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HMNY > SEC Filings for HMNY > Form 10-K on 3-Mar-2014All Recent SEC Filings

Show all filings for HELIOS & MATHESON ANALYTICS INC.

Form 10-K for HELIOS & MATHESON ANALYTICS INC.


3-Mar-2014

Annual Report


Item 7. 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 and liquidity and capital resources should be read in conjunction with the accompanying Consolidated Financial Statements and related Notes.

Overview

Helios and Matheson provides a wide range of high quality information technology ("IT") consulting solutions, custom application development and analytics services to Fortune 1000 companies and other large organizations. The Company is headquartered in New York City, New York and has a subsidiary in Bangalore, India.

For the three and twelve months ended December 31, 2013, approximately 93% and 91% of the Company's consulting services revenues were generated from clients under time and materials engagements, with the remainder generated under fixed-price engagements and recruitment process outsourcing (RPO) engagements as compared to 94% and 91% for the three and twelve months ended December 31, 2012, respectively. 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 weekly and 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's most significant operating cost is its personnel cost, which is included in cost of revenues. For the twelve months ended December 31, 2013 and 2012, gross margin was 20.6% and 22.5% respectively.

Helios and Matheson actively manages its personnel utilization rates by monitoring project requirements and timetables. Helios and Matheson's utilization rate for the three and twelve months ending December 31, 2013, was approximately 92% and 96%, respectively as compared to 94% and 96% for the three and twelve months ending December 31, 2012, respectively. As projects are completed, consultants either are re-deployed to new projects at the current client site or to new projects at another client site or are encouraged to participate in Helios and Matheson's training programs in order to expand their technical skill sets.

Investments by Helios and Matheson Parent

On March 30, 2006, Helios and Matheson Parent, an IT services organization with its corporate headquarters in Chennai, India, purchased 409,879 shares of the Company's common stock from Mr. Shmuel BenTov, the Company's former Chairman, Chief Executive Officer and President and his family members, which represented approximately 43% of the Company's outstanding common stock. In 2006, 2007, 2008, 2009 and 2010 Helios and Matheson Parent purchased additional shares of the Company's common stock. Helios and Matheson Parent owns 1,743,040 shares of common stock, representing approximately 75% of the shares of the common stock currently outstanding. Helios and Matheson Parent is a publicly listed company on three stock exchanges in India, the National Stock Exchange (NSE), the Stock Exchange, Mumbai (BSE) and Madras Stock Exchange (MSE).

Critical Accounting Policies

The methods, estimates and judgments the Company uses in applying its most critical accounting policies 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 consolidated financial statements and they require the most difficult, subjective or complex judgments in the preparation of the consolidated financial statements.


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. Clients for consulting revenues are billed on a weekly 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. Revenues from RPO services are recorded when service is performed and placement of a candidate is accepted by the customer. Unbilled accounts receivables represent amounts recognized as revenue based on services performed in advance of customer billings, including RPO services where placement of a candidate is accepted by the customer and payment is assured. 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 estimate 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 clients 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

The Company uses the fair value method as specified by the FASB whereby compensation cost is recognized over the remaining service period based on the grant-date fair value of those awards as calculated for pro forma disclosures as originally issued.

Results of Operations

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

                               Year Ended December 31,
                            2013                  2012
Revenues                       100.0 %               100.0 %
Cost of revenues                79.4 %                77.5 %
Gross profit                    20.6 %                22.5 %
Operating expenses              17.7 %                18.4 %
Profit from operations           2.8 %                 4.1 %
Net Profit                       2.9 %                 3.4 %


Comparison of Year Ended December 31, 2013 to Year Ended December 31, 2012

Revenues. Revenues of the Company increased by $0.9 million or 7.5% from $12.4 million for the twelve months ended December 31, 2012 to $13.3 million for the twelve months ended December 31, 2013. The increase was primarily attributable to an increase in consulting revenue.

Gross Profit. The resulting gross profit for the twelve months ended December 31, 2013 was $2.7 million, a decrease of $54,000 or 1.9% from the 2012 comparable period amount of $2.8 million. As a percentage of total revenue, gross margin for the twelve months ended December 31, 2013 and 2012 was 20.6% and 22.5% respectively. The gross margin decreased primarily as a result of decrease in high margin projects and RPO services revenue offsetting with increase in consulting revenue.

Operating Expenses. Operating expenses are comprised of Selling, General and Administrative ("SG&A") expenses and depreciation and amortization. For the twelve months ended December 31, 2013 and December 31, 2012 operating expenses were $2.4 million and $2.3 million respectively. The Company continues to focus on various cost reduction initiatives including, but not limited to, renegotiation with major vendors and process restructuring.

Other Income/(Expenses). Other expenses for the twelve months ended December 31, 2013 is comprised exclusively of interest income of $6,437. The comparable 2012 period is comprised of an early lease termination fee of $82,548 payable to the Company's former landlord as a result of the Company relocating to the Empire State Building. The termination payment was deducted from the security deposit already held by the landlord. Offsetting this lease termination fee was $9,425 of interest earned for the twelve months ended December 31, 2012 on cash and cash equivalents.

