HMNA Helios & Matheson North America Inc. (MM)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended: June 30, 2008

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: 0-22945

HELIOS & MATHESON NORTH AMERICA INC.

(Exact Name of Registrant as Specified in Its Charter)

New York		13-3169913
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
200 Park Avenue South
New York, New York 10003		(212) 979-8228
(Address of Principal Executive Offices)		(Registrant’s Telephone Number, Including Area Code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter 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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
				(Do not check if a smaller reporting company)

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

As of August 8, 2008, there were 2,396,707 shares of common stock, with $.01 par value per share, outstanding.

 

 

HELIOS & MATHESON NORTH AMERICA INC.

INDEX

PART I. FINANCIAL INFORMATION			3
Item 1. Financial Statements			3
Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007			3
Consolidated Statement of Operations for the three and six months ended June 30, 2008 and 2007			4
Consolidated Statement of Cash Flows for the six months ended June 30, 2008 and 2007			5
Notes to Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			10
Item 3. Quantitative and Qualitative Disclosures about Market Risk			16
Item 4T. Controls and Procedures			16
PART II. OTHER INFORMATION			17
Item 1. Legal Proceedings			17
Item 1A. Risk Factors			17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			17
Item 3. Defaults Upon Senior Securities			17
Item 4. Submission of Matters to a Vote of Security Holders			17
Item 5. Other Information			17
Item 6. Exhibits			18
SIGNATURES			19
Exhibit 10.1
Exhibit 31.1
Exhibit 32.1

Part I. Financial Information

Item 1. Financial Statements

HELIOS & MATHESON NORTH AMERICA INC.

CONSOLIDATED BALANCE SHEETS

		June 30,				December 31,
		2008				2007
		(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	1,640,803			$	3,077,655
Accounts receivable- less allowance for doubtful accounts of $199,489 at June 30, 2008, and $221,970 at December 31, 2007			3,360,846				3,479,561
Unbilled receivables			79,960				32,754
Prepaid expenses and other current assets			313,783				279,625
Total current assets			5,395,392				6,869,595
Property and equipment, net			295,709				342,937
Goodwill			1,140,964				1,140,964
Deposits and other assets			149,218				151,350
Total assets		$	6,981,283			$	8,504,846
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued expenses		$	1,624,121			$	1,807,033
Deferred revenue			177,502				178,018
Total current liabilities			1,801,623				1,985,051
Shareholders’ equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized; no shares issued and outstanding as of June 30, 2008, and December 31, 2007			—				—
Common stock, $.01 par value; 30,000,000 shares authorized; 2,396,707 issued and outstanding as of June 30, 2008; 2,396,707 issued and outstanding as of December 31, 2007			23,967				23,967
Paid-in capital			34,795,696				34,758,266
Accumulated other comprehensive (loss)/income — foreign currency translation			(554	)			1,655
Accumulated deficit			(29,639,449	)			(28,264,093	)
Total shareholders’ equity			5,179,660				6,519,795
Total liabilities and shareholders’ equity		$	6,981,283			$	8,504,846

See accompanying notes to consolidated financial statements.

HELIOS & MATHESON NORTH AMERICA INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

		Six Months Ended								Three Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
Revenues		$	9,607,982			$	10,609,764			$	4,835,953			$	4,733,370
Cost of revenues			7,759,236				7,480,251				3,971,752				3,574,608
Gross profit			1,848,746				3,129,513				864,201				1,158,762
Operating expenses:
Selling, general & administrative			3,154,739				3,472,664				1,369,137				1,706,205
Depreciation & amortization			88,953				94,157				44,827				49,246
			3,243,692				3,566,821				1,413,964				1,755,451
Loss from operations			(1,394,946	)			(437,308	)			(549,763	)			(596,689	)
Other income(expense):
Interest income-net			28,590				92,911				9,128				37,992
			28,590				92,911				9,128				37,992
Loss before income taxes			(1,366,356	)			(344,397	)			(540,635	)			(558,697	)
Provision for income taxes			9,000				11,832				4,500				9,000
Net loss			(1,375,356	)			(356,229	)			(545,135	)			(567,697	)
Other comprehensive (loss)/income — foreign currency adjustment			(2,209	)			5,227				(1,353	)			6,214
Comprehensive loss		$	(1,377,565	)		$	(351,002	)		$	(546,488	)		$	(561,483	)
Net loss per share
Basic		$	(0.57	)		$	(0.15	)		$	(0.23	)		$	(0.24	)
Diluted		$	(0.57	)		$	(0.15	)		$	(0.23	)		$	(0.24	)

See accompanying notes to consolidated financial statements.

