NOTES
TO
FINANCIAL STATEMENTS
JUNE
30,
2007
1.
THE
COMPANY
Comtex
News Network, Inc. (the "Company" or "Comtex"), is a leading wholesaler of
electronic real-time news and content to major financial and business
information distributors. Comtex enhances and standardizes news and
other content received from newswire services and publishers in order to provide
editorially superior and technically uniform products to its
customers. The customers then package, integrate and distribute these
products to their end-users. Comtex processes
unique
real-time news stories each
day. Processing includes adding stock ticker symbols, indexing
by keyword and category, and converting the diverse publisher materials and
formats received into XML, the industry standard delivery format.
Consistent
with standard practice in the information aggregation industry, the Company
generally has renewable long-term contractual relationships with those
information providers and information distributors with which it does
business. The Company generates revenues primarily from charges to
distributors for the licensing of enhanced content, including CustomWires,
TopNews products and publishers’ full feeds. Distributor licenses
typically consist of minimum royalty commitments and fixed fees for data
communications and support. Royalties are based upon the customers’ business and
revenue models such that success in their chosen markets generates increasing
revenues for the Company. Fees and royalties from information
distributors comprise the majority of the Company’s revenues. Fees
and royalties due to information providers, along with telecommunications costs
and employee payroll costs, comprise the majority of the Company’s costs and
expenses. The Company operates and reports in one segment,
information services.
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Use
of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Revenue
Recognition
The
Company recognizes revenue in accordance with Staff Accounting Bulletin (SAB)
104,
Revenue Recognition in Financial
Statements
. Information services revenues are recognized as
services are rendered based on contractual terms such as usage, fixed fee,
percentage of distributor revenues or other pricing models. The
Company defers start-up fee revenues and recognizes revenue over the initial
term of contracts for content services. Amounts received in advance
are deferred and recognized over the service period.
Cash
Credit Risk
The
Company maintains cash in bank deposit accounts which, at times, exceed
federally insured limits. The Company has not experienced any losses on these
accounts.
Marketable
Securities
Marketable
securities are bought and held principally for the purpose of maximizing near
term re-sales and are classified as trading securities. Marketable securities
are recorded at fair value, measured by quoted market prices in an active market
with the change in fair value during the period included in
earnings.
Accounts
Receivable
Accounts
receivable are reported at their outstanding unpaid principal balances reduced
by an allowance for doubtful accounts. The Company estimates doubtful accounts
based on historical bad debts, factors related to specific customers’ ability to
pay and current economic trends. The Company writes off accounts receivable
against the allowance when a balance is determined to be
uncollectible.
Research
and Development
The
Company conducts ongoing research and development in the areas of product
enhancement and quality assurance. Such costs are expensed as
incurred. Product development costs for the fiscal years ended June
30, 2007 and 2006 were approximately $285,000 and $193,000, respectively, and
are included in technical operations and support in the statement of
operations.
Advertising
The
Company engages in advertising and promotional activities to promote its
products and services. Advertising costs are expensed as
incurred. Advertising costs were approximately $4,000 for both fiscal
years ended June 30, 2007 and 2006.
Property
and Equipment
Property
and equipment are stated at cost. Maintenance and repairs are charged
to expense as incurred and the cost of renewals and betterments are
capitalized.
Depreciation
and amortization, which includes the amortization of assets under capital
leases, are computed using the straight-line method over the estimated lives
of
the related assets - five years for furniture and fixtures, computer equipment
and software development and three years for purchased
software. Leasehold improvements are amortized using the
straight-line method over the lesser of the lease term or the estimated useful
lives of the related assets.
Software
for Internal Use
The
Company capitalizes certain costs incurred in the development of internal use
software pursuant to the provisions of AICPA Statement of Position No. 98-1
(SOP
98-1),
Accounting for the Costs of Computer Software for Internal
Use
. In accordance with SOP 98-1, the Company capitalizes
internal software development costs incurred during the application
development
stage. Software
development costs incurred prior to or subsequent to the application development
stage are expensed as incurred.
