10-K 1 helios_10k-123112.htm FORM 10-K helios_10k-123112.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One):
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the fiscal year ended December 31, 2012
 
OR

 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from ________ to ________
 
HELIOS AND MATHESON INFORMATION TECHNOLOGY INC.
 (Exact Name of Registrant as Specified in Its Charter)

Delaware
(State or Other Jurisdiction
of Incorporation)
0-22945
(Commission File Number)
 
13-3169913
(I.R.S. Employer Identification No.)
 
 
 
Empire State Building, 350 Fifth Avenue
New York, New York 10118
(Address of Principal Executive Offices)
(212) 979-8228
(Registrant’s Telephone Number,
Including Area Code)
 
 
  Securities registered pursuant to Section 12(b) of the Act:    
       
  Title of Class Name of Exchange on which Registered  
       
  Common Stock, par value $.01 per share NASDAQ Capital Market  
 
 
Securities registered pursuant to Section 12(g) of the Act:
None
 


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes   o   No   x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes   o   No   x

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 preceding 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   x   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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes   x   No   o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x

 
 

 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting Company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer   o   Accelerated filer   o  
       
Non-accelerated filer   o (Do not check if a smaller reporting company) Smaller reporting company   x  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  
Yes   o   No   x
 
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant was approximately $1,806,246 based on the average of the bid and asked prices of the registrant's common stock on the NASDAQ Capital Market on the last business day of the registrant’s most recently completed second fiscal quarter.
 
As of January 30, 2013, there were 2,330,438 shares of the registrant’s common stock, $.01 par value per share, outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the registrant’s definitive Proxy Statement for the 2013 Annual Meeting of Shareholders are incorporated by reference into Part III of this Report.  See Item 15 for a list of other exhibits incorporated by reference into this Report.
 
 
 

 
 
TABLE OF CONTENTS
 
        Page
         
PART I      1
Item 1.   Business    1
Item 1A.   Risk Factors    4
Item 1B.   Unresolved Staff Comments    5
Item 2.   Properties    5
Item 3.   Legal Proceedings    5
Item 4.   Mine Safety Disclosure    5
         
PART II      5
Item 5.   Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities    5
Item 6.   Selected Financial Data    6
Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations   6
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk   10
Item 8.   Financial Statements and Supplementary Data   10
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   11
Item 9A.   Controls and Procedures    11
Item 9B.   Other Information   12
         
PART III     12
Item 10.   Directors, Executive Officers and Corporate Governance    12
Item 11.   Executive Compensation    12
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters    12
Item 13.   Certain Relationships and Related Transactions, and Director Independence    13
Item 14.   Principal Accountant Fees and Services    13
         
PART IV      13
Item 15.   Exhibits and Financial Statement Schedules    13
 
 
 

 

Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 throughout and in particular in the discussion at Item 7 titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.  These are statements regarding financial and operating performance and results and other statements that are not historical facts.  The words “expect,” “project,” “estimate,” “believe,” “anticipate,” “intend,” “plan,” “forecast,” and similar expressions are intended to identify forward-looking statements.  Certain important risks, including those discussed in the risk factors set forth in Item 1A of this report, could cause results to differ materially from those anticipated by some of the forward-looking statements.  Some, but not all, of these risks include, among other things:

 
·
our lack of capital and whether or not we will be able to raise capital when we need it;

 
·
changes in local, state or federal regulations that will adversely affect our business;

 
·
our ability to market and distribute or sell our products;

 
·
whether we will continue to receive the services of certain officers and directors;

 
·
our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others; and

 
·
other uncertainties, all of which are difficult to predict and many of which are beyond our control.

We do not intend to update forward-looking statements.  You should refer to and carefully review the information in future documents we file with the Securities and Exchange Commission.

 
 

 

PART I

ITEM 1.  BUSINESS

General

Since 1983, Helios and Matheson Information Technology Inc (“Helios and Matheson” or the “Company”) has provided high quality IT services and solutions to Fortune 1000 companies and other large organizations.  The Company is headquartered in New York City and has a second office in Bangalore, India.   The Company's shares are listed on The NASDAQ Capital Market (“NASDAQ”) under the symbol "HMNY". Our website address is www.hmny.com. Information on our website is not a part of this report.
 
Helios and Matheson Information Technology Ltd. (“Helios and Matheson Parent”), an IT services organization with corporate headquarters in Chennai, India, owns approximately 75% of the Company’s outstanding common stock.

Controlled Company

The Board of Directors has determined that Helios and Matheson meets the definition of a “Controlled Company” as defined by Rule 5615(c) of the NASDAQ Listing Rules.  A “Controlled Company” is defined in Rule 5615(c) as 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.

