maintain and develop advanced ticker planttechnologies in a cost effective manner and aggressively license suchtechnologies to the financial services industry.

 

RECENT DEVELOPMENTS

 

On July 26, 2004, HyperFeed announcedthat our HTPX software had been selected by the Susquehanna International Groupof companies to facilitate equity and option data feeds for use in optiontrading activities. Susquehanna, a large options market maker and specialistfirm, signed an enterprise HTPX software license that will allow it to use ourHTPX software to process direct exchange data utilizing HyperFeed’s tickerplant and data management technologies. We expect that Susquehanna will utilizeour HTPX software in multiple offices throughout North America and Europe.

 

RESULTS OF OPERATIONS: FOR THE THREE AND SIXMONTHS ENDED JUNE 30, 2004 AND 2003

 

The Company has reclassified its consolidatedstatements of operations data for all periods presented to reflect the sale onOctober 31, 2003 of its consolidated market data feed service business andthe sale on June 2, 2003 of the individual retail investor unit andrelated assets of its subsidiary, both of which have been accounted for asdiscontinued operations.

 

**Revenue**

 

Total revenue for the six months ended June 30, 2004 increased518.0% to $2.1 million compared with $0.3 million for the six months endedJune 30, 2003. Total revenue for the three months ended June 30, 2004increased 702.7% to $1.3 million compared with $0.2 million for the threemonths ended June 30, 2003. While HyperFeed revenue increased for thethree and six months ended June 30, 2004 compared to the same periods in2003, HYPRWare revenue decreased for the same comparable periods.

 

HyperFeed revenue increased to $1.9 million for the six months endedJune 30, 2004 and increased to $1.2 million for the three months endedJune 30, 2004 as compared to zero revenue for the comparable periods in2003. HyperFeed revenue is derived from HTPX and HBox software and ticker planttechnologies and includes license and consulting revenue, including revenuefrom multi-year contracts with CBOE, Telerate, Philadelphia Stock Exchange, andComStock. All HyperFeed revenue associated with the consolidated market datafeed service contracts sold to IDC has been included in discontinued operationsfor the three and six months ended June 30, 2003. HyperFeed currentlyexpects that future revenue will be derived principally from licensing andconsulting fees. In this regard, there is no assurance that the Company will beable to successfully license its ticker plant technologies, software, andmanaged services.

 

HYPRWare revenue decreased 29.5% to $0.2 million for the six monthsended June 30, 2004 compared with $0.3 million for the six months endedJune 30, 2003. For the three months ended June 30, 2004, HYPRWarerevenue decreased 31.2% to $0.1 million compared with $0.2 million for thethree months ended June 30, 2003. HYPRWare derives revenue from royaltiesrelated to license fees for customers it referred to Townsend prior toDecember 31, 2002. The decline in HYPRWare service revenue is due to adecrease in royalties from Townsend. All HYPRWare revenue associated with theconsolidated market data feed service contracts sold to IDC and to Money.nethas been included in discontinued operations for the three months endedJune 30, 2003. HyperFeed currently expects that any future revenuerecognized by HYPRWare will be derived exclusively from royalties from thelicensing agreement with Townsend.

 

11

----

 

**Direct Costs ofRevenue**

 

Total direct costs of revenue increased 36.2% to $0.9 million for thesix months ended June 30, 2004 compared with $0.7 million for the sixmonths ended June 30, 2003. For the three months ended June 30, 2004,total direct costs of revenue increased 34.8% to $0.5 million compared with$0.3 million for the three months ended June 30, 2003. The principalcomponent of this increase was software development labor costs related todevelopment of customer specific software. Amortization of software developmentcosts remained unchanged at $0.7 million for the six months ended June 30,2004 and 2003 and at $0.3 million for the three months ended June 30, 2004and 2003. There are no direct costs of revenue related to HYPRWare servicerevenue as such amounts consist solely of royalty income. Gross marginincreased to $1.2 million for the six months ended June 30, 2004 comparedwith a loss of $0.3 million for the six months ended June 30, 2003. Grossmargin increased to $0.9 million for the three months ended June 30, 2004compared with a loss of $0.2 million for the three months ended June 30,2003. Direct costs as a percentage of total revenue decreased to 43.7% for thesix months ended June 30, 2004 compared with 198.3% for the six monthsended June 30, 2003. Direct costs as a percentage of total revenuedecreased to 34.4% for the three months ended June 30, 2004 compared with204.6% for the three months ended June 30, 2003.

