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: March 31, 2010

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)

Delaware		13-3169913
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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 the 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 May 12, 2010, there were 3,086,362 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 March 31, 2010 and December 31, 2009			3
Consolidated Statement of Operations for the three months ended March 31, 2010 and 2009			4
Consolidated Statement of Cash Flows for the three months ended March 31, 2010 and 2009			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			15
Item 4T. Controls and Procedures			15
PART II. OTHER INFORMATION			15
Item 1. Legal Proceedings			15
Item 1A. Risk Factors			15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			16
Item 3. Defaults Upon Senior Securities			16
Item 4. [Removed and Reserved]			16
Item 5. Other Information			17
Item 6. Exhibits			17
SIGNATURES			18
Exhibit 31.1
Exhibit 32.1

Part I. Financial Information

Item 1.		Financial Statements

HELIOS & MATHESON NORTH AMERICA INC.

CONSOLIDATED BALANCE SHEETS

		March 31,				December 31,
		2010				2009
		(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	1,013,299			$	1,354,989
Accounts receivable- less allowance for doubtful accounts of $209,644 at March 31, 2010, and $220,879 at December 31, 2009			2,442,737				2,471,705
Unbilled receivables			96,949				184,229
Prepaid expenses and other current assets			140,837				178,879
Total current assets			3,693,822				4,189,802
Property and equipment, net			63,084				79,952
Deposits and other assets			150,953				154,703
Total assets		$	3,907,859			$	4,424,457
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued expenses		$	1,586,431			$	1,630,054
Deferred revenue			69,758				184,904
Total current liabilities			1,656,189				1,814,958
Shareholders’ equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized; no shares issued and outstanding as of March 31, 2010, and December 31, 2009			—				—
Common stock, $.01 par value; 30,000,000 shares authorized; 3,086,362 issued and outstanding as of March 31, 2010, and December 31, 2009			30,864				30,864
Paid-in capital			35,846,527				35,840,669
Accumulated other comprehensive income — foreign currency translation			1,470				2,084
Accumulated deficit			(33,627,191	)			(33,264,118	)
Total shareholders’ equity			2,251,670				2,609,499
Total liabilities and shareholders’ equity		$	3,907,859			$	4,424,457

See accompanying notes to consolidated financial statements.

HELIOS & MATHESON NORTH AMERICA INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended
		March 31,
		2010				2009
		(unaudited)				(unaudited)
Revenues		$	3,444,592			$	3,796,497
Cost of revenues			2,643,944				2,843,467
Gross profit			800,648				953,030
Operating expenses:
Selling, general & administrative			1,145,449				1,655,362
Depreciation & amortization			16,846				34,821
			1,162,295				1,690,183
Loss from operations			(361,647	)			(737,153	)
Other income(expense):
Interest income-net			3,074				1,416
			3,074				1,416
Loss before income taxes			(358,573	)			(735,737	)
Provision for income taxes			4,500				7,424
Net loss			(363,073	)			(743,161	)
Other comprehensive loss — foreign currency adjustment			(614	)			(2,147	)
Comprehensive loss		$	(363,687	)		$	(745,308	)
Basic and diluted loss per share		$	(0.12	)		$	(0.31	)

See accompanying notes to consolidated financial statements.

HELIOS & MATHESON NORTH AMERICA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Three Months Ended March 31,
		2010				2009
		(unaudited)				(unaudited)
Cash flows from operating activities:
Net loss		$	(363,073	)		$	(743,161	)
Adjustments to reconcile net loss to net cash used in operating activities, net of acquired assets:
Depreciation and amortization			16,847				34,821
Provision for doubtful accounts			15,000				15,000
Stock based compensation			5,858				6,122
Amortization of deferred financing cost			3,750				1,941
Changes in operating assets and liabilities:
Accounts receivable			13,968				353,039
Unbilled receivables			87,280				(6,941	)
Prepaid expenses and other current assets			38,042				110,690
Deposits			—				1,750
Accounts payable and accrued expenses			(43,623	)			(9,206	)
Deferred revenue			(115,146	)			146,847
Net cash used in operating activities			(341,097	)			(89,098	)
Cash flows from investing activities:
Sale/(Purchase) of property and equipment			21				391
Net cash provided by investing activities			21				391
Cash flows from financing activities:
Net cash provided by financing activities			—				—
Effect of foreign currency exchange rate changes on cash and cash equivalents			(614	)			(2,147	)
Net decrease in cash and cash equivalents			(341,690	)			(90,854	)
Cash and cash equivalents at beginning of period			1,354,989				912,272
Cash and cash equivalents at end of period		$	1,013,299			$	821,418
Supplemental disclosure of cash flow information:
Cash paid during the period for interest		$	—			$	—
Cash paid during the period for income taxes — net of refunds		$	9,028			$	(58,435	)

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 and Matheson” or the “Company”) Form 10-K for the year ended December 31, 2009 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, 2009.