Industry Background

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 companies’ 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 partnering with IT service providers like the Company for application development, support and related services.  Accordingly, organizations turn to external IT services organizations such as Helios and Matheson to develop, support and enhance their internal IT systems.

Strategy

Helios and Matheson endeavors to provide high-quality, value-based offerings in the areas of Application Value Management, Application Development, Integration, Independent Validation, Infrastructure and Information Management services. The Company believes that a philosophy of intense focus on client satisfaction, business aware solutions and guaranteed delivery provides tangible business value to its client base across banking, financial services, insurance, healthcare, pharmaceutical and manufacturing/automotive verticals.

The Company’s goal is to realize consistent growth and competitive advantage through the following strategic initiatives:

Expand Existing Client Market Share. The Company endeavors to expand its penetration and market share within its existing client base through client focused sales and marketing initiatives allowing the Company to offer existing clients a broad suite of technology services. The Company’s relationships with current clients provide opportunities to market additional services in current and new geographical markets.

Expand Client Base. The Company endeavors to expand its client base particularly in the financial services sector. The Company endeavors to broaden the geography of its client base by offering services to many of its existing clients in their offices outside New York and New Jersey and using such contacts as a gateway into new geographies.
 
 
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Global Delivery. The Company is dedicated to providing a Flexible Delivery Model to its clients, which allows for dynamically configurable ”right shoring” of service delivery based on client needs.

Operational Efficiency. The Company is keeping a tight rein on discretionary expenditures and SG&A to enhance its competitiveness.

Helios and Matheson Operations

Service Lines.  The Company’s main services include Application Value Management, Application Development, Integration, Independent Validation, Infrastructure and Information Management services.  These services account for approximately 91% of the Company’s revenues.
 
Software.  Helios and Matheson markets and distributes software products developed by independent software developers. During 2012, software revenue was approximately 1% of the Company’s total revenues.

Clients
 
The Company’s clients consist primarily of Fortune 1000 companies and other large organizations.  The Company’s clients operate in a diverse range of industries with a concentration in the financial services, pharmaceutical and manufacturing/automotive industries.  The Company’s four out of top five clients measured by revenue for the year ended December 31, 2012 have been clients for over five years.  The revenues of the Company’s top three clients represented approximately 88% of the revenues for the twelve month period ended December 31, 2012.  The revenues of the Company’s top three clients represented approximately 76% of revenues for the same period in 2011.  No other client represented greater than 10% of the Company’s revenues for such periods. During 2013, the Company expects that a significant portion of its revenues will continue to come from these clients.  As indicated above, the Company continues to work positively to expand its client base by offering services to many of its existing clients in their offices outside New York and New Jersey and using such contacts as a gateway into new geographies.

All of the Company’s revenues were derived from clients within the United States for each of the years ended December 31, 2012 and 2011.

Sales and Marketing

The Company’s marketing strategy is to develop long-term mutually beneficial relationships with existing and new clients that will lead the Company to become a preferred provider of IT services.  The Company seeks to employ a "cross selling" approach where appropriate to expand the number of services utilized by a single client.  Other sales and marketing methods include client referrals, networking, and attendance at conferences.

Competition

The market for IT consulting services is intensely competitive, affected by rapid technological advances and includes a large number of competitors.  The Company's competitors include the current or former consulting divisions of the “Big Four” accounting firms, major offshore outsourcing companies, systems consulting and implementation firms, application software development firms, management consulting firms, divisions of large hardware and software companies, and niche providers of IT services. Many of these competitors have significantly greater financial, technical and marketing resources than the Company.  Competition imposes significant pricing pressures on the Company. Given the positive improvement in operations during the 2012 fiscal year, the Company expects to improve its competitive presence in the IT Industry going forward.

The Company believes that the principal competitive factors in the IT services market include breadth of services offered, industry and technology knowledge, expertise, cost competitiveness, quality of service and responsiveness to client needs.  A critical component of the Company’s ability to compete in the marketplace is its ability to attract, develop, motivate and retain skilled professionals.

 
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Human Resources

At December 31, 2012, the Company had 38 employees, of whom 30 were client consultants, 3 provided sales and marketing services, 1 provided technical and customer service and 4 were executive, financial and administrative personnel. None of the Company’s employees are represented by a labor union, and the Company has never incurred a work stoppage. In addition to these employees, the Company was utilizing the services of 55 independent contractors at December 31, 2012. These independent contractors act as consultants and they are not employees of the Company.

Long-Lived Assets

Substantially all of the Company’s long-lived assets were located in the United States for the years ended December 31, 2012 and 2011, respectively.