 

**Operating Expenses**

 

Total operating expenses increased 84.1% to $5.1 million for the sixmonths ended June 30, 2004 compared with $2.8 million for the six monthsended June 30, 2003. For the three months ended June 30, 2004, totaloperating expenses increased 58.6% to $2.4 million compared with $1.5 millionfor the three months ended June 30, 2003. Increases in sales and marketingcosts and operations costs for the three and six months ended June 30,2004 and an increase in general and administrative expenses for the six monthsended June 30, 2004 were partially offset by decreases in depreciation andamortization for the three and six months ended June 30, 2004 and adecrease in research and development costs for the six months endedJune 30, 2004. Total operating expenses as a percentage of total revenuedecreased to 242.1% for the six months ended June 30, 2004 compared to812.9% for the six months ended June 30, 2003. Total operating expenses asa percentage of total revenue decreased to 178.4% for the three months endedJune 30, 2004 compared to 903.2% for the three months ended June 30,2003.

 

Sales and marketing costs were $1.0 million for the six months endedJune 30, 2004 compared with $0.1 million for the six months endedJune 30, 2003. For the three months ended June 30, 2004, sales andmarketing costs were $0.5 million compared with $0.1 million for the threemonths ended June 30, 2003. All sales costs prior to May 2003 have been reclassifiedas discontinued operations. Beginning in May 2003, the Company recognized salescosts pertaining to HTPX and HBox licensing as operating expenses. Sales costsas a percentage of total revenue were 46.4% for the six months endedJune 30, 2004 compared to 41.9% for the six months ended June 30,2003. Sales costs as a percentage of total revenue were 36.8% for the threemonths ended June 30, 2004 compared to 86.1% for the three months endedJune 30, 2003.

 

General and administrative expenses increased36.4% to $1.7 million for the six months ended June 30, 2004 compared with$1.2 million for the six months ended June 30, 2003. General andadministrative expenses remained unchanged at $0.7 million for the three monthsended June 30, 2004 and 2003. The increase for the six-month period wasprimarily due to expenses of $0.4 million incurred in connection with theseverance agreement entered into with the Company’s former Chief ExecutiveOfficer in the first quarter of 2004. General and administrative expenses as apercentage of total revenue decreased to 79.9% for the six months endedJune 30, 2004 compared to 362.2% for the six months ended June 30,2003. General and administrative expenses as a percentage of total revenuedecreased to 49.8% for the three months ended June 30, 2004 compared to394.8% for the three months ended June 30, 2003.

 

Research and development costs decreased 13.0% to $0.7 million for thesix months ended June 30, 2004 compared with $0.9 million for the sixmonths ended June 30, 2003. Research and development costs remainedunchanged at $0.4 million for the three months ended June 30, 2004 and2003. The decrease for the six-month period resulted from the allocation ofsoftware development labor related to development of customer specific softwareto direct costs of revenue. Research and development costs as a percentage oftotal revenue decreased to 35.3% for the six months ended June 30, 2004compared to 250.6% for the six months ended June 30, 2003. Research anddevelopment costs as a percentage of total revenue decreased to 31.5% for thethree months ended June 30, 2004 compared to 260.4% for the three monthsended June 30, 2003.

 

12

----

 

Operations costs were $1.3 million for the six months ended June 30,2004 and $0.6 million for the three months ended June 30, 2004. Alloperations costs prior to November 2003 have been reclassified asdiscontinued operations. Beginning in November 2003, the Companyrecognized operations costs pertaining to HTPX and HBox as operating expenses.Operations costs as a percentage of total revenue were 60.8% for the six monthsended June 30, 2004 and 45.2% for the three months ended June 30,2004.