2) CONTROLLED COMPANY:

The Board of Directors has determined that Helios and Matheson is a “Controlled Company” for purposes of NASDAQ listing requirements. A “Controlled Company” is a company of which more than 50% of the voting power for the election of directors 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 and Matheson is a “Controlled Company” based on the fact that Helios and Matheson Information Technology, Ltd. (“Helios and Matheson Parent”) holds approximately 69% 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 March 31, 2010, the consolidated results of operations for the three month period ended March 31, 2010 and 2009 and cash flows for the three month period ended March 31, 2010 and 2009. The Company has performed an evaluation of subsequent events through May 14, 2010 based upon reviews of the Company’s financial transactions through that date and inquiries conducted by the Company’s interim Chief Executive Officer of senior management and the Board of Directors.

The consolidated balance sheet at December 31, 2009 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, 2009.

The consolidated results of operations for the three month period ended March 31, 2010 are not necessarily indicative of the results to be expected for any other interim period or for the full year.

For the twelve month period ended December 31, 2009, the Company reported an operating loss of approximately ($2.1) million and for the three month period ended March 31, 2010, the Company reported an operating loss of approximately ($362,000). While the Company continues to focus on revenue growth and cost reductions, including but not limited to outsourcing and off-shoring solutions, in an attempt 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 (assuming obtaining a commercially reasonable consent if required) 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 of 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 established by the Company in its discretion on the date of grant. Stock options terminate in connection with the termination of employment.

The Company uses the modified prospective application method as specified by the Financial Accounting Standards Board (“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. For the three month period ended March 31, 2010 and 2009, the Company recorded stock based compensation expense of $5,858 and $6,122, respectively.

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

						Weighted
		Number of				Average
		Shares				Exercise Price
Balance — December 31, 2009			35,500			$	4.62
Granted during 1st Qtr 2010			—				—
Exercised during 1st Qtr 2010			—				—
Forfeitures during 1st Qtr 2010			—				—
Balance — March 31, 2010			35,500			$	4.62

The following table summarizes the status of the stock options outstanding and exercisable at March 31, 2010:

Number of

Weighted

Weighted-

Stock

Exercise Price

Average

Number of

Remaining

Options

Range

Exercise Price

Options

Contractual Life

Exercisable

$0.00 – $4.80

$

3.06

15,500

1.2 years

15,500

$4.80 – $9.60

$

5.82

20,000

6.1 years

15,000

35,500

30,500

At March 31, 2010, 30,500 stock options were exercisable with a weighted average exercise price of $4.42.

5) NET LOSS PER SHARE :

The following table sets forth the computation of basic and diluted net loss per share for the three months ended March 31, 2010 and 2009.

		Three Months Ended
		March 31,
		2010				2009
Numerator for basic net loss per share
Net loss		$	(363,073	)		$	(743,161	)
Net loss available to common stockholders		$	(363,073	)		$	(743,161	)
Numerator for diluted net loss per share
Net loss available to common stockholders & assumed conversion		$	(363,073	)		$	(743,161	)
Denominator:
Denominator for basic and diluted loss per share — weighted-average shares			3,086,362				2,396,707
Basic and diluted loss per share:
Net loss per share		$	(0.12	)		$	(0.31	)

During the three month period ended March 31, 2010 and March 31, 2009, 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 revenue of two customers represented approximately 21% and 20% of the revenues for the three month period ended March 31, 2010. The revenues of two customers represented approximately 26% and 14% of revenues for the same period in 2009. No other customer represented greater than 10% of the Company’s revenues for such periods.

7) CREDIT ARRANGEMENT:

The Company has entered into a Loan and Security Agreement (‘the Loan Agreement”) with Keltic Financial Partners, LP II (“Keltic”). The Loan Agreement, which was set to expire December 31, 2009, has been extended through December 31, 2010 with no material changes in terms and conditions. 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 based on the higher of prime rate plus 2.75%, 90 day LIBOR rate plus 5.25% or 7%. Net availability at March 31, 2010 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 March 31, 2010, or at December 31, 2009, under the Loan Agreement.