Intellectual Property Rights

The Company relies upon a combination of nondisclosure and other contractual arrangements and trade secret, copyright and trademark laws to protect its proprietary rights and the proprietary rights of third parties from whom the Company licenses intellectual property, but there can be no assurance that the steps taken by the Company in this regard will be adequate to deter misappropriation of proprietary information or that the Company will be able to detect unauthorized use and take appropriate steps to enforce its intellectual property rights.  In addition, the Company is subject to the risk of litigation alleging infringement of third-party intellectual property rights.  Any such claims could require the Company to spend significant sums in litigation, pay damages, develop non-infringing intellectual property or acquire licenses to the intellectual property which is the subject of the asserted infringement.

Effective as of May 2, 2011, the company changed its name from Helios and Matheson North America Inc. to Helios and Matheson Information Technology Inc. Management believes that the new name more accurately reflects its business and operations going forward. Further, the name change reflects the Company’s desire to develop long term, mutually beneficial opportunities both in the United States and globally through its association with Helios and Matheson Parent, an information technology services organization with corporate headquarters in Chennai, India and the owner of approximately 75% of the Company’s outstanding common stock.  Helios and Matheson Parent has granted the Company a non-exclusive right to use the name "Helios and Matheson" and related trademarks, service names and service marks.  Helios and Matheson Parent has the right to terminate the Company’s right to use such name and related trademarks and service marks upon each of the following events: (i) the Company duly and properly effectuates a change of the Company's corporate name which change is not consented to or approved by Helios and Matheson Parent; (ii) the Company consummates a business combination or merger, pursuant to which the Company is not the surviving corporation, or the Company consummates a sale of all or substantially all of its assets without the consent or approval of Helios and Matheson Parent or (iii) the Company files, or becomes a debtor subject to, a bankruptcy proceeding which proceeding or filing was not commenced by Helios and Matheson Parent or consented to by Helios and Matheson Parent.  The Company could be materially adversely affected if Helios and Matheson Parent terminated the Company’s rights to use such name and the related trademarks and service marks as the Company would be forced to change its name, commence marketing under a new name and would not be able to enjoy the benefits of the Company’s marketing efforts under the name Helios and Matheson.  Additionally, the Company is reliant upon Helios and Matheson Parent to protect Helios and Matheson’s trademarks, trade names, service marks and service names.
 
All ownership rights to software developed by the Company in connection with a client engagement are typically assigned to the client.  In limited situations, the Company may retain ownership or obtain a license from its client, which permits the Company or a third party to market the software for the joint benefit of the client and the Company or for the sole benefit of the Company.
 
Seasonality
 
The Company’s business has not been affected by seasonality.
 
 
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ITEM 1A.  RISK FACTORS

The continued uncertain economic environment may adversely affect our business.

Spending on IT consulting services is largely discretionary and will decline during economic downturns or periods of economic uncertainty when the Company’s clients are operating under reduced budgets, including during the current period.  A significant portion of the Company’s revenues is derived from sales to clients in the financial services, pharmaceutical and manufacturing/automotive industries.  Many of the Company’s major clients in the financial services industry came under significant financial pressure as a result of the recent economic crisis.  If the period of economic uncertainty continues or if the economic environment worsens it could further erode the Company’s ability to sell future projects.

We rely on concentrated client base for much of our revenue.

We rely on a concentrated client base for a significant portion of our revenue.  During the year ended December 31, 2012, our top three clients accounted for 88% of our revenue.  During the year ended December 31, 2011, our top three clients accounted for 76% of our revenue.  If we were to lose any of these clients, we cannot assure you that they could be replaced quickly or at all.  Our loss of any of these clients could have a material adverse affect on our revenues and results of operations.

Our stock price is volatile.

The Company’s stock was traded on 201 days during 2012 and may be subject to wide fluctuations in price in response to variations in quarterly results of operations and other factors, including financings, technological innovations and general economic or market conditions. Stock markets have experienced extreme price and volume trading volatility in the recent past.  This volatility had a substantial effect on the market price of many technology companies that has often been unrelated to the operating performance of those companies.  This volatility may adversely affect the market price of the Company’s common stock.

Our industry is subject to rapid change.

Our industry is characterized by rapidly changing technology, evolving industry standards, frequent new product and service introductions, evolving distribution channels and changing customer demands.  We must adapt to rapidly changing technological and application needs by continually improving our products as well as introducing new products and services to address user demands.  Our success will depend in part on our ability to develop information technology solutions to meet client expectations, and offer services and solutions that keep pace with continuing changes in information technology, evolving industry standards and changing client preferences.
 