 

Depreciation and amortization decreased 23.0% to $0.4 million for thesix months ended June 30, 2004 compared with $0.5 million for the sixmonths ended June 30, 2003. For the three months ended June 30, 2004,depreciation and amortization decreased 25.1% to $0.2 million compared with$0.3 million for the three months ended June 30, 2003. The decreasesprimarily resulted from assets that became fully depreciated during 2003.Depreciation and amortization as a percentage of total revenue decreased to19.7% for the six months ended June 30, 2004 compared to 158.2% for thesix months ended June 30, 2003. Depreciation and amortization as apercentage of total revenue decreased to 15.1% for the three months endedJune 30, 2004 compared to 161.9% for the three months ended June 30,2003.

 

**DiscontinuedOperations**

 

In June 2003, the Company sold theindividual retail investor unit and related assets of its subsidiary,PCQuote.com, Inc., and, in October 2003, the Company sold its remainingconsolidated market data feed business. The Company recorded a net loss fromdiscontinued operations of $0.2 million, net of a tax benefit of $0.1 million,for the six months ended June 30, 2004 compared with net income of $0.9million, net of tax expense of $0.4 million, for the six months endedJune 30, 2003. For the three months ended June 30, 2004, the Companyrecorded a net loss from discontinued operations of $0.1 million, net of a taxbenefit of $0.1 million compared with net income of $0.4 million, net of taxexpense of $0.1 million, for the three months ended June 30, 2003. The netloss for the three and six months ended June 30, 2004 resulted from theincurrence of inbound communications costs associated with the Company’sobligation under a transition services agreement related to the sale of itsconsolidated market data feed business. The Company recorded $0.2 million, netof tax expense of $0.1 million, as a gain on disposition of discontinuedoperations during the first quarter of 2004 related to holdbacks from the saleof the consolidated market data feed business. The Company recorded $0.2 million,net of tax expense of $0.1 million, as a gain on disposition of discontinuedoperations during the second quarter of 2003 related to the sale onJune 2, 2003 of the Company’s individual retail investor unit and relatedassets of its subsidiary, PCQuote.com.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Net cash and cash equivalents of $0.4 millionat June 30, 2004 decreased $4.3 million from $4.7 million atDecember 31, 2003. This decrease was primarily due to the Company’soperating loss, as well as an increase in accounts receivable and a decrease inliabilities related to discontinued operations.

 

Operating activities used net cash of $3.7million for the six months ended June 30, 2004 compared to net cash usedof $0.6 million for the six months ended June 30, 2003. For the six monthsended June 30, 2004, continuing operations used $2.9 million of cashcompared to net cash provided of $23,235 for the six months ended June 30,2003. The increase in accounts receivable for the six months ended June 30,2004 resulted from delayed payment by customers. The increase in unearnedrevenue for the six months ended June 30, 2004 resulted from contractualbilling arrangements with up-front payment terms. For the six months endedJune 30, 2004, discontinued operations used $0.9 million, resulting from areduction in accounts payables, compared to cash used of $0.6 million for thesix months ended June 30, 2003.

 

Investing activities used net cash of $0.8million for the six months ended June 30, 2004 compared to net cash usedof $1.1 million for the six months ended June 30, 2003. During the sixmonths ended June 30, 2004, the Company invested $0.2 million in equipmentand $0.7 million in its developed technology. During the six months endedJune 30, 2003, the Company invested $0.3 million in equipment and $0.6million in its developed technology. Additionally, in connection with the saleon June 2, 2003 of the Company’s individual retail investor unit andrelated assets of its subsidiary, PCQuote.com, Inc., to Money.net, Inc., theCompany issued a $150,000 promissory note due in twelve equal installmentscommencing on July 15, 2003 with an interest rate of 8.0% per annum.

 

Financing activities provided net cash of$0.2 million for the six months ended June 30, 2004 compared to net cashprovided of $1.5 million for the six months ended June 30, 2003, primarilydue to the $1.4 private placement of common stock with our executive officers,individual board members, and the Company’s majority stockholder, PICOHoldings, Inc., completed in May 2003.