HELIOS & MATHESON NORTH AMERICA INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Six Months Ended June 30,
		2008				2007
		(unaudited)				(unaudited)
Cash flows from operating activities:
Net loss		$	(1,375,356	)		$	(356,229	)
Adjustments to reconcile net loss to net cash used in operating activities, net of acquired assets:
Depreciation and amortization			88,953				94,157
Provision for doubtful accounts			30,000				13,000
Stock based compensation			37,430				60,738
Amortization of deferred financing cost			3,882				6,000
Write down of investment			—				87,059
Reduction of capital lease obligation			—				(119,758	)
Changes in operating assets and liabilities:
Accounts receivable			88,715				272,269
Unbilled receivables			(47,206	)			223,768
Prepaid expenses and other current assets			(34,158	)			(47,168	)
Deposits			(1,750	)			(44,441	)
Accounts payable and accrued expenses			(182,912	)			(389,211	)
Deferred revenue			(516	)			(247,967	)
Net cash used in operating activities			(1,392,918	)			(447,783	)
Cash flows from investing activities:
Purchase of property and equipment			(41,725	)			(53,642	)
Net cash used in investing activities			(41,725	)			(53,642	)
Cash flows from financing activities:
Proceeds from the exercise of stock options			—				10,931
Net cash provided by financing activities			—				10,931
Effect of foreign currency exchange rate changes on cash and cash equivalents			(2,209	)			5,227
Net decrease in cash and cash equivalents			(1,436,852	)			(485,267	)
Cash and cash equivalents at beginning of period			3,077,655				3,849,056
Cash and cash equivalents at end of period		$	1,640,803			$	3,363,789
Supplemental disclosure of cash flow information:
Cash paid during the period for interest		$	—			$	—
Cash paid during the period for income taxes — net of refunds		$	4,932			$	152,610

See accompanying notes to consolidated financial statements.

HELIOS & MATHESON NORTH AMERICA INC.

Notes to Consolidated Financial Statements
(Unaudited)

1) GENERAL:

These financial statements should be read in conjunction with the financial statements contained in Helios & Matheson North America Inc.’s (“Helios & Matheson” or the “Company”) Form 10-K for the year ended December 31, 2007 filed with the Securities and Exchange Commission (“SEC”) and the accompanying financial statements and related notes thereto. The accounting policies used in preparing these financial statements are the same as those described in the Company’s Form 10-K for the year ended December 31, 2007.

2) CONTROLLED COMPANY:

The Board of Directors has determined that Helios & Matheson is a “Controlled Company” for purposes of the NASDAQ listing requirements. A “Controlled Company” is a company of which more than 50% of the voting power is held by an individual, group or another company. Certain NASDAQ requirements do not apply to a “Controlled Company”, including requirements that: (i) a majority of its Board of Directors must be comprised of “independent” directors as defined in NASDAQ’s rules; and (ii) the compensation of officers and the nomination of directors be determined in accordance with specific rules, generally requiring determinations by committees comprised solely of independent directors or in meetings at which only the independent directors are present. The Board of Directors has determined that Helios & Matheson is a “Controlled Company” based on the fact that Helios & Matheson Information Technology, Ltd. (“Helios & Matheson Parent”) holds more than 50% of the voting power of the Company.

3) INTERIM FINANCIAL STATEMENTS:

In the opinion of management, the accompanying unaudited consolidated financial statements contain all the adjustments (consisting only of normal recurring accruals) necessary to present fairly the consolidated financial position as of June 30, 2008, the consolidated results of operations for the three and six month periods ended June 30, 2008 and 2007 and cash flows for the six month period ended June 30, 2008 and 2007.

The consolidated balance sheet at December 31, 2007 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. For further information, refer to the audited consolidated financial statements and footnotes thereto included in the Form 10-K filed by the Company for the year ended December 31, 2007.

The consolidated results of operations for the six month period ended June 30, 2008 are not necessarily indicative of the results to be expected for any other interim period or for the full year.

For the twelve months ended December 31, 2007 and the three and six month periods ended June 30, 2008, the Company reported operating losses of approximately ($1.1) million, ($550,000) and ($1.4) million, respectively. While the Company continues to focus on revenue growth and cost reductions, including but not limited to outsourcing and off-shoring solutions, to improve its financial condition, there can be no assurance that the Company will be profitable in future periods.

In management’s opinion, cash flows from operations and borrowing capacity combined with cash on hand will provide adequate flexibility for funding the Company’s working capital obligations for the next twelve months.

4) STOCK BASED COMPENSATION:

The Company has a stock based compensation plan, which is described as follows:

The Company’s Stock Option Plan (the “Plan”) provides for the grant of stock options that are either “incentive” or “non-qualified” for federal income tax purposes. The Plan provides for the issuance of a maximum of 460,000 shares of common stock (subject to adjustment pursuant to customary anti-dilution provisions). Stock options vest over a period between one to four years.

The exercise price per share of a stock option is established by the Compensation Committee of the Board of Directors in its discretion but may not be less than the fair market value of a share of common stock as of the date of grant. The aggregate fair market value of the shares of common stock with respect to which “incentive” stock options first become exercisable by an individual to whom an “incentive” stock option is granted during any calendar year may not exceed $100,000.

Stock options, subject to certain restrictions, may be exercisable any time after full vesting for a period not to exceed ten years from the date of grant. Such period is to be established by the Company in its discretion on the date of grant. Stock options terminate in connection with the termination of employment.

Effective January 1, 2006, the Company adopted the modified prospective application method as specified by Financial Accounting Standards Board Statement 123 (revised 2004), Share Based Payment (Statement 123 (R)), whereby compensation cost for the portion of awards for which the requisite service has not yet been rendered that are outstanding as of the adoption date will be recognized over the remaining service period. The compensation cost for that portion of awards is based on the grant-date fair value of those awards as calculated using pro forma disclosures under Statement 123, as originally issued. All new awards and awards that are modified, repurchased, or cancelled after the adoption date will be accounted for under the provisions of Statement 123 (R). For the three month period ended June 30, 2008 and 2007, the Company recorded stock based compensation expense under the provisions of Statement 123 (R) of $16,339 and $30,327, respectively.