Our industry is intensely competitive.
 
The market for IT consulting services is intensely competitive, affected by rapid technological advances and includes a large number of competitors.  Our competitors include the current or former consulting divisions of the “Big Four” accounting firms, major offshore outsourcing companies, systems consulting and implementation firms, application software development firms, management consulting firms, divisions of large hardware and software companies, and niche providers of IT services.  Many of these competitors have significantly greater financial, technical and marketing resources than we have.  Competition imposes significant pricing pressures on us.
 
Our success depends on our ability to protect our intellectual property.
 
We rely upon a combination of nondisclosure and other contractual arrangements and trade secret, copyright and trademark laws to protect our proprietary rights and the proprietary rights of third parties from whom we license intellectual property, but there can be no assurance that the steps we take in this regard will be adequate to deter misappropriation of proprietary information or that we will be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights.
 
 
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Infringement on the proprietary rights of others could put us at a competitive disadvantage and any related litigation could be time consuming and costly.
 
Third parties may claim that we violated their intellectual property rights.  To the extent of a violation of a third party’s intellectual property rights, we may be prevented from operating our business as planned, and may be required to pay damages, to obtain a license, if available, or to use a non-infringing method if possible, to accomplish our objectives.  Any of these claims, with or without merit, could result in costly litigation and divert the attention of key personnel from our day-to-day operations.  If such claims are successful, they could result in costly judgments or settlements.
 
While we recently declared and paid a dividend of $0.09 per share, there can be no assurance that we will pay dividends in the future.
 
On February 3, 2013, our Board of Directors declared a cash dividend of $0.09 per share to shareholders of record on February 18, 2013.  However, there can be no assurance that we will pay dividends in the future.  We may use all of our earnings to cover operating costs.  We cannot assure you that we would, at any time in the future, again generate sufficient surplus cash that would be available for distribution to the holders of our common stock as a dividend. Therefore, at this time you should not expect to receive cash dividends on our common stock.
 
ITEM 1B.  UNRESOLVED STAFF COMMENTS

Not Required.

ITEM 2.  PROPERTIES

The Company’s executive office is located at the Empire State Building, 350 Fifth Avenue, Suite # 7520, New York, NY 10118.  The Company’s executive office is located in a leased facility with a term expiring on April 30, 2017. In addition, the Company has an office in Bangalore, India and pays a facilities fee that is based on the utilization of such facility.  The Company is currently using such facilities under a Statement of Work, which expires on July 31, 2013.
.
ITEM 3.  LEGAL PROCEEDINGS

See Note 13 “Legal Proceedings” included in the Company’s financial statements which are included at Item 15 (a)  of Part IV of this report.

ITEM 4.  MINE SAFETY DISCLOSURE

Not Applicable
 
PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Price Range of Common Stock

The Company’s common stock is currently listed on The NASDAQ Capital Market under the symbol “HMNY.”  The Company completed an initial public offering of its common stock on August 8, 1997 and was listed on The NASDAQ National Market.  In August 2002, the Company’s common stock transitioned to The NASDAQ Capital Market.

 
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The following table sets forth the quarterly range of high and low sale prices of the Company’s common stock since January 1, 2011 as reported by NASDAQ:
 
2012
 
High
   
Low
 
First Quarter
    7.00       1.71  
Second Quarter
    4.70       1.97  
Third Quarter
    3.70       1.81  
Fourth Quarter
    3.90       1.92  
                 
2011
               
First Quarter
    3.45       1.73  
Second Quarter
    3.25       0.75  
Third Quarter
    3.32       0.64  
Fourth Quarter
    3.90       0.74  
 

Dividends
 
During the last two fiscal years, the Company has not paid any cash dividends on its common stock. However on February 3, 2013, our Board of Directors declared a cash dividend of $0.09 per share to shareholders of record on February 18, 2013.  See Note 14 “Subsequent Events” included in the Company’s financial statements which are included at Item 15 (a) of Part IV of this report for details on this dividend.
 
Holders
 
There were approximately 14 registered holders of record of the Company’s common stock as of January 30, 2013.
 
Share Repurchases
 
None.
 
Equity Compensation Plan
 
For information about the Company’s equity compensation plan, please see Item 12 of this report.
 
ITEM 6.  SELECTED FINANCIAL DATA

Not Required.
 
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 was incorporated in the state of New York in February of 1983 and became a public company in August of 1997.  In October of 2009, Helios and Matheson changed its state of incorporation from New York to Delaware.  The Company is headquartered in New York City, New York and has a subsidiary in Bangalore, India.  The Company provides a wide range of high quality information technology (“IT”) consulting solutions and custom application development services to Fortune 1000 companies and other large organizations.  The Company's shares are listed on The NASDAQ Capital Market (“NASDAQ”) under the symbol "HMNY".