 

The Company has an existing line of creditfor $500,000 at prime, secured by the assets of the Company. As ofJune 30, 2004, the Company had borrowings against the line of credit of$200,000.

 

13

----

 

HyperFeed restructured its operations inApril 2004, which included as part of such restructuring a reduction instaff equal to 17% of HyperFeed’s labor costs. This reduction in staff wascompleted in April 2004. The Company recorded approximately $38,000 ofseverance during the second quarter related to the restructuring. Labor andbenefits expenses were reduced by approximately $100,000 per month beginning inMay 2004 as a result of this restructuring. The Company expects to streamlineits inbound communications costs relating to the ticker plant operations, whichthe Company believes will reduce costs by approximately $45,000 per monthbeginning in July 2004.

 

The Company believes its existing capitalresources, including cash and cash equivalents, accounts receivable, and assetsrelated to discontinued operations, cash expected to be received from holdbacksassociated with the sale of its consolidated market data feed business,available line of credit, and ability to raise capital, if necessary, will besufficient to fund its operations over the next twelve months.

 

Although the Company has taken actions, andintends to take further actions, to reduce its costs, there can be noassurances that such reductions in costs will ensure that the Company has sufficientworking capital to fund its operations over the next twelve months if one ormore anticipated sources of working capital are not realized by the Company. Inparticular, the Company’s ability to fund its operations over the next twelvemonths will be dependent, among other things, on its ability to convertaccounts receivable and assets related to discontinued operations into cash, onthe receipt of holdbacks associated with the sale of our consolidated marketdata feed business, and on its ability to raise capital. There can be noassurances that the Company will realize capital from any of these sources.

 

The Company continues to explore multiplealternatives that may be available for the purpose of enhancing stockholdervalue, including a merger, a spin-off or sale of part of its business, astrategic relationship or joint venture with another technology or financialservices firm and equity financing.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations discusses the Company’sconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States of America. Thepreparation of these financial statements requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities andthe disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenue and expenses duringthe reporting period.

 

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

 

**Revenue Recognition**:  TheCompany principally derives revenue from licensing technology and providingmanagement and maintenance services of HTPX and HBox software, ticker planttechnologies, and managed services. Additionally, the Company derives revenuefrom the development of customized software. Revenue is recognized (1) ratablyover the term of the agreement for HTPX and HBox and (2) based on theapplication of contract accounting for the development of customized software.

 

The Company applies the provisions ofStatement of Position 97-2, “Software Revenue Recognition,” as amended, whichspecifies the following four criteria that must be met prior to recognizingrevenue: (1) persuasive evidence of the existence of an arrangement, (2)delivery, (3) fixed or determinable fee, and (4) probable collection. Inaddition, revenue earned on software arrangements involving multiple elementsis allocated to each element based on the relative fair value of the elements.When applicable, 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 should be recognized asrevenue when the sale is effected. If the fee is not considered fixed anddeterminable, it should be recognized as revenue as payments from customersbecome due. Revenue allocated to post contract customer support is recognizedratably over the term of the support and revenue allocated to service elements(such as training) is recognized as the services are performed.

 

14

----

 

The use of contract accounting inherentlyincludes the use of estimates of progress toward completion. Such estimates aresubject to periodic revisions and, as a result, the financial statements couldbe materially impacted.

 

On October 31, 2003, the Company soldits consolidated market data feed business. Revenue recognized prior toOctober 31, 2003, related to the assets sold and included in discontinuedoperations was principally derived from service contracts for the provision ofmarket data only and service contracts for the provision of market datatogether with analytical software. HyperFeed primarily serviced thebusiness-to-business marketplace. Revenue from service contracts was recognizedratably over the contract term as the contracted services were rendered.

 

On June 2, 2003, the Company soldcertain assets of HYPRWare, consisting of its retail investor unit and Website. Revenue recognized prior to June 2, 2003 related to the HYPRWareassets sold was primarily derived from analytics service, powered by theHyperFeed data feed, for Internet users in the consumer marketplace and fromthe sale of advertising on its Web site. Revenue from the sale of advertisingwas recognized as the advertising was displayed on the Web site.