Information with respect to options under the Company’s Plan is as follows:

						Weighted
		Number of				Average
		Shares				Exercise Price
Balance — December 31, 2007			129,000			$	4.96
Granted during 1st Qtr 2008			—				—
Exercised during 1st Qtr 2008			—				—
Forfeited during 1st Qtr 2008			—				—
Balance — March 31, 2008			129,000			$	4.96
Granted during 2nd Qtr 2008			—				—
Exercised during 2nd Qtr 2008			—				—
Forfeited during 2nd Qtr 2008			5,000			$	5.90
Balance — June 30, 2008			124,000			$	4.92

The following table summarizes the status of the stock options outstanding and exercisable at June 30, 2008:

Stock Options Outstanding
																Number of
				Weighted								Weighted-				Stock
Exercise Price				Average				Number of				Remaining				Options
Range				Exercise Price				Options				Contractual Life				Exercisable
$0.00 – $4.80				$	2.760				61,000			2.5 years					57,250
$4.80 – $9.60				$	5.873				55,500			3.7 years					36,625
$14.40 – $19.20				$	15.504				7,500			1.4 years					7,500
									124,000								101,375

At June 30, 2008, 101,375 stock options were exercisable with a weighted average exercise price of $4.77.

5) NET INCOME/(LOSS) PER SHARE :

The following table sets forth the computation of basic and diluted net loss per share for the six months and the three months ended June 30, 2008 and 2007.

		Six Months Ended								Three Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Numerator for basic net loss per share
Net loss		$	(1,375,356	)		$	(356,229	)		$	(545,135	)		$	(567,697	)
Net loss available to common stockholders		$	(1,375,356	)		$	(356,229	)		$	(545,135	)		$	(567,697	)
Numerator for diluted net loss per share
Net loss available to common stockholders & assumed conversion		$	(1,375,356	)		$	(356,229	)		$	(545,135	)		$	(567,697	)
Denominator:
Denominator for basic loss per share — weighted-average shares			2,396,707				2,386,538				2,396,707				2,388,560
Effect of dilutive securities:
Employee stock options			—				—				—				—
Denominator for diluted loss per share — adjusted weighted-average shares			2,396,707				2,386,538				2,396,707				2,388,560
Basic earnings loss per share:
Net loss		$	(0.57	)		$	(0.15	)		$	(0.23	)		$	(0.24	)
Diluted earnings loss per share:
Net loss		$	(0.57	)		$	(0.15	)		$	(0.23	)		$	(0.24	)

During the six and three month periods ended June 30, 2008 and June 30, 2007, all options and warrants outstanding were excluded from the computation of net loss per share because the effect would have been anti-dilutive.

6) CONCENTRATION OF CREDIT RISK:

The revenues of three customers represented approximately 17%, 15% and 11% of the revenues for the six month period ended June 30, 2008. The revenues of three customers represented approximately 25%, 18% and 10% of revenues for the same period in 2007. No other customer represented greater than 10% of the Company’s revenues for such periods.

7) CREDIT ARRANGEMENT:

The Company has entered into a Restated and Amended Loan and Security Agreement (“the Loan Agreement”) with Keltic Financial Partners, LP, (“Keltic”) which is effective as of June 27, 2007 and expires June 27, 2009. Under the Loan Agreement, the Company has a line of credit up to $1.0 million based on the Company’s eligible accounts receivable balances at an interest rate that varies based on the extent of usage in any given calendar year from a minimum of prime to a maximum of prime plus 0.75% assuming no event of default under the Loan Agreement. Net availability at June 30, 2008 was approximately $1.0 million. The Loan Agreement has certain financial covenants that shall apply only if the Company has any outstanding obligations to Keltic including borrowing under the facility. The Company had no outstanding balance at June 30, 2008, or at December 31, 2007, under the Loan Agreement.

8) CONTRACTUAL OBLIGATIONS AND COMMITMENTS:

The Company has the following commitments as of June 30, 2008: long term obligations of certain employment contracts and operating lease obligations. The Company has two operating leases: one for its corporate headquarters located in New York and the other for its branch office in New Jersey.

The Company’s commitments at June 30, 2008, are comprised of the following:

		Payments Due by Period
						Less Than 1												More Than
Contractual Obligations		Total				Year				1 – 3 Years				3 – 5 Years				5 Years
Long Term Obligations
Employment Contracts (1)			437,000				218,500				218,500				—				—
Operating Leases
Rent (2)			1,447,842				208,399				789,406				450,037				—
Total		$	1,884,842			$	426,899			$	1,007,906			$	450,037			$	—

As of June 30, 2008, the Company does not have any “Off Balance Sheet Arrangements”.

9) PROVISION FOR INCOME TAXES

The provision for income taxes as reflected in the consolidated statements of operations varies from the expected statutory rate primarily due to a provision for minimum state taxes and the recording of additional valuation allowance against deferred tax assets. Internal Revenue Code Section 382 (“Code”) places a limitation on the utilization of Federal net operating loss and other credit carry-forwards when an ownership change, as defined by the tax law, occurs. Generally, this occurs when a greater than 50 percentage point change in ownership occurs. On September 5, 2006, Helios & Matheson Parent acquired a greater than 50 percent ownership of the Company. Accordingly, the actual utilization of the net operating loss carry-forwards for tax purposes are limited annually under Code to a percentage (currently about four and a half percent) of the fair market value of the Company at the date of this ownership change. The Company did not generate taxable income during the six months ended June 30, 2008. The Company maintains a valuation allowance against additional deferred tax assets arising from net operating loss carry-forwards since, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of significant factors affecting the Company’s operating results, liquidity and capital resources should be read in conjunction with the accompanying financial statements and related notes.