The Company’s services include Application Value Management, Application Development, Integration, Independent Validation, Infrastructure and Information Management services. The Company believes that a philosophy of intense focus on client satisfaction, business aware solutions and guaranteed delivery provides tangible business value to its client base across banking, financial services, insurance, pharmaceutical and manufacturing/automotive verticals.
 
 
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The Company is dedicated to providing a Flexible Delivery Model to its clients, which allows for dynamically configurable ”right shoring” of service delivery based on client needs.

For the three and twelve months ended December 31, 2012, approximately 94% 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 92% and 92% for the three and twelve months ended December 31, 2011, 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, 2012 and 2011, gross margin was 22.5% and 20.7% 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, 2012, was approximately 94% and 96%, respectively as compared to 93% and 95% for the three and twelve months ending December 31, 2011, 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

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 Bombay 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.
 
 
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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,  
    2012     2011  
Revenues     100.0 %     100.0 %
Cost of revenues     77.5 %     79.3 %
Gross profit     22.5 %     20.7 %
Operating expenses     18.4 %     19.0 %
Income from operations     4.1 %     1.7 %
Net Income     3.4 %     1.7 %
 
Comparison of Year Ended December 31, 2012 to Year Ended December 31, 2011
 
Revenues. Revenues of the Company increased by $0.2 million or 1.4% from $12.2 million for the twelve months ended December 31, 2011 to $12.4 million for the twelve months ended December 31, 2012.  The increase was primarily attributable to an increase in consulting and RPO revenue.
 
Gross Profit. The resulting gross profit for the twelve months ended December 31, 2012 was $2.8 million, an increase of $261,000 or 10.3% from the 2011 comparable period amount of $2.5 million.  As a percentage of total revenue, gross margin for the twelve months ended December 31, 2012 and 2011 was 22.5% and 20.7% respectively. The gross margin increased primarily as a result of higher margin long term annuity revenue and additional net revenue from RPO services.
 
 
8

 
 
Operating Expenses. Operating expenses are comprised of Selling, General and Administrative (“SG&A”) expenses and depreciation and amortization.  Operating expenses have been stable at approximately $2.3 million for the twelve months ended December 31, 2011 and 2012.  The Company continues to focus on various cost reduction initiatives including, but not limited to, renegotiation with major vendors and process restructuring.
 
Other Expenses. Other expenses for the twelve months ended December 31, 2012 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.  The comparable 2011 period was comprised exclusively of interest income of $3,669 for the twelve months ended December 31, 2011.
 
Taxes.  For the twelve months ended December 31, 2012, the Company recorded a tax provision of $24,000 for minimum state taxes and provision to return adjustments of ($12,845) from the filing of state and federal tax returns, as compared to a tax provision of $17,500 for minimum state taxes and provision to return adjustments of ($5,257) for the twelve months ended December 31, 2011.  In addition, deferred taxes were not impacted by the pre-tax net income since such amounts were fully reserved as of December 31, 2012 and 2011 respectively.
 
Net Income. As a result of the above, the Company had net income of approximately $422,000 or $0.18 per basic and diluted share for the twelve months ended December 31, 2012, compared to net income of approximately $203,000 or $0.09 per basic and diluted share for the twelve months ended December 31, 2011.
 
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 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 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, still the Company has reported a 108% increase in net income during 2012 as compared to net income during 2011. The Company had an operating income of approximately $506,000 and a net income of approximately $422,000 for the twelve months ended December 31, 2012.  During the twelve months ended December 31, 2011, the Company had an operating income of approximately $211,000 and a net income of approximately $203,000.
 
The Company's cash balances were approximately $2.9 million at December 31, 2012 as compared to $ 2.0 million at December 31, 2011.  Net cash provided by operating activities for the twelve months ended December 31, 2012 was approximately $928,000 as compared to approximately $358,000 for the twelve months ended December 31, 2011.

The Company's accounts receivable, less allowance for doubtful accounts, at December 31, 2012 and December 31, 2011 were $1.3 million and $1.7 million, respectively, representing 34 days and 52 days of sales outstanding (“DSO”) respectively.  The Company believes DSO of 34 days and 52 days in 2012 and 2011, 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, 2012 and at December 31, 2011 were approximately $1.2 million and $1.1 million, respectively.

For the twelve months ended December 31, 2012 and 2011, revenues from the Company’s three largest clients represented 88% and 76% of revenues, respectively.  No other customer represented greater than 10% of the Company's revenues for such periods.