Impairment
of Long-Lived Assets
The
Company evaluates, on a quarterly basis, long-lived assets to be held and used,
including capitalized software, for impairment in accordance with Statement
of
Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment
or Disposal of Long-Lived Assets
. The evaluation is based on
certain impairment indicators, such as the nature of the assets, the future
economic benefit of the assets, any historical or future profitability
measurements, as well as other external market conditions or factors that may
be
present. If these impairment indicators are present or other factors exist
that
indicate that the carrying amount of the asset may not be recoverable, then
an
estimate of the undiscounted value of expected future operating cash flows
is
used to determine whether the asset is recoverable and the amount of any
impairment is measured as the difference between the carrying amount of the
asset and its estimated fair value. The fair value is estimated using valuation
techniques such as market prices for similar assets or discounted future
operating cash flows.
Income
Taxes
The
Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes
. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using the enacted
tax rates in effect for the year in which the differences are expected to
reverse. Deferred tax assets are reduced by a valuation allowance
when the Company cannot make the determination that it is more likely than
not
that some portion or all of the related tax asset will be realized.
Stock-based
Compensation
Prior
to
fiscal year ended June 30, 2006, the Company accounted for stock-based employee
compensation under the provisions of Accounting Principles Board Opinion No.
25,
“Accounting for Stock Issued to Employees” (“APB 25”) and related
interpretations and provided the required pro forma disclosures under Statement
of Financial Accounting Standards No. 123, “Accounting for Stock-Based
Compensation” (“Statement 123”). On December 16, 2004, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 123(R),
Share-Based Payment.
SFAS No. 123(R) addresses the accounting
for share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or
(b) liabilities that are based on the fair value of the enterprise’s equity
instruments or that may be settled by the issuance of such equity instruments.
SFAS No. 123(R) eliminates the ability to account for share-based
compensation transactions using Accounting Principles Board Opinion No. 25
and generally requires that such transactions be accounted for using a
fair-value-based method. Comtex adopted this standard on its effective date,
July 1, 2005.
The
Company accounts for non-employee stock-based awards in which goods or services
are the consideration received for the equity instruments based on the fair
value of the equity instruments issued, in accordance with the Emerging Issues
Task Force (EITF) Issue 96-18,
Accounting for Equity Instruments That Are
Issued To Other Than Employees For Acquiring, or in Conjunction With Selling
Goods or Services.
Risks
and Uncertainties
Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist principally of accounts receivable. The Company
periodically performs credit evaluations of its customers’ financial condition
and generally does not require collateral on accounts receivable. For the fiscal
year ended June 30, 2007, one of the Company’s customers accounted for
approximately 22.4% of gross revenues and as of June 30, 2007 this customer
receivable accounted for 33.7% of gross receivables. For the fiscal
year ended June 30, 2006, two of the Company’s customers accounted for
approximately 40.1% of gross revenues. The Company maintains reserves
on accounts receivable and to date credit losses have not exceeded management’s
expectations.
Earnings
(Loss) per Common Share
Basic
earnings per share ("EPS") is presented in accordance with the provisions of
SFAS No. 128,
Earnings per Share.
Basic EPS excludes
dilution for potentially dilutive securities and is computed by dividing net
income (loss) available to common shareholders by the weighted average number
of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock
were exercised or converted resulting in the issuance of common
stock. For the years ended June 30, 2007 and 2006, diluted EPS is
equal to basic EPS since all potentially dilutive securities are anti-dilutive
for each of the periods presented. Diluted net loss per common share
for the years ended June 30, 2007 and 2006 does not include the effects of
options to purchase approximately 3.25 million and 3.3 million shares of common
stock, respectively, nor does it include approximately 0.9 million shares
of potential common stock in 2006, related to the note payable to AMASYS, on
an
“as if” converted basis.
Fair
Value of Financial Instruments
Accounts
receivable, accounts payable and other accrued expenses and other current assets
and liabilities are carried at amounts which reasonably approximate their fair
values because of the relatively short maturity of those
instruments.