Statements included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this document that do not relate to present or historical conditions are “forward-looking statements” within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and in Section 21E of the Securities Exchange Act of 1934, as amended. Additional oral or written forward-looking statements may be made by the Company from time to time, and such statements may be included in documents that are filed with the SEC. Such forward-looking statements involve risk and uncertainties that could cause results or outcomes to differ materially from those expressed in such forward-looking statements. Forward-looking statements may include, without limitation, statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Words such as “believes,” “forecasts,” “intends,” “possible,” “expects,” “estimates,” “anticipates,” or “plans” and similar expressions are intended to identify forward-looking statements. The Company cautions readers that results predicted by forward-looking statements, including, without limitation, those relating to the Company’s future business prospects, revenues, working capital, liquidity, capital needs, interest costs, and income are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements. The important factors on which such statements are based, include but are not limited to, assumptions concerning the anticipated growth of the information technology industry, the continued needs of current and prospective customers for the Company’s services, the availability of qualified professional staff, and price and wage inflation.

Overview

Since 1983, Helios & Matheson has provided IT services and solutions to Fortune 1000 companies and other large organizations. In 1997, Helios & Matheson became a public company headquartered in New York, New York. In addition, the Company has offices in Clark, New Jersey and Bangalore, India. The Company’s common stock is currently listed on NASDAQ Capital Market ^CM under the symbol “HMNA”. Prior to January 30, 2007, the Company’s name was The A Consulting Team, Inc.

Helios & Matheson provides a wide range of high quality, software and consulting solutions, through an integrated suite of market driven Service Lines in the areas of Application Value Management, Application Development and Integration, Independent Validation, Infrastructure, Information Management and IT Advisory Services for Fortune 1000 companies and other large organizations. These services account for over 90% of the Company’s revenues. The Company’s solutions are based on an understanding of each client’s enterprise model. The Company’s accumulated knowledge is applied to new projects such as planning, designing and implementing enterprise-wide information systems, database management services, performance optimization, migrations and conversions, strategic sourcing, outsourcing and systems integration.

Helios & Matheson delivers its IT solutions through Solution Teams composed of Client Partners, Solution Partners, Project Managers, and Technical Specialists. These professionals possess the industry experience, project management skills and technical expertise to identify and effectively address a particular client’s needs in relation to its business objectives. Helios & Matheson’s focus on providing highly qualified IT professionals allows the Company to identify additional areas of the client’s business which could benefit from the Company’s IT solutions, thereby facilitating the cross-marketing of multiple Company services. The Company keeps its Solution Teams at the forefront of emerging technologies and business trends through close interaction with Helios & Matheson research personnel who identify innovative IT trends, tools and technologies and market driven solutions. As a result, management believes that Helios & Matheson Solution Teams are prepared to anticipate client needs, develop appropriate strategies and deliver comprehensive IT services, thereby allowing the Company to deliver the highest quality IT services in a timely fashion.

Helios & Matheson markets and distributes a number of software products developed by independent software developers. The Company believes its relationships with over 60 software clients throughout the country provide opportunities for the delivery of additional Company consulting and training services. The software products offered by Helios & Matheson are marketed primarily through trade shows, direct mail, telemarketing, client presentations and referrals. Revenue from the sale of software is ancillary to the Company’s total revenues, but in the future the Company hopes to use such sales as a means of introducing itself to potential clients.

The Company is dedicated to providing cost efficient competitive services to its clients through its Flexible Delivery Model which allows for dynamically configurable Onsite, Onshore or Offshore service delivery based on the needs of the clients. This capability is made possible through Helios and Matheson Global Services Private Limited (‘HMGS”), the Company’s wholly-owned subsidiary operating in Bangalore, India. The Company’s ability to blend more offshore work into its pricing should allow it to be more price competitive.

On April 7, 2008, the Executive Committee of the Board of Directors established the Transformation Committee, the purpose of which is to work with management and effect the transformation of the Company to one that is capable of delivering a higher percentage of its services through outsourcing and offshoring solutions. In this regard, the Company will explore the appropriateness of moving functions such as recruiting, solutions delivery and finance and administration offshore in an effort to become more price competitive while maintaining high quality services for our clients.

Rapid technological advances and the widespread acceptance and use of the Internet as a driving force in commerce, accelerated the growth of the IT industry. These advances, including more powerful and less expensive computer technology, fueled the transition from predominantly centralized mainframe computer systems to open and distributed computing environments and the advent of capabilities such as relational databases, imaging, software development productivity tools, and web-enabled software. These advances expanded the benefits that users can derive from computer-based information systems and improved the price-to-performance ratios of such systems. As a result, an increasing number of companies are employing IT in new ways, often to gain competitive advantages in the marketplace, and IT services have become an essential component of many company’s long-term growth strategies. The same advances that have enhanced the benefits of computer systems rendered the development and implementation of such systems increasingly complex, popularizing the outsourcing of IT development and services to third party IT service providers like the Company. Many companies outsource such work because their internal personnel lack the qualifications for certain projects or they have an insufficient number of internal staff to address all of the projects being undertaken. Outsourcing also enables companies to realize cost efficiencies through reduced personnel costs. Accordingly, organizations turn to external IT services organizations such as Helios & Matheson to develop, support and enhance their internal IT systems.