8) CONTRACTUAL OBLIGATIONS AND COMMITMENTS:

The Company has the following commitments as of March 31, 2010: obligations resulting from one employment contract and two operating lease obligations. The Company has two operating leases for its corporate headquarters located in New York and its branch office in New Jersey. The Company is also currently using a facility in Massachusetts on a month-to-month basis through May 31, 2010.

The Company is unlikely to renew its lease for the New Jersey facility which expires August 31, 2010.

The Company’s commitments at March 31, 2010, are comprised of the following:

		Payments Due by Period
																		More Than 5
Contractual Obligations		Total				Less Than 1 Year				1 – 3 Years				3 – 5 Years				Years
Long Term Obligations
Employment Contracts (1)			55,000				55,000				—				—				—
Operating Lease Obligations
Rent (2)			718,448				339,469				378,979				—				—
Total		$	773,448			$	394,469			$	378,979			$	—			$	—

As of March 31, 2010, 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 (the “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 percent change in ownership occurs. On September 5, 2006, Helios and 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 the 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 three months ended March 31, 2010. 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.

10) SUBSEQUENT EVENTS

On May 12, 2010, the Company’s Board of Directors resolved that NR Suparna would be appointed as the Company’s Chief Operating Officer, effective on May 20, 2010, the date of the Company’s Annual Shareholder Meeting.

Mr. Suparna, age 63, has over 35 years of diverse sales, marketing and management experience. From 2004 to 2009, Mr. Suparna served as President and CEO of the Bangalore, India operation of Helios and Matheson Information Technology Ltd., the Company’s parent. Mr. Suparna has also served as a Director of Helios & Matheson Global Services Pvt. Ltd., the Company’s wholly-owned subsidiary, since 2007. From 2000 to 2002, Mr. Suparna was the Chief Operating Officer of Swedish Match. The terms of Mr. Suparna’s employment agreement and compensation are currently under consideration and will be disclosed once finalized under a separate filing on a Form 8-K.

On May 12, 2010, the Company’s Board of Directors also resolved that effective May 20, 2010, Mr. Salvatore M. Quadrino will cease to serve as interim Chief Executive Officer of the Company and will revert back to his original role as the Company’s Chief Financial Officer.

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 under Section 27A of the Securities Act of 1933, as amended, and under 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 impact of the recent economic crisis and ongoing economic uncertainty, including the impact on the IT spending of the Company’s customers, demand trends in the information technology industry and the continuing needs of current and prospective customers for the Company’s services.

Overview

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

Helios and Matheson provides a wide range of high quality, consulting solutions, through an integrated suite of market driven Service Lines in the areas of Application Value Management, Application Development and Integration, Independent Validation, Information Management and Strategic Sourcing for Fortune 1000 companies and other large organizations. These services historically account for approximately 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 may be 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.

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 either through Helios and Matheson Global Services Private Limited (“HMGS”), the Company’s subsidiary operating in Bangalore, India or Helios and Matheson Parent. The Company’s ability to blend more offshore work into its pricing should allow it to be more price competitive. To date, any offshore work being performed through Helios and Matheson Parent has been de minimus.

Rapid technological advances and the wide 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 expand the benefits that users can derive from computer-based information systems and improve 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 outsourcing enables companies to realize cost efficiencies. 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 crisis and ongoing economic uncertainty. A significant portion of the Company’s major customers are in the financial services, pharmaceutical and manufacturing/automotive industries and came under considerable pressure as a result of the unprecedented economic conditions in the financial markets. Spending on IT consulting services is largely discretionary. While the Company has not lost any major clients, it has experienced a pushback of new assignments from existing clients and difficulty in replacing completed projects, both of which have impacted revenue growth through 2010 year to date.

For the three months ended March 31, 2010, approximately 87% of the Company’s consulting services revenues were generated from clients under time and materials engagements, as compared to approximately 73% for the three months ended March 31, 2009, 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’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). For the three month period ended March 31, 2010, gross margin was 23.2% as compared to 25.1% for the three month period ended March 31, 2009. The decrease in gross margin is primarily a result of a decrease in higher margin project revenue. 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. Additionally, during the past three years, an increasing number of the Company’s clients are outsourcing the management of their time and material engagements to external Vendor Management Organizations (“VMOs”) as a means of monitoring and controlling the costs of external service providers. The Company has been challenged with absorbing the costs associated with the VMOs which have negatively impacted the Company’s margins.