Recent
Accounting Pronouncements
In
June
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes—an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in a
company’s financial statements in accordance with SFAS No. 109, “Accounting for
Income Taxes.” FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 is effective
for
the Company’s fiscal year beginning July 1, 2007. The Company is currently
reviewing this new standard to determine its effects, if any, on results of
operations or financial position.
In
September 2006, the FASB issued Statement No. 157, “
Fair Value
Measurements
” (“SFAS No. 157”). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value and expands fair value
measurement disclosures. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15,
2007. The Company is currently evaluating whether adoption of SFAS
No. 157 will have an impact on the financial statements.
In
September 2006, the Securities and Exchange Commision issued Staff Accounting
Bulletin No. 108, “
Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements
” (“SAB
108”). SAB 108 addresses the diversity in practice in quantifying
financial statement misstatements and establishes an approach that requires
quantification of financial statement misstatements based on the effects of
misstatements on each of the Company’s financial statements and the related
disclosures. SAB 108 is effective for fiscal years ending after
November 15, 2006. The application of SAB 108 did not have any impact
on the Company’s balance sheet, statements of operations, or statements of cash
flows for fiscal 2007.
In
February 2007, the FASB issued Statement No. 159, “
The Fair Value Option for
Financial Assets and Financial Liabilities
” (“SFAS No.
159”). SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. Most of
the provisions of SFAS No. 159 apply only to entities that elect the fair value
option. The Company does not believe the adoption of this standard
will have a material impact on the financial statements. This
standard will become effective for the Company in the first quarter of fiscal
2009.
3.
RELATED
PARTY TRANSACTIONS
Note
Payable to AMASYS
On
December 9, 2003, the Company executed an amendment to the Amended, Consolidated
and Restated 10% Senior Subordinated Secured Note (the “Amended Note”), payable
to AMASYS Corporation ("AMASYS"), (the “Third Amendment”) for the purpose of
reducing the price at which the Amended Note could have been converted into
common stock of the Company. Pursuant to the Third Amendment,
AMASYS agreed to subordinate the Amended Note to senior debt instruments.
AMASYS, at the time was deemed to be an affiliated company by nature of its
stock ownership position and its Chairman and President, C.W. Gilluly, Chairman
of the Company. In consideration for subordination agreements, the
Company agreed to reduce the conversion price stipulated in the Amended Note
from the previously-stated conversion price of $1.20 per share to $0.75 per
share, which price increased by $0.05 every one hundred and eighty (180) days
thereafter.
On
September 26, 2006, AMASYS executed an agreement to redeem from the holders
of
its Preferred Stock, pro rata to their respective ownership interests, 55,209
shares of AMASYS Series A Preferred Stock in exchange for: (a) AMASYS’ entire
interest in the outstanding Amended Note of Comtex in the amount of $856,954;
and (b) 2,153,437 shares of Comtex common stock. As of September 26,
2006 AMASYS transferred all title and interest in the Note to unrelated third
party investors.
On
February 28, 2007, in order to save the Company the continuing costs of
servicing the Note, Comtex entered into a Note Repayment Agreement with the
holders of the Note to settle this Note for a combination of cash and restricted
stock equal to the value of the Note. The total consideration paid
was $650,000 in cash and the issuance of 1,591,953 shares of restricted common
stock of Comtex. In accordance with SFAS No. 84,
Induced
Conversions of Convertible Debt
, the Company recorded a non-cash expense in
the amount of $234,336 for the year ended June 30, 2007. SFAS No. 84
prescribes the method by which value is ascribed to transactions in which the
repayment of debt via the issuance of stock varies from its original
terms.
4.
MARKETABLE
SECURITIES
Marketable
securities consisted of equity positions with a cost of $524,406 and fair value
of $523,303 at June 30, 2007. Realized gains and losses are determined based
on
the specific identification method. Gross realized losses amounted to $5,845
and
unrealized holding losses amounted to $1,103 for the year ended June 30,
2007.
5.