The Company believes that its business, operating results and financial condition have been harmed by the recent economic downturn. A significant portion of the Company’s major customers are in the financial services industry and have come under considerable pressure as a result of the recent developments in the financial markets. Spending on IT consulting services is largely discretionary, and the Company has experienced a delay in the start of projects from existing customers and extended lead times in closing new projects, both of which have impacted revenue growth through the second quarter of 2008.

Beginning in 2006 and continuing through the fourth quarter of 2007, the Company expanded its sales and recruiting resources in an effort to increase its revenues in both the short and long-term. This effort, however, has been unsuccessful through the second quarter of 2008 as indicated by the general decline in the Company’s consulting revenue.

For the twelve months ended December 31, 2007 and the three and six month periods ended June 30, 2008, the Company reported operating losses of approximately ($1.1) million, ($550,000) and ($1.4) million, respectively. While the Company continues to focus on revenue growth and cost reductions, including but not limited to outsourcing and off-shoring solutions, to improve its financial condition, there can be no assurance that the Company will be profitable in future periods.

For the six months ended June 30, 2008, approximately 68% of the Company’s consulting services revenues were generated from the hourly billing of its consultants’ services to its clients under time and materials engagements, as compared to approximately 65% for the six months ended June 30, 2007, with the remainder generated under fixed-price engagements. The Company has established standard-billing guidelines for consulting services based on the types of services offered. Actual billing rates are established on a project-by-project basis and may vary from the standard guidelines. The Company typically bills its clients for time and materials services on a semi-monthly basis. Arrangements for fixed-price engagements are made on a case-by-case basis. Consulting services revenues generated under time and materials engagements are recognized as those services are provided. Revenues from fixed fee contracts are recorded when work is performed on the basis of the proportionate performance method, which is based on costs incurred to date relative to total estimated costs.

The Company has also generated revenues by selling software licenses. In addition to initial software license fees, the Company also derives revenues from the annual renewal of software licenses. Because future obligations associated with such revenue are insignificant, revenues from the sale of software licenses are recognized upon delivery of the software to a customer. The Company views software sales as ancillary to its core consulting services business. Revenue generated from software sales will vary from period to period.

The Company’s most significant operating cost is its personnel cost, which is included in cost of revenues. As a result, the Company’s operating performance is primarily based upon billing margins (billable hourly rate less the consultant’s hourly cost) and consultant utilization rates (number of days worked by a consultant during a semi-monthly billing cycle divided by the number of billing days in that cycle). Due to a continued decline in consulting revenue and consultant utilization, the Company’s gross margin for the six months ended June 30, 2008 was 19.2% as compared to 29.5% for the six months ended June 30, 2007 which included a significantly higher margin project. Large portions of the Company’s engagements are on a time and materials basis. While most of the Company’s engagements allow for periodic price adjustments to address, among other things, increases in consultant costs, to date clients have been averse to accepting cost increases. In addition, an increasing number of the Company’s clients are outsourcing the management of their time and material engagements to external Vendor Management Organizations (“VMOs”) who are responsible for monitoring the costs of external service providers. The Company has been challenged by the price compression created by the VMOs, as well as, absorbing the costs associated with the VMOs, both of which have “squeezed” gross margin.

Helios & Matheson actively manages its personnel utilization rates by monitoring project requirements and timetables. Helios & Matheson’s utilization rate for the three and six month period ended June 30, 2008, was approximately 76% and 74%, respectively, as compared to 70% and 69% for the three and six month period ended June 30, 2007. As projects are completed, consultants either are re-deployed to new projects at the current client site, to new projects at another client site or are encouraged to participate in Helios & Matheson’s training programs in order to expand their technical skill sets. The Company carefully monitors consultants that are not utilized. While the Company has established guidelines for the amount of non-billing time that it allows before a consultant is terminated, actual terminations vary as circumstances warrant.

On July 19, 2002, the Company acquired all of the common stock of International Object Technology, Inc. (“IOT”). The purchase price of the acquisition exceeded the fair market value of the net assets acquired, resulting in the recording of goodwill currently stated at $1,140,964 on the balance sheet. IOT provided data management and business intelligence solutions, technology consulting and project management services. During the first quarter of 2006, IOT’s operations were fully integrated into Helios & Matheson.

The Company had a minority investment in Methoda Computer Ltd. (“Methoda”), a methodology provider and knowledgebase for IT management and software engineering based in Israel. Repeated attempts by the Company to obtain current financial and operational information relating to this investment were unsuccessful. During the first quarter of 2007, the Company wrote off, to Selling, General and Administrative expenses, its investment in Methoda of $87,000.

The Company acquired a 51% ownership interest in T3 Media as a result of several investments in 1998 and 1999. Due to deterioration in performance and market conditions for T3 Media’s services, the operations of T3 Media ceased in the second quarter of 2001. T3 Media had entered into a series of capital lease obligations, which the Company had guaranteed, to finance its expansion plans, covering leasehold improvements, furniture and computer-related equipment. The balance outstanding under such leases was $291,000 and was included in accounts payable and accrued expenses on the balance sheet as of December 31, 2006. In 2007, the Company reduced this liability ratably over the year, consistent with the decrease in exposure that diminished over time. For the three and six months ended June 30, 2007, the write down was $47,000 and $120,000, respectively, and is reflected in Selling, General and Administrative expenses.