Net cash used in investing activities was $43,636 and $0, for the twelve months ended December 31, 2012 and 2011, respectively.  During 2012, additions of property and equipment were offset by disposals totaling $12,000.
 
 
9

 
 
For the twelve month periods ended December 31, 2012 and 2011, there was no cash provided by financing activities.

In management's opinion, cash flows from operations combined with cash on hand will provide adequate flexibility for funding the Company's working capital obligations for the next twelve months.
 
For the twelve months ended December 31, 2012 and 2011, 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, 2012 and 2011.

Contractual Obligations

The Company has the following contractual obligations as of December 31, 2012:
 
    Payments Due by Period  
Contractual Obligations
  Total     Less Than 1 Year     1-3 Years     3-5 Years    
More Than
5 Years
 
                               
Operating Lease Obligations                              
Rent (1)     680,472       157,032       314,064       209,376       -  
                                         
Total   $ 680,472     $ 157,032     $ 314,064     $ 209,376     $ -  
 
(1) The Company has a New York facility at 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.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Required.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See the Company’s financial statements which are included at Item 15 (a) (1) and (2) of Part IV of this report.

 
10

 
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
 
Our management under the supervision of and with the participation of our President and Chief Executive Officer and Principal Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or the “Exchange Act”) as of December 31, 2012.  Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our President and Chief Executive Officer, and Principal Financial Officer, to allow timely decisions regarding required disclosures.  Based on that evaluation, our President and Chief Executive Officer and Principal Financial Officer have concluded that, as of December 31, 2012, our disclosure controls and procedures were effective.

Management Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the preparation of the financial statements for external purposes in accordance with U.S. generally accepted accounting principles.  Internal control over financial reporting includes those policies and procedures that

 
(i)
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

 
(ii)
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

 
(iii)
Provide reasonable assurance regarding prevention or timely detection of the unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
 
Management assessed the Company’s internal control over financial reporting as of December 31, 2012, the end of the Company’s fiscal year.  Management based its assessment on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on management’s assessment, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2012. Management has reviewed the results of the assessment of the Company’s internal controls over financial reporting with the Audit Committee of the Company’s Board of Directors.

Inherent Limitations on Effectiveness of Controls
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
 
11

 
 
Changes in Internal Controls
 
During the period covered by this report, there was no change in the Company’s internal control over financial reporting for the year (as defined in Rule 13a-15(f) of the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.  OTHER INFORMATION

None
 
PART III

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

  The information concerning the Company’s Code of Ethics is set forth below in this Item 10.  All other information required by this item is incorporated by reference to the Company’s Proxy Statement for the 2013 Annual Meeting of Shareholders.

Code of Ethics

The Board of Directors has adopted a code of ethics designed, in part, to deter wrongdoing and to promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships, full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with or submits to the Securities and Exchange Commission and in the Company’s other public communications, compliance with applicable governmental laws, rules and regulations, the prompt internal reporting of code violations to an appropriate person or persons, as identified in the code and accountability for adherence to the code.  The code of ethics applies to all directors, executive officers and employees of the Company.  The Company will provide a copy of the code to any person without charge, upon request to Ms. Jeannie Lovastik, Human Resources Manager by calling 212-979-8228 or writing to Ms. Lovastik’s attention at Helios and Matheson Information Technology Inc., 350 Fifth Avenue, Suite 7520, New York, New York, 10118.

The Company intends to disclose any amendments to or waivers of its code of ethics as it applies to directors or executive officers by filing them on Form 8-K.

ITEM 11.  EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to the Company’s Proxy Statement for the 2013 Annual Meeting of Shareholders.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

The information concerning the Company’s equity compensation plan is set forth below in this Item 12.  All other information required by this item is incorporated by reference to the Company’s Proxy Statement for the 2013 Annual Meeting of Shareholders.

 
12

 
 
Equity Compensation Plan Information

The Equity Compensation Plan Information as of December 31, 2012 was as follows:

Plan Category
 
Number of securities to be issued upon exercise of outstanding options, warrants and rights as of December 31,2012
   
Weighted-average exercise price of outstanding options, warrants and rights as of December 31, 2012
   
Number of securities remaining available for future issuance under equity compensation plans (Excluding securities to be issued upon exercise of outstanding options, warrants and rights as of December 31, 2012
 
                   
Equity compensation plans approved by security holders
    -     $ -       136,375  
                         
Equity compensation plans not approved by security holders
    -       -       -  
Total
    -     $ -       136,375  

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated by reference to the Company’s Proxy Statement for the 2013 Annual Meeting of Shareholders.