PROPERTY
AND EQUIPMENT
Property
and equipment consisted of
the following at June 30, 2007:
|
Computer
Equipment
|
|
$
|
1,343,670
|
|
|
|
|
|
|
|
|
Furniture
and Fixtures
|
|
|
64,868
|
|
|
|
|
|
|
|
|
Purchased
Software and Software Development
|
|
|
2,524,244
|
|
|
|
|
|
|
|
|
Other
Equipment
|
|
|
8,464
|
|
|
|
|
|
3,941,246
|
|
|
Less
Accumulated Depreciation and Amortization
|
|
|
(3,762,488
|
)
|
|
|
|
|
|
|
|
Property
and Equipment, Net
|
|
$
|
178,758
|
|
6.
AMOUNT
DUE UNDER BANK FINANCING AGREEMENT
In
December 2003, the Company entered into an Accounts Receivable Purchase
Agreement with a bank (the “Financing Agreement”), which provides for a
revolving line of credit of up to $1 million collateralized by the Company’s
accounts receivable. At June 30, 2007, no amount was due to the bank
for advances under the Financing Agreement.
7.
INCOME
TAXES
Income
taxes included in the Statements of Operations consist principally of state
income taxes and local franchise taxes. The tax provision differs
from the amounts computed using the statutory federal income tax rate as
follows:
|
|
|
2007
|
|
|
2006
|
|
|
Provision
at statutory federal income tax rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
Provision -
state income tax
|
|
|
4.0
|
%
|
|
|
4.0
|
%
|
|
Permanent
items
|
|
|
(86.7
|
%)
|
|
|
1.2
|
%
|
|
Other
adjustments
|
|
|
(15.5
|
%)
|
|
|
(5.1
|
%)
|
|
Change
in valuation allowance
|
|
|
58.0
|
%
|
|
|
(31.2
|
%)
|
|
Effective
income tax rate
|
|
|
(6.2
|
%)
|
|
|
2.9
|
%
|
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting and income
tax purposes.
Significant
components of the
deferred tax assets and liabilities as of June 30, 2007, were as
follows:
|
Deferred
tax assets:
|
|
|
|
|
Amortization
|
|
|
1,537
|
|
|
Depreciation
|
|
|
220,197
|
|
|
Net
operating loss carryforwards
|
|
|
1,394,161
|
|
|
Allowance
for bad debts
|
|
|
43,851
|
|
|
Options
to executives
|
|
|
310,298
|
|
|
Accruals
|
|
|
87,800
|
|
|
AMT
credit carryforwards
|
|
|
6,532
|
|
|
Capital
loss carryforwards
|
|
|
2,640
|
|
|
Total
deferred tax assets
|
|
|
2,067,016
|
|
|
Less: Valuation
allowance
|
|
|
(2,067,016
|
)
|
|
|
|
|
|
|
|
Net
deferred tax asset (liability)
|
|
$
|
0
|
|
The
Company has a net operating loss (“NOL”) carryforward available to offset future
taxable income of approximately $3,669,000 as of June 30, 2007. The
net change in valuation allowance during 2006 was a decrease of approximately
$63,000. The NOL’s expire in the years 2021 through 2024. Utilization
of these net operating losses may be subject to limitations in the event of
significant changes in stock ownership of the Company.
In
assessing the realizability of its net deferred tax assets, management considers
whether it is more likely than not that some portion or all of the net deferred
tax assets are realizable. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. As of June 30, 2007, the Company provided
a full valuation allowance of approximately $2,067,000 against its net deferred
tax assets.
8.