Helios and Matheson actively manages its personnel utilization rates by monitoring project requirements and timetables. Helios and Matheson’s utilization rate for the three month period ended March 31, 2010 was approximately 94% as compared to approximately 78% for the three month period ended March 31, 2009. 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. 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.

Helios and Matheson markets and distributes software products developed by independent software developers. The Company believes its relationships with approximately 52 software clients throughout the country provide opportunities for the delivery of additional Company consulting and training services. The software products offered by Helios and Matheson are developed in the United States, England and Finland and marketed primarily through trade shows, direct mail, telemarketing, client presentations and referrals.

Historically, the Company has generated revenues by selling software licenses. In addition to initial software license fees, the Company has historically derived 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 have varied from period to period. For the three month period ending March 31, 2010, revenue from the software service line was approximately 10% of the Company’s total revenues.

On March 15, 2010, Cogito, a software company whose products the Company has marketed since 1991 under an exclusive perpetual distribution agreement, notified the Company of Cogito’s intent to terminate the agreement effective thirty days from the date of notice. The Company disputes that there are any valid grounds for termination of the Cogito agreement and communicated its position to Cogito after receiving Cogito’s notice of termination. Thus far, the Company and Cogito have not reached a mutual resolution of the matter and the Company has reserved all of its rights and continues to explore all available legal remedies. As a result of Cogito’s actions, the Company expects that future software product revenues will be significantly reduced until or unless the Company develops an alternate software business line.

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.

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

The Company uses the modified prospective application 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 Operations:

		Three Months Ended
		March 31,
		2010				2009
Revenues			100.0	%			100.0	%
Cost of revenues			76.8	%			74.9	%
Gross profit			23.2	%			25.1	%
Operating expenses			33.7	%			44.5	%
Loss from operations			(10.5	)%			(19.4	)%
Net loss			(10.5	)%			(19.6	)%

Comparison of The Three Months Ended March 31, 2010 to The Three Months Ended March 31, 2009

Revenues. Revenues for the three months ended March 31, 2010 were $3.4 million compared to $3.8 million for the three months ended March 31, 2009. The decrease is primarily attributable to a decline in consulting revenue due to difficulty in replacing completed projects and a pushback of new assignments from existing clients primarily as a result of the continuing economic uncertainty still adversely affecting spending on IT services.

Gross Profit . The resulting gross profit for the three months ended March 31, 2010 was $801,000 compared to $953,000 for the three months ended March 31, 2009. As a percentage of total revenues, gross margin for the three months ended March 31, 2010 was 23.2% compared to 25.1% for the three months ended March 31, 2009. Gross margin has declined primarily as a result of a decrease in higher margin project revenue.

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 March 31, 2010 were $1.1 million compared to the 2009 comparable period level of $1.7 million. The decrease in SG&A expenses is associated with various cost reduction initiatives including, but not limited to, a reduction in employee headcount. Depreciation and amortization expenses decreased $18,000 from $35,000 for the three months ended March 31, 2009 to $17,000 for the three months ended March 31, 2010.

Taxes. Taxes for the three months ended March 31, 2010 were $5,000 compared to $7,000 for the three months ended March 31, 2009. For the three months ended March 31, 2010, the Company recorded a tax provision of $5,000 for minimum state taxes compared to a provision for minimum state taxes of $5,000 and a provision to return adjustment of $2,000 from the filing of state and federal tax returns for the three months ended March 31, 2009.

Net Loss. As a result of the above, the Company incurred a net loss of ($363,000) or ($0.12) per basic and diluted share for the three months ended March 31, 2010 compared to a net loss of ($743,000) or ($0.31) per basic and diluted share for the three months ended March 31, 2009.