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated by reference to the Company’s Proxy Statement for the 2013 Annual Meeting of Shareholders.
 
PART IV
 
ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

15(a) (1) Financial Statements

The Consolidated Financial Statements filed as part of this report are listed and indexed in the table of contents. Schedules other than those listed in the index have been omitted because they are not applicable or the required information has been included elsewhere in this report.

15(a) (2) Consolidated Financial Statement Schedules

Schedule II – Valuation and Qualifying Accounts are included in this report.

15 (a) (3) Exhibits

The exhibits filed as part of this Annual Report on Form 10-K are listed in the Exhibit Index immediately preceding the exhibits. The Company has identified in the Exhibit Index each management contract and compensation plan filed as an exhibit to this Annual Report on Form 10-K in response to Item 15(a) (3) of Form 10-K.
 
 
13

 
 
Exhibit
Number
  Description of 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 SEC on March 31, 2010.
     
3.2
 
Bylaws of Helios and Matheson Information Technology Inc. , incorporated by reference to Exhibit 3.2 to the form 10-K, as previously filed with SEC on March 31, 2010.
     
4.1
 
Specimen common stock certificate, incorporated by reference to Exhibit 4.1 to the form 10-K, as previously filed with SEC on March 31, 2010.
     
10.1
 
Securities Purchase Agreement between the Company and Helios and Matheson Information Technology Ltd. dated as of August 4, 2010, incorporated by reference to Exhibit 10.1 on Form 8-K, as previously filed with the SEC on August 6, 2010
     
10.1.1
 
Amended and Restated 1997 Stock Option and Reward Plan, incorporated by reference to Annex J to the Company’s Definitive Proxy Statement, as previously filed with the SEC on June 27, 2005. †
     
10.1.2
 
Amendment No. 1 to the Registrant’s Amended and Restated 1997 Stock Option and Award Plan, incorporated by reference to Exhibit 10.2 on Form 8-K, as previously filed with the SEC on June 9, 2006. †
     
10.1.3
 
Amendment No. 2 to the Registrant’s Amended and Restated 1997 Stock Option and Award Plan, incorporated by reference to Exhibit 10.1.3 to the Form 10-K for the period ended December 31, 2006, as previously filed with the SEC on March 29, 2007. †
     
10.1.4
 
Form of Restricted Stock Award Grant and Notice Agreement between the Registrant and each of its Non-Employee Directors, incorporated by reference to Exhibit 10.9 to the Form 10-Q for the nine months ended September 30, 2005, as previously filed with the SEC on November 14, 2005. †
     
10.1.5
 
Form of Non-Qualified Stock Option Agreement between the Registrant and each of its Non-Employee Directors incorporated by reference to Exhibit 10.10 to the Form 10-Q for the nine months ended September 30, 2005, as previously filed with the SEC on November 14, 2005. †
     
10.2
 
Memorandum of Understanding, dated as of September 22, 2010, between the Registrant and Helios and Matheson Information Technology Limited, incorporated by reference to Exhibit 10.2 to Form 10-Q for the nine months ended September 30, 2010, as previously filed with the SEC on November 15, 2010.
     
10.3
 
Form of Indemnification Agreement between the Registrant and certain of its Directors and its Chief Executive Officer, incorporated by reference to Exhibit 10.12 to the Form 10-Q for the period ended September 30, 2003 as previously filed with the SEC on November 14, 2003. †
     
10.4
 
Professional Services Agreement by and between the Registrant and IonIdea, Inc., dated as of August 1, 2012. †
     
21
 
Helios and Matheson Information Technology, Inc. (formerly Helios and Matheson North America Inc) List of Subsidiaries, incorporated by reference to Exhibit 21 to the Form 10-K for the period ended December 31, 2009, as previously filed with SEC on March 31, 2010.
     
23.2
 
Consent of Mercadien, P.C., Certified Public Accountants.
     
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
 
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
     
32.1
 
Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
14

 
 
32.2
 
Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS
 
XBRL Instance Document.
     
101.SCH
 
XBRL Taxonomy Extension Schema.
     
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase.
     
101.LAB
 
XBRL Taxonomy Extension Label Linkbase.
     
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase.
     
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase.
 

† Management contract or compensation plan.
 
 
15

 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.
 
 
HELIOS AND MATHESON INFORMATION TECHNOLOGY INC.
 