STOCK
OPTION
PLANS
The
Company’s 2003 Incentive Stock Plan (the “2003 Plan”) and 1995 Stock Option Plan
(the "1995 Plan") provide for both incentive stock options within the meaning
of
Section 422 of the Internal Revenue Code of 1986, as amended, and non-qualified
stock options to purchase shares by key employees, consultants and directors
of
the Company. The 1995 Plan expired on October 12, 2005 and the
Company will no longer grant options under its provisions. At this
time, the Company has not replaced the 1995 Plan and does not intend to do
so. The exercise price of an incentive stock option is required to be
at least equal to 100% of the fair market value of the Company’s common stock on
the date of grant (110% of the fair market value in the case of options granted
to employees who are 10% shareholders). The exercise price of a
non-qualified stock option is required to be not less than the par value, nor
greater than the fair market value, of a share of the Company’s common stock on
the date of the grant. The term of an incentive or non-qualified stock option
may not exceed ten years (five years in the case of an incentive stock option
granted to a 10% stockholder), and options generally vest within three years
of
issuance.
Effective
July 1, 2005, the Company adopted Statement 123(R), which requires the
measurement and recognition of compensation expense for all stock-based payments
made to employees, including employee stock option, performance share,
performance unit, restricted stock and restricted unit awards based on estimated
fair value. We previously applied the provisions of Accounting Principles Board
Opinion, or APB, No. 25, “Accounting for Stock Issued to Employees” (“APB 25”)
and related interpretations and provided the required pro forma disclosures
under Statement of Financial Accounting Standard No. 123, “Accounting for
Stock-Based Compensation” (“Statement 123”).
The
Company is using the modified prospective transition method. Under this method,
compensation cost recognized for the fiscal years ended June 30, 2007 and 2006
includes: (a) compensation costs for all share based payments granted prior
to,
but not yet vested as of July 1, 2005, based on grant-date fair value estimated
in accordance with the original provisions of Statement 123, and (b)
compensation cost for all share-based payments granted subsequent to July 1,
2005, based on the grant-date fair value estimated in accordance with the
provisions of 123(R). Results for prior periods have not been
restated. As a result of adopting Statement 123(R) on July 1, 2005,
the Company’s income before income taxes and net income for the fiscal years
ended June 30, 2007 and 2006 was $44,084 and $772,488, respectively, lower
than
if it had continued to account for share-based compensation under APB Opinion
25. Basic earnings per share would have been $0.00 and $0.02 for the
fiscal years ended June 30, 2007 and 2006, had the Company not
adopted
SFAS 123(R) compared to $(0.01) and $(0.03), respectively for basic loss per
share with the adoption. The adoption of Statement 123(R) had no
effect on cash flow from operations and cash flow from financing activities
for
the years ended June 30, 2007 and 2006.
Information
with respect to stock
options under the 2003 and 1995 Plans is as follows:
|
|
|
2007
|
|
2006
|
|
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Outstanding
at beginning of year
|
|
|
3,312,249
|
|
|
$
|
0.30
|
|
|
1,332,929
|
|
|
$
|
0.25
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
1,668,000
|
|
|
|
0.34
|
|
|
Reinstated
|
|
|
-
|
|
|
|
-
|
|
|
450,000
|
|
|
|
0.26
|
|
|
Exercised
|
|
|
(2,000
|
)
|
|
|
0.26
|
|
|
(100,000
|
)
|
|
|
0.10
|
|
|
Expired/
Forfeited
|
|
|
(44,990
|
|
|
|
0.31
|
|
|
(38,680
|
)
|
|
|
0.47
|
|
|
Outstanding
at end of year
|
|
|
3,265,259
|
|
|
|
0.30
|
|
|
3,312,249
|
|
|
|
0.30
|
|
|
Options
exercisable at end of year
|
|
|
3,250,979
|
|
|
|
0.30
|
|
|
3,122,429
|
|
|
|
0.30
|
|
|
Weighted
average fair value of options granted
|
|
|
|
|
|
|
-
|
|
|
|
|
|
$
|
0.47
|
|
The
reinstated stock options reflect stock options previously written off by the
Company and were awarded to a former executive in settlement of a litigation
proceeding in the year ended June 30, 2006 (see Note 11). These stock options
fully vested before fiscal year 2006 and, therefore, had no effect on the net
loss for the year ended June 30, 2006.