Liquidity and Capital Resources

The Company had an operating loss of ($362,000) and a net loss of ($363,000) for the three months ended March 31, 2010. During the three months ended March 31, 2009, the Company had an operating loss of ($737,000) and a net loss of ($743,000). The Company believes that its business, operating results and financial condition have been harmed by the recent economic crisis and ongoing economic uncertainty which continue to adversely affect the IT spending of its clients. A significant portion of the Company’s major customers are in the financial services industry and came under considerable pressure as a result of the recent unprecedented economic conditions in the financial markets. While the Company has not lost any major clients, it has experienced a pushback of new assignments from existing clients and difficulty replacing high-margin completed projects, both of which have impacted revenue growth through the first quarter of 2010. While the Company continues to focus on revenue growth and cost reductions, including but not limited to eliminating non-billing resources, outsourcing and off-shoring solutions, in an attempt to improve its financial condition, there can be no assurance that the Company will be profitable in future periods.

The Company’s cash balances were $1.0 million at March 31, 2010 and $1.4 million at December 31, 2009. Net cash used in operating activities for the three months ended March 31, 2010 was $341,000 compared to net cash used in operating activities of $89,000 for the three months ended March 31, 2009.

The Company’s accounts receivable, less allowance for doubtful accounts, at March 31, 2010 and at December 31, 2009 were $2.5 million and $2.7 million, respectively, representing 68 and 60 days of sales outstanding (“DSO”), respectively. The increase in DSO is attributed to an extension in payment terms for one major client as well as a limited number of dated client disputes. The accounts receivable at March 31, 2010 and December 31, 2009 included $97,000 and $184,000 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.

For the three month periods ended March 31, 2010 and March 31, 2009, there was no cash provided by investing activities. Additions to property and equipment of $3,000 for the three month period ended March 31, 2010 and $5,000 for the three month period ended March 31, 2009 were offset by proceeds in like amounts from the sale of Company automobiles in the comparable periods.

There was no cash provided by or used in financing activities for the three month periods ended March 31, 2010 and March 31, 2009, respectively.

The Company has entered into a Loan and Security Agreement with Keltic. The Loan Agreement, which was set to expire December 31, 2009, has been extended through December 31, 2010 with no material changes in terms and conditions. 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 is based on the higher of prime rate plus 2.75%, 90 day LIBOR rate plus 5.25% or 7%. Availability at March 31, 2010 was $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 March 31, 2010, or at December 31, 2009, under the Loan Agreement.

In management’s opinion, cash flows from operations and borrowing capacity (assuming obtaining a commercially reasonable consent if required) combined with cash on hand will provide adequate flexibility for funding the Company’s working capital obligations for the next twelve months.

For the three months ended March 31, 2010, there were no shares of common stock issued pursuant to the exercise of options issued under the Company’s stock option plan.

Off Balance Sheet Arrangements

As of March 31, 2010, the Company does not have any “Off Balance Sheet Arrangements”.

Contractual Obligations and Commitments

The Company has the following commitments as of March 31, 2010: obligations of one employment contract and two operating lease obligations. The Company has two operating leases for its corporate headquarters located in New York and its branch office in New Jersey. The Company is also currently using a facility in Massachusetts on a month-to-month basis through May 31, 2010.

The Company is unlikely to renew its lease for the New Jersey facility which expires August 31, 2010.

The Company’s commitments at March 31, 2010 are reflected and further detailed in the Contractual Obligation table located in Part I, Item 1, Note 8 of this Form 10-Q.

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.

Recent Accounting Pronouncements

None.

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. Salvatore M. 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.

Changes in internal control. There were no significant changes in the Company’s internal control over financial reporting in connection with the evaluation that occurred during its first fiscal quarter of 2010 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 2009 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, 2009.

Going Concern and Capital Requirements

The Company’s financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. At March 31, 2010, the Company had $1.0 million of cash and cash equivalents on hand as compared to $1.4 million at December 31, 2009. The Company has a line of credit up to $1.0 million with Keltic based on the Company’s eligible accounts receivable balances which is subject to certain financial covenants that shall apply only if the Company has any outstanding obligations to Keltic including borrowing under the facility. The combination of an outstanding balance at the end of any fiscal quarter and earnings before taxes, depreciation and amortization of less than $25,000 for that quarter will cause a default under the Loan Agreement and may require the Company to obtain a waiver from Keltic or limit the Company’s access to the line of credit. The Keltic line of credit, which was set to expire on December 31, 2009, has been extended through December 31, 2010 with no material changes in terms and conditions. For the twelve month period ended December 31, 2009 the Company reported a net loss of ($2.1) million. For the three month period ended March 31, 2010, the Company reported a net loss of ($363,000). Beyond December 31, 2010, there is no guarantee that the Company will be able to renew or replace its current financing upon expiration on commercially reasonable terms or at all. Based upon the Company’s reduced liquidity and net losses, the ability of the Company to continue as a going concern is dependent on the Company achieving profitable operations and or obtaining additional sources of financing within the current fiscal year.