 

HYPRWare derives revenue from royaltiesrelated to license fees for customers it referred to Townsend prior toDecember 31, 2002.

 

**Allowance ForDoubtful Accounts**:  The Company maintainsallowances for doubtful accounts for estimated losses resulting from theinability of its customers to make payments for services or debtors to satisfynote receivable obligations. The Company analyzes accounts receivable, customercredit-worthiness, current economic trends and changes in its customer paymentterms when evaluating the adequacy of the allowance for doubtful accounts andnotes receivable. If the financial condition of the Company’s customers ordebtors deteriorates, resulting in an impairment of their ability to makepayments, additional allowances may be required.

 

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

 

**ITEM 3****. Quantitative and Qualitative Disclosures About Market Risk**

 

At June 30, 2004, the Company had excesscash invested in a money market account and a short-term certificate ofdeposit. The Company does not expect any material loss, if at all, on theseinvestments. The Company had $200,000 drawn on its line of credit atJune 30, 2004.

 

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

 

(a)          *Disclosure Controls andProcedures.* The Company’smanagement, with the participation of the Company’s Chief Executive Officer andChief Financial Officer, has evaluated the effectiveness of the Company’sdisclosure controls and procedures (as such term is defined in Rule 15d-15(e)under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) asof the end of the period covered by this quarterly report. Based on suchevaluation, the Company’s Chief Executive Officer and Chief Financial Officerhave concluded that, as of the end of such period, the Company’s disclosurecontrols and 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 OverFinancial 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 the Exchange Act)during the fiscal quarter to which this report relates that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

15

----

 

**Part II**

 

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

 

The annual meeting of the stockholders ofHyperFeed Technologies, Inc. was held on May 14, 2004. The following proposalswere submitted, considered and voted upon, as indicated below, by thestockholders.

 

1.To elect five members to our Board of Directors to serve until the 2005 AnnualMeeting, or until their successors are elected and shall have qualified.

 

| **Director**        | ** ** | **Shares For** | ** ** | **Shares Withheld** |
|---------------------|------------|----------------|------------|---------------------|
| Louis J. Morgan     |       | 2,566,597      |       | 86,351              |
| Ronald Langley      |       | 2,581,387      |       | 71,561              |
| John R. Hart        |       | 2,590,509      |       | 62,439              |
| Kenneth J. Slepicka |       | 2,590,989      |       | 61,959              |
| John L. Borling     |       | 2,599,749      |       | 53,199              |

 

2. To approve and ratify the appointment ofKPMG LLP as our independent auditors for 2004.

 

| **Shares For** | ** ** | **Shares Against** | ** ** | **Abstentions** |
|----------------|------------|--------------------|------------|-----------------|
| 2,631,332      |       | 18,911             |       | 2,705           |

 

No other matters were submitted for vote.

 

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

 

(a) Exhibits

 

Exhibit 31.1 - Certification of the ChiefExecutive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the ExchangeAct.

 

Exhibit 31.2 - Certification of the ChiefFinancial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the ExchangeAct.

 

Exhibit 32 – Certification Pursuant toSection 1350 of Chapter 63 of Title 18 of the United States Code.

 

(b) Reports on Form 8-K

 

A Form 8-K was filed on May 14, 2004 attachinga copy of the press release reporting the first quarter 2004 results.

 

16

----

 

SIGNATURES

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
| HYPERFEED TECHNOLOGIES, INC. |
|------------------------------|
|                         |   |
|                         |   |
| Date:                        | August 5, 2004 |
|                         |   |
| By:                          | /s/ Paul Pluschkell |   |
|                         | Paul Pluschkell |
|                         | President and Chief Executive  Officer |
|                         |   |
| By:                          | /s/ Randall J. Frapart |   |
|                         | Randall J. Frapart |
|                         | Chief Financial Officer and  Principal Accounting Officer |

 

17

----