The
following table summarizes information about the stock options outstanding
at
June 30, 2007:
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Number
of
|
|
|
Exercise
|
|
|
Contractual
Life
|
|
|
Number
of
|
|
|
Exercise
|
|
|
Exercise
Price
|
|
|
|
Shares
|
|
|
Price
|
|
|
(years)
|
|
|
Shares
|
|
|
Price
|
|
|
$0.10-0.63
|
|
|
|
3,226,259
|
|
$
|
0.27
|
|
|
7.4
|
|
|
3,211,979
|
|
$
|
0.27
|
|
|
$1.50-1.81
|
|
|
|
19,500
|
|
$
|
1.65
|
|
|
2.8
|
|
|
19,500
|
|
$
|
1.65
|
|
|
$2.05-4.88
|
|
|
|
19,500
|
|
$
|
3.04
|
|
|
2.9
|
|
|
19,500
|
|
$
|
3.04
|
|
|
|
|
|
|
3,265,259
|
|
|
|
|
|
|
|
|
3,250,979
|
|
|
|
|
As
of
June 30, 2007, 3,250,979 stock option grants had vested. Of this
total, 1,665,579 were granted prior to July 1, 2005, and 1,585,400 were granted
subsequent to July 1, 2005. In the fiscal year ended June 30, 2007,
2,000 options were exercised. The weighted average remaining contractual term
for stock options that were outstanding as of June 30, 2007 was approximately
7.1 years. The weighted average remaining contractual term for stock options
that were exercisable as of June 30, 2007 was approximately 7.1 years. The
intrinsic value for stock options outstanding and exercisable as of June 30,
2007 was approximately $90,000.
A
summary
of the status of the Company’s nonvested shares as of June 30, 2007, and changes
during fiscal 2007, is presented as follows:
|
Nonvested
Shares
|
|
Shares
|
|
Weighted
Average
Grant
Date
Fair Value
|
|
|
Nonvested
at June 30, 2006
|
|
|
189,820
|
|
$
|
0.23
|
|
|
Granted
|
|
|
0
|
|
|
0.00
|
|
|
Vested
|
|
|
(164,500
|
)
|
|
0.19
|
|
|
Forfeited (1)
|
|
|
(11,040
|
)
|
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested
at June 30, 2007
|
|
|
14,280
|
|
$
|
0.33
|
|
(1)
Of
the 44,990 forfeited options in the fiscal year ended June 30, 2007, 33,950
had
vested in prior years.
In
the
fiscal year ended June 30, 2007 the Company did not issue any stock options.
The
fair value of stock options issued in fiscal 2006 was estimated to be $0.47,
using a Black-Scholes-option pricing model.
The model
considers assumptions related to exercise price, expected volatility, risk-free
interest rate, and the weighted average expected term of the stock option
grants. Expected volatility assumptions utilized in the model were
based on historical volatility of the Company’s stock price over the expected
term. The risk-free rate is derived from the U.S. Treasury
yield. The expected term of options represents the period of time
that options granted are expected to be outstanding. A total of
1,668,000 options were granted in fiscal 2006. The fair values of
options granted in fiscal 2006 were estimated at the date of grant with the
following assumptions:
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
4.20
|
%
|
|
Expected
Volatility Factor
|
|
|
169
|
%
|
|
Expected
life (in years)
|
|
|
6.2
|
|
|
Exercise
Price
|
|
$
|
0.34
|
|
|
Expected
Dividend
|
|
|
0
|
|
|
Fair
Value of each option
|
|
$
|
0.47
|
|
As
of
June 30, 2007, the Company had one share-based plan, which is described
above. The 1995 plan expired as of October 12, 2005. The
compensation cost charged against income for this plan for fiscal years ended
June 30, 2007 and 2006 were $44,084 and $772,488, respectively. These
numbers includes (a) $24,372 and $49,716, for fiscal year 2007 and 2006,
repectively, of compensation costs for all share based payments granted prior
to, but not yet vested as of July 1, 2005, based on the grant-date fair value
estimated in accordance with the original provisions of Statement 123, and
(b)
$19,712 and $722,772 for fiscal years 2007 and 2006, respectively, of
compensation cost for all share-based payments granted subsequent to July 1,
2005, based on the grant-date fair value estimated in accordance with the
provisions of 123(R). No income tax benefits are recognized in the
statement of operations for share-based arrangements due to the utilization
of
federal and state net operating loss carryforwards.