The Company may require additional financing in the future to continue to implement its product and services development, marketing and other corporate programs. If the Company is able to obtain additional debt financing, the terms of such financing could contain restrictive covenants that might negatively affect its shares of common stock, such as limitations on payments of dividends and could reduce earnings due to interest expenses. Any further issuance of equity securities could have a dilutive effect on the holders of the Company’s shares of common stock. The Company’s business, operating results and financial condition (including, potentially, its ability to continue as a going concern) may be materially harmed if the Company cannot obtain additional financing.

NASDAQ Listing

The NASDAQ Capital Market’s ^CM continued listing requirements, as applicable to the Company, include requirements that a company maintain a minimum shareholders’ equity of $2,500,000, a minimum bid price of $1 and that the market value of its publicly held shares (the market value of its shares not held by officers, directors or beneficial owners of more than 10% of the Company’s total shares outstanding) be at least $1,000,000.

On February 1, 2010, the Company received a letter from NASDAQ stating that, based on the closing bid price of the Company’s listed securities for the preceding 30 consecutive business days, a deficiency exists with regard to NASDAQ Listing Rule 5550(a)(2), which requires a minimum bid price of $1.00 per share.

On March 9, 2010, the Company received an additional letter from NASDAQ stating that for the preceding 30 consecutive trading days the Company’s common stock had not maintained a minimum market value of publicly held shares of $1,000,000 as required by NASDAQ Listing Rule 5550(a)(5).

On March 23, 2010, the Company received a letter from NASDAQ stating that since the time NASDAQ contacted the Company on March 9, 2010, the Company regained compliance with both the $1.00 minimum bid price requirement and the minimum market value of publicly held shares requirement of $1,000,000.

As of March 31, 2010, the Company’s shareholders’ equity was $2,251,670 which is below the minimum $2,500,000 requirement. At the close of business on May 12, 2010, the bid price for a share of the Company’s stock was $1.15, and the Company believes the value of its publicly held shares was approximately $1,085,018 based upon the public filings of our officers, directors and beneficial owners.

If the Company’s common stock is delisted from The NASDAQ Capital Market ^CM , the market liquidity of the Company’s common stock will likely be significantly limited, which would reduce shareholders’ ability to sell the Company’s common stock. Additionally, any such delisting could harm the Company’s ability to raise capital through alternative financing sources on acceptable terms, if at all, and may result in the loss of confidence in the Company’s financial stability by suppliers, customers and employees. In addition, a delisting would likely increase the price volatility of the Company’s shares of common stock and have a material adverse impact on the price of the Company’s shares of common stock.

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

None.

Item 3.		Defaults Upon Senior Securities

None.

Item 4.		[Removed and Reserved]

Item 5.		Other Information

On May 12, 2010, the Company’s Board of Directors resolved that NR Suparna would be appointed as the Company’s Chief Operating Officer, effective on May 20, 2010, the date of the Company’s Annual Shareholder Meeting.

Mr. Suparna, age 63, has over 35 years of diverse sales, marketing and management experience. From 2004 to 2009, Mr. Suparna served as President and CEO of the Bangalore, India operation of Helios and Matheson Information Technology Ltd., the Company’s parent. Mr. Suparna has also served as a Director of Helios & Matheson Global Services Pvt. Ltd., the Company’s wholly-owned subsidiary, since 2007. From 2000 to 2002, Mr. Suparna was the Chief Operating Officer of Swedish Match. The terms of Mr. Suparna’s employment agreement and compensation are currently under consideration and will be disclosed once finalized under a separate filing on a Form 8-K.

On May 12, 2010, the Company’s Board of Directors also resolved that effective May 20, 2010, Mr. Salvatore M. Quadrino will cease to serve as interim Chief Executive Officer of the Company and will revert back to his original role as the Company’s Chief Financial Officer.

Item 6.		Exhibits

(a)

Exhibits

	3.1			Certificate of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1 to the Form 10-K, as previously filed with the SEC on March 31, 2010.
	3.2			Bylaws of Helios & Matheson North America Inc., incorporated by reference to Exhibit 3.2 to the Form 10-K, as previously filed with the SEC on March 31, 2010.
	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.

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