Critical Accounting Policies

The methods, estimates and judgments the Company uses in applying its most critical accounting polices have a significant impact on the results the Company reports in its consolidated financial statements. The Company evaluates its estimates and judgments on an on-going basis. Estimates are based on historical experience and on assumptions that the Company believes to be reasonable under the circumstances. The Company’s experience and assumptions form the basis for its judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what is anticipated and different assumptions or estimates about the future could change reported results. The Company believes the following accounting policies are the most critical to it, in that they are important to the portrayal of its financial statements and they require the most difficult, subjective or complex judgments in the preparation of the consolidated financial statements.

Goodwill and Intangible Assets

Goodwill acquired in a purchase and determined to have an indefinite useful life is not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. If it is determined by the Company that goodwill has been impaired it will be written down at that time.

Revenue Recognition

Consulting revenues are recognized as services are provided. The Company primarily provides consulting services under time and material contracts, whereby revenue is recognized as hours and costs are incurred. Customers for consulting revenues are billed on a weekly, semi-monthly or monthly basis. Revenues from fixed fee contracts are recorded when work is performed on the basis of the proportionate performance method, which is based on costs incurred to date relative to total estimated costs. Any anticipated contract losses are estimated and accrued at the time they become known and estimable. Unbilled accounts receivables represent amounts recognized as revenue based on services performed in advance of customer billings. Revenue from sales of software licenses is recognized upon delivery of the software to a customer because future obligations associated with such revenue are insignificant.

Allowance for Doubtful Accounts

The Company monitors its accounts receivable balances on a monthly basis to ensure that they are collectible. On a quarterly basis, the Company uses its historical experience to accurately determine its accounts receivable reserve. The Company’s allowance for doubtful accounts is an estimate based on specifically identified accounts as well as general reserves. The Company evaluates specific accounts where it has information that the customer may have an inability to meet its financial obligations. In these cases, management uses its judgment, based on the best available facts and circumstances, and records a specific reserve for that customer, against amounts due, to reduce the receivable to the amount that is expected to be collected. These specific reserves are reevaluated and adjusted as additional information is received that impacts the amount reserved. The Company also establishes a general reserve for all customers based on a range of percentages applied to aging categories. These percentages are based on historical collection and write-off experience. If circumstances change, the Company’s estimate of the recoverability of amounts due the Company could be reduced or increased by a material amount. Such a change in estimated recoverability would be accounted for in the period in which the facts that give rise to the change become known.

Valuation of Deferred Tax Assets

Deferred tax assets are reduced by a valuation allowance when, in the opinion of the Company, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company assesses the recoverability of deferred tax assets at least annually based upon the Company’s ability to generate sufficient future taxable income and the availability of effective tax planning strategies.

Stock Based Compensation

Effective January 1, 2006, the Company adopted the modified prospective application method whereby compensation cost for the portion of awards for which the requisite service has not yet been rendered that are outstanding as of the adoption date of Statement 123 (R) will be recognized over the remaining service period. The compensation cost for that portion of awards is based on the grant-date fair value of those awards as calculated for pro forma disclosures under Statement 123, as originally issued. All new awards and awards that are modified, repurchased, or cancelled after the adoption date will be accounted for under the provisions of Statement 123 (R) and recognized as compensation cost over the applicable service period of each award.

Results of Operations

The following table sets forth the percentage of revenues of certain items included in the Company’s Statements of Operations:

		Six Months Ended								Three Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Revenues			100.0	%			100.0	%			100.0	%			100.0	%
Cost of revenues			80.8	%			70.5	%			82.1	%			75.5	%
Gross profit			19.2	%			29.5	%			17.9	%			24.5	%
Operating expenses			33.8	%			33.6	%			29.2	%			37.1	%
Loss from operations			(14.5	)%			(4.1	)%			(11.4	)%			(12.6	)%
Net loss			(14.3	)%			(3.4	)%			(11.3	)%			(12.0	)%

Comparison of The Three Months Ended June 30, 2008 to The Three Months Ended June 30, 2007

Revenues. Revenues for the three months ended June 30, 2008 were $4.8 million compared to $4.7 million for the three months ended June 30, 2007. Consulting revenue has declined due to extended lead times in replacing completed projects as well as a decline in new business from existing customers, many of whom have been adversely affected by the current slow-down of the economy. For the three months ended June 30, 2008, the decline in consulting revenue was offset by an increase in revenue from the sale of software.

Gross Profit. The gross profit for the three months ended June 30, 2008 was $864,000, a decrease of $295,000 from the prior year comparable period. As a percentage of total revenues, gross margin for the three months ended June 30, 2008 was 17.9% compared to 24.5% for the three months ended June 30, 2007. Gross margin has declined primarily as a result of a decrease in higher margin project revenue, increases in costs associated with VMOs and price compression on staffing assignments.

Operating Expenses. Operating expenses are comprised of Selling, General and Administrative (“SG&A”) expenses, and depreciation and amortization. SG&A expenses for the three months ended June 30, 2008 were $1.4 million compared to the 2007 comparable period level of $1.7 million. This decrease is attributed to cost reduction initiatives associated with various selling, general and administrative expenses including, but not limited to, employee compensation resulting from a reduction in sales and administrative resources, sales commission expenses, health insurance, legal fees and other professional fees. Depreciation and amortization expenses decreased $4,000.