Stock-based
compensation costs are allocated in operating expense categories as
follows:
|
|
|
For
the Year Ended June 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Technical
Operations & Support
|
|
$
|
7,326
|
|
|
$
|
53,520
|
|
|
Sales
& Marketing
|
|
|
10,144
|
|
|
|
41,579
|
|
|
General
& Administrative
|
|
|
26,614
|
|
|
|
677,389
|
|
|
Total
Stock-based Compensation costs
|
|
$
|
44,084
|
|
|
$
|
772,488
|
|
As
of
June 30, 2007, the total compensation cost related to non-vested awards not
yet
recognized is $3,297. The period over which this cost will be
recognized is 2 months.
9.
EMPLOYEE
STOCK PURCHASE PLAN
In
December 1997, stockholders approved the 1997 Employee Stock Purchase
Plan. The Company has 600,000 shares reserved for issuance under the
Plan as of June 30, 2007. The purpose of the Plan is to secure for
the Company and its stockholders the benefits of the incentive inherent in
the
ownership of Common Stock by present and future employees of the
Company. The Plan is intended to comply with the terms of Section 423
of the Internal Revenue Code of 1986, as amended, and Rule 16b-3 of the
Securities Exchange Act of 1934. Under the terms of the Plan
individual employees may pay up to $10,000 per calendar year for the purchase
of
the Company’s common shares at 85% of the determined market price.
10.
SUPPLEMENTARY
INFORMATION
Interest
The
Company made payments for interest of approximately $57,000 and $91,000 for
the
fiscal years ended June 30, 2007 and 2006, respectively.
Income
Taxes
The
Company made payments for income taxes of approximately $6,000 and $17,100
for
the fiscal years ended June 30, 2007 and 2006, respectively.
Allowance
for Doubtful Accounts
The
following table summarizes
activity in the allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
Fiscal
Year Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Beginning
Balance
|
|
$
|
79,396
|
|
|
$
|
180,758
|
|
|
Additions
– charged to operating expenses
|
|
|
59,400
|
|
|
|
|
|
|
Write-Offs
|
|
|
(23,400
|
)
|
|
|
(101,362
|
)
|
|
Balance
at End of Year
|
|
$
|
115,396
|
|
|
$
|
79,396
|
|
Non-cash
financing activity
On
February 28, 2007, the Company settled a note by payment of $650,000 in cash
and
the issuance of 1,591,953 shares of restricted common stock of Comtex (see
Note
3).
11.
COMMITMENTS
AND CONTINGENCIES
The
Company leases office space and certain equipment under non-cancelable operating
leases that expire at various dates through February 2012. The leases
require fixed escalations and payment of property taxes, insurance and
maintenance costs.
The
future minimum rental commitments under operating leases are as
follows:
|
Fiscal
year ending
June
30,
|
|
Minimum
Rental
Commitments
|
|
|
2008
|
|
$
|
219,548
|
|
|
2009
|
|
|
140,337
|
|
|
2010
|
|
|
4,656
|
|
|
2011
|
|
|
4,656
|
|
|
2012
|
|
|
3,104
|
|
|
|
|
$
|
372,301
|
|
Rent
expense, included in general and administrative expenses, under all operating
leases totaled approximately $248,000 and $202,000 for the fiscal years ended
June 30, 2007 and 2006, respectively.
In
November 2006, the Company entered into an employment agreement with Mr. Chip
Brian, its newly appointed President and Chief Executive Officer. The agreement
provides for a two-year term, which will expire on October 31, 2008, but may
be
renewed. Mr. Brian will receive an annual salary of $200,000 and
$220,000 over the two-year term with the possibility of a performance bonus
of
up to 25% of his base salary for each year. Mr. Brian may be terminated from
employment with or without cause. However, if he is terminated without cause
or
for good reason, he will be entitled to receive payment of his annual salary,
full vesting of his stock options which will then become
immediately
exercisable and his employee benefits at the Company's expense for a period
not
to exceed 18 months. The agreement also contains change in control
and non-compete provisions.