Taxes. For the twelve months ended December 31, 2013, the Company recorded a tax provision of $12,000 for minimum state taxes and provision to return adjustments of ($13,446) from the filing of state and federal tax returns, as compared to a tax provision of $24,000 for minimum state taxes and provision to return adjustments of ($12,845) for the twelve months ended December 31, 2012. In addition, deferred taxes were not impacted by the pre-tax net income since such amounts were fully reserved as of December 31, 2013 and 2012 respectively.

Net Income. As a result of the above, the Company had net income of approximately $383,000 or $0.16 per basic and diluted share for the twelve months ended December 31, 2013, compared to net income of approximately $422,000 or $0.18 per basic and diluted share for the twelve months ended December 31, 2012.

Liquidity and Capital Resources

The Company believes that its business, operating results and financial condition have been affected by the economic crisis and ongoing economic uncertainty which continue to impact the IT and analytics spending of its clients. A significant portion of the Company's major clients are in the financial services industry and came under considerable pressure as a result of the unprecedented economic conditions in the financial markets. Spending on IT consulting and analytics services is largely discretionary, and the Company has experienced a pushback of new assignments and high margin projects from existing clients. Although revenues have remained relatively consistent year over year, the Company has reported a 9% decrease in net income during 2013 as compared to net income during 2012 primarily as a result of decrease in high margin projects and RPO services revenue offsetting with increase in consulting revenue. The Company had a net income of approximately $383,000 for the twelve months ended December 31, 2013. During the twelve months ended December 31, 2012, the Company had a net income of approximately $422,000.

The Company's cash balances were approximately $0.7 million at December 31, 2013 as compared to $ 2.9 million at December 31, 2012. Net cash used in operating activities for the twelve months ended December 31, 2013 was approximately $1.9 million as compared to net cash provided by operating activities of approximately $928,000 for the twelve months ended December 31, 2012. During the year ended December 31, 2013 cash used in operating activities included an increase in the amount of $1 million to a security deposit transferred to Helios and Matheson Parent. The security deposit is used to cover any expenses, claims or damages that Helios and Matheson Parent may incur while discharging its obligations under a memorandum of understanding we entered into with Helios and Matheson Parent in September 2010 and also to cover the Company's payable to Helios and Matheson Parent pursuant to the memorandum of understanding. See Note
12 "Transaction with Related Party" included in the Company's financial statements which are included at Item 15 (a) of Part IV of this report.


The Company's accounts receivable, less allowance for doubtful accounts, at December 31, 2013 and December 31, 2012 were $2.1 million and $1.3 million, respectively, representing 59 days and 34 days of sales outstanding ("DSO") respectively. The Company believes DSO of 59 days and 34 days in 2013 and 2012, respectively, is consistent with favorable resolutions of a limited number of dated client disputes. 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.

The Company's accounts payable and accrued expenses at December 31, 2013 and at December 31, 2012 were approximately $0.8 million and $1.2 million, respectively.

For the twelve months ended December 31, 2013 and 2012, revenues from the Company's three largest clients represented 88% of revenues. No other customer represented greater than 10% of the Company's revenues for such periods.

Net cash used in investing activities was $7,699 and $43,636 for the twelve months ended December 31, 2013 and 2012, respectively. During 2013, additions of property and equipment were offset by disposals totaling $250 as compared to $12,000 during 2012.

For the twelve months period ended December 31, 2013, cash used by financing activities was ($210,000) as compared to $0 for the twelve months ended December 31, 2012. On February 3, 2013 the Company's Board of Directors declared a dividend of $0.09 per share on the Company's common stock, amounting to a payout of $209,740.

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

For the twelve months ended December 31, 2013 and 2012, there were no shares of common stock issued pursuant to the exercise of options issued under the Company's stock option plan.

Going Concern

See "Going Concern" in Note 1 of the Company's financial statements which are included at Item 15 (a) (1) and (2) of Part IV of this report.

Off-Balance Sheet Arrangements

The Company did not have any "Off Balance Sheet Arrangements" during the twelve months ended December 31, 2013 and 2012.

Contractual Obligations



The Company has the following contractual obligations as of December 31, 2013:



  Contractual Obligations                                  Payments Due by Period
                                             Less Than 1                                          More Than 5
                                Total           Year          1 - 3 Years       3 - 5 Years          Years
Operating Lease Obligations
Rent (1)                         523,467         157,040           314,080            52,347                 -

Total $ 523,467 $ 157,040 $ 314,080 $ 52,347 $ -

(1) The Company has a New York facility in the Empire State Building with a lease term expiring April 30, 2017.


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 our clients' purchasing decisions, and consequently may impact the Company's margins and overall cost structure.

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