Taxes. Taxes decreased approximately $4,000 from $9,000 for the three months ended June 30, 2007 to $5,000 for the three months ended June 30, 2008. The amount recorded during the second quarter of 2008 was comprised solely of a tax provision for minimum State taxes.

Net Loss. As a result of the above, the Company had a net loss of ($545,000) or ($0.23) per basic and diluted share for the three months ended June 30, 2008 compared to a net loss of ($568,000) or ($0.24) per basic and diluted share for the three months ended June 30, 2007.

Comparison of The Six Months Ended June 30, 2008 to The Six Months Ended June 30, 2007

Revenues. Revenues for the six months ended June 30, 2008 were $9.6 million, a $1.0 million decrease from the comparable 2007 period. Consulting revenue has declined due to extended lead times in replacing completed projects as well as a decline in new business from existing customers, many of whom have been adversely affected by the current slow-down of the economy.

Gross Profit. The gross profit for the six months ended June 30, 2008 was approximately $1.8 million, a decrease of $1.3 million from the comparable 2007 period. As a percentage of total revenues, gross margin for the six months ended June 30, 2008 was 19.2% compared to 29.5% for the six months ended June 30, 2007. Gross margin has declined primarily as a result of a decrease in higher margin project revenue, increases in costs associated with VMOs and price compression on staffing assignments.

Operating Expenses. SG&A expenses were $3.2 million for the six months ended June 30, 2008 compared to $3.5 million for the six months ended June 30, 2007. This decrease is attributed to cost reduction initiatives associated with various selling, general and administrative expenses including, but not limited to, employee compensation resulting from a reduction in sales and administrative resources, sales commission expenses, health insurance, legal fees and other professional fees. Depreciation and amortization expenses decreased $5,000.

Taxes. Taxes decreased $3,000 from $12,000 in the six months ended June 30, 2007 to $9,000 in the six months ended June 30, 2008. The amount recorded during the six months ended June 30, 2008 was comprised solely of a tax provision for minimum State taxes.

Net Loss. As a result of the above, the Company had a net loss of ($1.4) million or ($0.57) per basic and diluted share for the six months ended June 30, 2008 compared to a net loss of ($356,000) or ($0.15) per basic and diluted share for the six months ended June 30, 2007.

Liquidity and Capital Resources

The Company’s cash balances were approximately $1.6 million at June 30, 2008 and $3.1 million at December 31, 2007. Net cash used in operating activities for the six months ended June 30, 2008 was approximately $1.4 million compared to net cash used in operating activities of $448,000 for the six months ended June 30, 2007. The increase in net cash used is primarily a result of operating losses incurred for the six months ended June 30, 2008.

The Company had an operating and net loss of approximately ($1.4) million during the six months ended June 30, 2008. During the six months ended June 30, 2007, the Company had an operating loss of ($437,000) and a net loss of ($356,000). While the Company continues to focus on revenue growth and cost reductions, including but not limited to outsourcing and off-shoring solutions, to improve its financial condition, there can be no assurance that the Company will be profitable in future periods.

The Company’s accounts receivable, less allowance for doubtful accounts, at June 30, 2008 and December 31, 2007 were $3.4 million and $3.5 million, respectively, representing 58 and 60 days of sales outstanding, respectively. The accounts receivable at June 30, 2008 and December 31, 2007 included $80,000 and $33,000 of unbilled revenue, respectively. The Company has provided an allowance for doubtful accounts at the end of each of the periods presented. After giving effect to this allowance, the Company does not anticipate any difficulty in collecting amounts due.

Net cash used in investing activities was approximately $42,000 and $54,000 for the six month periods ended June 30, 2008 and 2007, respectively, comprised solely of additions to property and equipment.

Net cash provided by financing activities was $0 and $11,000 for the six months ended June 30, 2008 and 2007, respectively.

The Company has entered into a Restated and Amended Loan and Security Agreement (“the Loan Agreement”) with Keltic Financial Partners, LP, (“Keltic”) which is effective as of June 27, 2007 and expires June 27, 2009. Under the Loan Agreement, the Company has a line of credit up to $1.0 million based on the Company’s eligible accounts receivable balances at an interest rate that varies based on the extent of usage in any given calendar year from a minimum of prime to a maximum of prime plus 0.75% assuming no event of default under the Loan Agreement. Net availability at June 30, 2008, was approximately $1.0 million. The Loan Agreement has certain financial covenants that shall apply only if the Company has any outstanding obligations to Keltic including borrowing under the facility. The Company had no outstanding balance at June 30, 2008, or at December 31, 2007, under the Loan Agreement.

In management’s opinion, cash flows from operations and borrowing capacity combined with cash on hand will provide adequate flexibility for funding the Company’s working capital obligations for the next twelve months.

For the six months ended June 30, 2008, no shares of common stock were issued pursuant to the exercise of options issued under the Company’s stock option plan. No other shares of common stock were issued pursuant to the exercise of options issued under the Company’s stock option plan.

Off Balance Sheet Arrangements

As of June 30, 2008, the Company does not have any “Off Balance Sheet Arrangements”.

Contractual Obligations and Commitments

The Company has the following commitments as of June 30, 2008: long term obligations of certain employment contracts and operating lease obligations. The Company has two operating leases: one for its corporate headquarters located in New York and the other for its branch office in New Jersey. The Company’s commitments at June 30, 2008 are reflected and further detailed in the Contractual Obligation table located in Part I, Item 1, Note 8 of this Form 10-Q.

Recent Accounting Pronouncements

None.