On
April
15, 2004, each of the Company’s former Chairman/CEO and President, who both
resigned on February 5, 2004, filed separate demands for arbitration against
the
Company related to the terms of their employment agreements. The
demands alleged breaches of the employment agreements and requested payment
of
approximately $129,000 to the former employees. On August 8, 2006, an
arbitrator denied the former President’s claim, awarding only a bonus, vacation
pay and certain previously granted options, none of which was in
dispute. Because both parties have requested additional clarification
of certain portions of the settlement, the end result remains
uncertain. The Company continues to deny the former CEO’s allegations
and continues to vigorously defend this action. Based upon events to
date in the arbitration, the Company has accrued approximately $61,000 in
expenses as of June 30, 2007.
12.
401(K)
PLAN
The
Company has a 401(k) plan available to all full-time employees who meet a
minimum service requirement. Employee contributions are voluntary and
are determined on an individual basis with a maximum annual amount equal to
the
maximum amount allowable under federal tax regulations. All
participants are fully vested in their contributions. The 401(k) plan
provides for discretionary Company contributions. The Company did not
make any contributions during the fiscal years ended June 30, 2007 and
2006.
13.
SELECTED
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The
following is a summary of selected quarterly results of operations for the
years
ended June 30, 2007 and 2006.
|
|
|
|
Quarter
Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2006
|
|
|
|
December
31, 2006
|
|
|
|
March
31, 2007
|
|
|
|
June
30, 2007
|
|
|
Revenues
|
|
$
|
1,750,975
|
|
|
$
|
1,699,227
|
|
|
$
|
1,796,473
|
|
|
$
|
1,822,730
|
|
|
Gross
Profit
|
|
|
988,687
|
|
|
|
934,762
|
|
|
|
1,029,041
|
|
|
|
1,058,028
|
|
|
Net
Income (Loss)
|
|
|
61,493
|
|
|
|
(73,284
|
)
|
|
|
(180,669
|
)
|
|
|
85,629
|
|
|
Net
Income (Loss) per share, basic
|
|
$
|
0.00
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
Shares
used in per share calculation, basic
|
|
|
13,700,334
|
|
|
|
13,702,247
|
|
|
|
14,232,898
|
|
|
|
15,294,200
|
|
|
Net
Income (Loss) per share, diluted
|
|
$
|
0.00
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
Shares
used in per share calculation, diluted
|
|
|
14,862,450
|
|
|
|
13,702,247
|
|
|
|
14,232,898
|
|
|
|
15,444,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2005
|
|
|
|
December
31, 2005
|
|
|
|
March
31, 2006
|
|
|
|
June
30, 2006
|
|
|
Revenues
|
|
$
|
1,996,431
|
|
|
$
|
1,932,612
|
|
|
$
|
1,966,772
|
|
|
$
|
1,780,709
|
|
|
Gross
Profit
|
|
|
1,060,004
|
|
|
|
994,204
|
|
|
|
1,064,568
|
|
|
|
882,377
|
|
|
Net
Income (Loss)
|
|
|
62,882
|
|
|
|
(184,177
|
)
|
|
|
(125,268
|
)
|
|
|
(211,544
|
)
|
|
Net
Income (Loss) per share, basic
|
|
$
|
0.01
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
Shares
used in per share calculation, basic
|
|
|
13,600,247
|
|
|
|
13,700,247
|
|
|
|
13,700,247
|
|
|
|
13,700,247
|
|
|
Net
Income (Loss) per share, diluted
|
|
$
|
0.01
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
Shares
used in per share calculation, diluted
|
|
|
14,784,325
|
|
|
|
13,700,247
|
|
|
|
13,700,247
|
|
|
|
13,700,247
|
|