MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The
following discussion of our financial condition and results of operations
should
be read in conjunction with the financial statements and the related notes
included elsewhere in this Form 10-QSB and the financial statements and related
notes and Management's Discussion and Analysis of Financial Condition and
Results of Operations included in our annual report on Form 10-KSB for the
year
ended June 30, 2007 filed with the Securities and Exchange Commission on
September 24, 2007. Historical results and percentage relationships among
any
amounts in the interim Financial Statements are not expected to be indicative
of
trends in operating results for any future period.
Forward-looking
Statements
This
Form
10-QSB contains forward-looking statements within the meaning of Section
27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These statements are subject to a variety
of
risks and uncertainties, many of which are beyond our control, which could
cause
actual results to differ materially from those contemplated in these
forward-looking statements. In particular, the risks and uncertainties include
those described in our annual report on Form 10-KSB for the year ended June
30,
2007 and in other periodic Securities and Exchange Commission filings. These
risks and uncertainties include, among other things, the consolidation of
the
Internet news market; competition within our markets; the financial stability
of
our customers; maintaining a secure and reliable news-delivery network;
maintaining relationships with key content providers; attracting and retaining
key personnel; the volatility of our Common Stock price; successful marketing
of
our services to current and new customers; and operating expense
control.
Existing
and prospective investors are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. We undertake
no obligation to update or revise the information contained in this Form
10-QSB,
whether as a result of new information, future events or circumstances or
otherwise.
RESULTS
OF OPERATIONS
Comparison
of the three months ended
September 30
, 2007 to the three months
ended September 30, 2006
Revenues
consist primarily of royalty revenues and fees from the licensing of content
products to information distributors. During the three months ended
September 30, 2007, total revenues were approximately $1,856,000 or
approximately $105,000 (6%) greater than the total revenues for the three
months
ended September 30, 2006. The increase in revenue was due to the
realization of approximately $181,000 of prior year revenue from a customer
as a
result of an internal audit by the customer. Excluding the $181,000,
our revenue base declined by $76,000 (4%) compared to the first quarter of
the
prior year.
During
the three months ended September 30, 2007, we reported net income of
approximately $242,000 compared to net income of approximately $61,000 for
the
three months ended September 30, 2006. Excluding the $181,000
relating to prior year revenue realized and the reversal of accrued expenses
related to a legal settlement of $61,000, our net income decreased by
approximately $61,000.
Our
cost of revenues consists
primarily of content license fees and royalties to information providers,
depreciation expense on our production software, and data communication costs
for the delivery of our products to customers. The cost of revenues
for the three months ended September 30, 2007 was approximately $712,000
or
approximately $50,000 (7%) less than the cost of revenues for the three months
ended September 30, 2006. The decrease in cost was primarily due to
renegotiation of fixed costs associated with certain content providers, and
a
decrease in software amortization expenses.
Gross
profit for the three months ended September 30, 2007 was approximately
$1,144,000 or approximately $155,000 (16%) greater than the gross profit
for the
same period in the prior year. The gross profit as a percentage
of revenue increased for the three months ended September 30, 2007 to
approximately 62% from approximately 56% for the three months ended September
30, 2006. The increase, as noted in the above paragraphs, is due to
the realization of prior year revenue and the negotiation of lower fixed
costs
and the decreased software amortization expenses.
Total
operating expenses for the three months ended September 30, 2007 were
approximately $836,000 representing an approximate $88,000 (10%) decrease
in
operating expenses from the three months ended September 30, 2006. The decrease
in expenses resulted primarily from a reversal of $61,000 of accrued legal
expenses and a decrease in stock-based compensation and depreciation and
amortization expenses.
Technical
operations and support
expenses during the three months ended September 30, 2007 increased
approximately $43,000 (15%) from the three months ended September 30,
2006. The increase is primarily due to an increase in outside
consulting services and an increase in bonuses and fringe benefits
paid.
Sales
and
marketing expenses decreased by approximately $57,000 (32%) for the three
months
ended September 30, 2007 compared to the three months ended September 30,
2006. The decrease is due to a reduction in payroll expense resulting
from decreases in personnel and related commission expenses over the same
period
in the prior year.
General
and administrative expenses
for the three months ended September 30, 2007 decreased approximately $68,000
(16%) over G&A expenses for the comparable quarter of the prior
year. The decrease resulted primarily from a reversal of accrued
expenses related to a legal settlement and a decrease in salary
expense.
Depreciation
and amortization expense for the three months ended September 30, 2007 decreased
approximately $6,000 (29%) from the same period in the prior
year. The decrease was due primarily to older assets becoming fully
depreciated.
Other
expense, net of other income, for the three months ended September 30, 2007
was
approximately $61,000, compared to other income, net of other expenses of
approximately $2,000 for the three months ended September 30,
2006. This change from the prior year was mainly due to realized and
unrealized losses on marketable securities in the period.
FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES
For
the three months ended September
30, 2007, we had operating income of approximately $307,000 and net income
of
approximately $242,000. At September 30, 2007, we had working capital
of approximately $1,155,000, compared to working capital of approximately
$888,000 at June 30, 2007. We had total stockholders’ equity of
approximately $1,355,000 and $1,110,000 at September 30, 2007 and June 30,
2007
respectively. The increase in stockholders’ equity was due primarily
to the net income for the three months ended September 30, 2007.
We
had
cash of approximately $1,102,000 at September 30, 2007, compared to
approximately $581,000 of cash at June 30, 2007. For the three months
ended September 30, 2007, the Company provided approximately $521,000 in
cash,
which was mainly due to the sale of marketable securities and the net income
for
the three month period.
We
did not make any significant
capital expenditures during the three months ended September 30, 2007, compared
to approximately $26,000 for the three months ended September 30,
2006.
The
Company’s future contractual obligations and commitments as of September 30,
2007 are as follows:
|
|
|
Contractual
Obligations
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Total
|
|
|
Operating
Leases
|
|
$
|
165,052
|
|
|
$
|
140,337
|
|
|
$
|
4,656
|
|
|
$
|
4,656
|
|
|
$
|
3,104
|
|
|
$
|
317,805
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
165,052
|
|
|
$
|
140,337
|
|
|
$
|
4,656
|
|
|
$
|
4,656
|
|
|
$
|
3,104
|
|
|
$
|
317,805
|
|
Currently
we are dependent on our cash reserves to fund operations. We have the option
available to use accounts receivable financing through the
bank. Although we recorded a greater net income for the quarter ended
September 30, 2007 than the prior year period, when prior period revenues
are
excluded our revenue base declined compared to the first quarter of the prior
fiscal year. Assuming a continuing erosion of revenue without an
infusion of capital, the Company is at risk of being unable to generate
sufficient liquidity to meet its obligations. The Company utilized
and will utilize its bank financing agreement, should the need arise, to
meet
its liquidity needs. Further corporate consolidation or market
deterioration affecting our customers could impair our ability to generate
such
revenues. No assurance may be given that we will be able to maintain
the revenue base or the profitable operations that may be necessary to achieve
our liquidity needs.
EBITDA,
as defined below, was approximately $331,000 for the three months ended
September 30, 2007 compared to EBITDA of approximately $111,000 for the three
months ended September 30, 2006. The increase in EBITDA during the
three months ended September 30, 2007 compared to the three-month period
in the
prior year is due to the collection and recognition of revenue from prior
periods and the reversal of accrued expense related to a legal settlement
as
discussed earlier.
The
table
below shows the reconciliation from net income to EBITDA (in
thousands);
|
|
|
Three
Months
|
|
|
|
|
Ended
September 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Reconciliation
to EBITDA
:
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
242
|
|
|
$
|
61
|
|
|
Stock
Based Compensation
|
|
|
3
|
|
|
|
12
|
|
|
Depreciation
and Amortization
|
|
|
21
|
|
|
|
35
|
|
|
Interest/Other
(Income) Expense
|
|
|
61
|
|
|
|
(2
|
)
|
|
Income
Taxes
|
|
|
4
|
|
|
|
5
|
|
|
EBITDA
|
|
$
|
331
|
|
|
$
|
111
|
|
EBITDA
consists of earnings before stock-based compensation, interest expense, interest
and other income, unrealized and realized gains (losses) in marketable
securities, income taxes, and depreciation and amortization. EBITDA
does not represent funds available for management's discretionary use and
is not
intended to represent cash flow from operations. EBITDA should also
not be construed as a substitute for operating income or a better measure
of
liquidity than cash flow from operating activities, which are determined
in
accordance with generally accepted accounting principles. EBITDA
excludes components that are significant in understanding and assessing our
results of operations and cash flows. In addition, EBITDA is not a
term defined by U.S. generally accepted accounting principles, and as a result,
our measure of EBITDA might not be comparable to similarly titled measures
used
by other companies.
However,
we believe that EBITDA is relevant and useful information, which is often
reported and widely used by analysts, investors and other interested parties
in
our industry. Accordingly, we are disclosing this information to
permit a more comprehensive analysis of our operating performance, as an
additional meaningful measure of performance and liquidity, and to provide
additional information with respect to our ability to meet future debt service,
capital expenditure and working capital requirements. See the
financial statements and notes thereto contained elsewhere in this report
for
more detailed information.
Item
3.
CONTROLS
AND PROCEDURES
The
Company’s Chief Executive Officer and Principal Accounting Officer have
concluded, based on their evaluation as of the end of the period covered
by this
report, that the Company’s disclosure controls and procedures (as defined in
Securities Exchange Act Rules 13a-15(e) or 15d-15(e)) are effective to ensure
that information required to be disclosed in the reports that the Company
files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Securities
and
Exchange Commission’s rules and forms. There have been no significant
changes during the last fiscal quarter that have materially affected, or
are
reasonably likely to materially affect, the Company’s internal controls over
financial reporting or in other factors that could significantly affect these
controls subsequent to the date of the foregoing evaluation.