Inflation

The Company has not suffered material adverse affects from inflation in the past. However, a substantial increase in the inflation rate in the future may adversely affect customers’ purchasing decisions, may increase the costs of borrowing or may have an adverse impact on the Company’s margins and overall cost structure.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company has not entered into market risk sensitive transactions required to be disclosed under this item.

Item 4T. Controls and Procedures

Evaluation of disclosure controls and procedures. Sal Quadrino, the Company’s Principal Executive Officer and Principal Financial Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities and Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report, has concluded that its disclosure controls and procedures are effective and designed to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to it by others within these entities.

Management Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statement for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Management assessed our internal control over financial reporting as of December 31, 2007, the end of our last fiscal year. Management based its assessment on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included evaluation of the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. This assessment is supported by testing and monitoring performed by both an external independent third party serving as our internal audit organization and our internal finance department.

Based on our assessment, management has concluded that our internal control over financial reporting was effective as of the end of our last fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. We reviewed the results of management’s assessment with the Audit Committee of our Board of Directors. In addition, on a quarterly basis we evaluate any changes to our internal control over financial reporting to determine if material changes occurred.

The Company’s 2007 Annual Report on Form 10-K did not include an attestation report of Mercadien P.C., Certified Public Accountants, the Company’s registered public accounting firm, regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in the Company’s Annual Report.

Management’s Report on Internal Controls Over Financial Reporting shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

Changes in internal controls. There were no significant changes in the Company’s internal control over financial reporting in connection with the evaluation that occurred during its second fiscal quarter of 2008 that has materially affected or is reasonably likely to materially affect its internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

The Company’s 2007 Annual Report on Form 10-K includes a detailed discussion of risk factors. Additional risks or uncertainties not currently known to the Company or that the Company deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results. The information presented below updates and should be read in conjunction with the risk factors and information disclosed in the Company’s Form 10-K for the year ended December 31, 2007.

Capital Requirements

The Company may be unable to meet its future capital requirements. The Company’s cash balances were approximately $1.6 million at June 30, 2008 as compared to approximately $3.4 million at June 30, 2007. Cash used in operating activities for the six months ended June 30, 2008 was approximately $1.4 million as a result of continued operating losses since the second quarter of 2007. For the twelve months ended December 31, 2007 and the three and six month periods ended June 30, 2008, the Company reported operating losses of approximately ($1.1) million, ($550,000) and ($1.4) million, respectively. While the Company continues to focus on revenue growth and cost reductions, including but not limited to outsourcing and off-shoring solutions, to improve its financial condition, there can be no assurance that the Company will be profitable in future periods. Additionally, while the Company believes that its current allowance for doubtful accounts is adequate, there can be no guarantee that all amounts due will ultimately be collected.

The Company has a line of credit up to $1.0 million with Keltic Financial Partners, LP (“Keltic”) based on the Company’s eligible accounts receivable balances with net availability at June 30, 2008 of approximately $1.0 million. The line of credit, however, may be inadequate to satisfy the Company’s liquidity demands if the downturn in the Company’s business continues, and the Company may require additional financing in the future in order to continue to implement its product and services development, marketing and other corporate programs. The Company, however, may not be able to obtain such financing on acceptable terms or at all. Without additional financing, the Company may be forced to delay, scale back or eliminate some or all of its product and services development, marketing and other corporate programs. Even if the Company is able to obtain additional financing, the terms may contain restrictive covenants that might negatively affect the Company’s shares of common stock, such as limitations on payments of dividends or, in the case of a debt financing, reduced earnings due to interest expenses. Any further issuance of equity securities would likely have a dilutive effect on the holders of the Company’s shares of common stock. The Company’s business, operating results and financial condition may be materially harmed if the Company cannot obtain additional financing.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits

(a) Exhibits

3.1

Restated Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1 to the Form 10-Q for the period ended June 30, 2001, as previously filed with the SEC on August 10, 2001.

3.2.1

Certificate of Amendment of the Certificate of Incorporation of the Registrant dated August 8, 2002 incorporated by reference to Exhibit 3.2 to the Form 10-Q for the period ended June 30, 2001, as previously filed with the SEC on August 14, 2002.

3.2.2

Certificate of Amendment of the Certificate of Incorporation of the Registrant dated November 12, 2002, incorporated by reference to Exhibit 3.2.2 to the Form 10-Q for the period ended September 30, 2002, as previously filed with the SEC on November 14, 2002.

3.2.3

Certificate of Amendment of the Certificate of Incorporation of the Registrant dated January 5, 2004, incorporated by reference to Exhibit 3.2.3 to the Form 8-K dated January 8, 2004, as previously filed with the SEC on January 8, 2004.

3.2.4

Certificate of Amendment of the Certificate of Incorporation of the Registrant dated January 30, 2007, incorporated by reference to Exhibit 3.2.4 to the Form 10-K for the period ended December 31, 2006, as previously filed with the SEC on March 29, 2007.

	3.3		Second Amended and Restated By-Laws of the Registrant, dated June 20, 2007, incorporated by reference to Exhibit 3.3 on Form 8-K, as previously filed with the SEC on June 22, 2007.
	10.1		Amended Quadrino Employment Agreement.

31.1

Certification of Interim Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

32.1

Certification of the Interim Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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 the undersigned, thereunto duly authorized.

EXHIBIT INDEX

10.1

Amended Quadrino Employment Agreement.

31.1

Certification of Interim Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

32.1

Certification of the Interim Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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