 
 
By: /s/ Divya Ramachandran
 
         Divya Ramachandran
         President and Chief Executive Officer
 
By: /s/ Umesh Ahuja
       Umesh Ahuja
       Chief Financial Officer
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature   Title   Date
         
         
         
/s/ Divya Ramachandran
 
President, Chief Executive Officer and Director
 
March 4, 2013
Divya Ramachandran   (Principal Executive Officer)    
         
         
/s/ Shri S. Jambunathan
 
Chairman and Director
 
March 4, 2013
Shri S. Jambunathan        
         
         
/s/ Viraj Patel
 
Director
 
March 4, 2013
Viraj Patel
       
         
         
/s/ Kishan Grama Ananthram
 
Director
 
March 4, 2013
Kishan Grama Ananthram        
         
         
/s/ Umesh Ahuja
 
Chief Financial Officer (Principal Financial Officer)
 
March 4, 2013
Umesh Ahuja
       
 
 
16

 
 
ITEM 15 (a) (1) and (2)
 
HELIOS AND MATHESON INFORMATION TECHNOLOGY INC.


The following consolidated financial statements and financial statement schedule of Helios and Matheson Information Technology Inc. are included in Item 8:
 
Report of Independent Registered Public Accounting Firm – Mercadien, P.C. Certified Public Accountants   F-2
     
Consolidated Balance Sheets   F-3
     
Consolidated Statements of Income and Comprehensive Income   F-4
     
Consolidated Statements of Shareholders’ Equity   F-5
     
Consolidated Statements of Cash Flows   F-6
     
Notes to Consolidated Financial Statements   F-7
     
The following consolidated financial statement schedule of Helios and Matheson Information Technology Inc. is included in Item 15(c): Schedule II – Valuation and Qualifying Accounts   S-1

All other schedules for which provision is made in the applicable accounting regulation of the SEC are not required under the related instructions or are inapplicable and therefore have been omitted.

 
F-1

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors
Helios and Matheson Information Technology Inc.

We have audited the accompanying consolidated balance sheets of Helios and Matheson Information Technology Inc. and Subsidiary, (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows for the years then ended..  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Helios and Matheson Information Technology Inc. and Subsidiary as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

We were not engaged to examine management’s assertion about the effectiveness of Helios and Matheson Information Technology Inc.’s internal control over financial reporting as of December 31, 2012 included in Item 9A on the Form 10-K entitled Management Report on Internal Control Over Financial Reporting and, accordingly, we do not express an opinion thereon.

Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole.  The Schedule II listed in the index of financial statements is presented for purposes of additional analysis and is not a required part of the basic financial statements.  The Schedule II is the responsibility of the Company’s management. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

 

/s/ Mercadien, P.C., Certified Public Accountants

Mercadien, P.C., Certified Public Accountants
Hamilton, New Jersey
March 4, 2013
 
 
F-2

 
 
HELIOS AND MATHESON INFORMATION TECHNOLOGY INC.
CONSOLIDATED BALANCE SHEETS
 
 
December 31,
 
   
2012
   
2011
 
ASSETS
           
Current Assets:
           
Cash and cash equivalents
  $ 2,861,733     $ 1,998,158  
Accounts receivable- less allowance for doubtful accounts of $32,421 at December 31, 2012, and $77,590 at December 31, 2011
    1,257,488       1,665,553  
Unbilled receivables
    21,490       46,408  
Prepaid expenses and other current assets
    130,571       83,326  
Total current assets
    4,271,282       3,793,445  
Property and equipment, net
    52,717       20,685  
Security Deposit
    1,000,000       1,000,000  
Deposits and other assets
    100,032       142,673  
Total assets
  $ 5,424,031     $ 4,956,803  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current Liabilities:
               
Accounts payable and accrued expenses
  $ 1,171,249     $ 1,104,736  
Total current liabilities
    1,171,249       1,104,736  
                 
Shareholders' equity:
               
Preferred stock, $.01 par value; 2,000,000 shares authorized; no shares issued and outstanding as of December 31, 2012, and December 31, 2011
    -       -  
                 
Common stock, $.01 par value; 30,000,000 shares authorized; 2,330,438 issued and outstanding as of December 31, 2012 and as of December 31, 2011
    23,304       23,304  
                 
Paid-in capital
    37,855,740       37,855,740  
Accumulated other comprehensive loss - foreign currency translation
    (46,910 )     (25,932 )
Accumulated deficit
    (33,579,352 )     (34,001,045 )
Total shareholders' equity
    4,252,782       3,852,067  
Total liabilities and shareholders' equity
  $ 5,424,031     $ 4,956,803  
 
See accompanying notes to consolidated financial statements.
 
 
F-3

 
 
 HELIOS AND MATHESON INFORMATION TECHNOLOGY INC.
 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 
   
Year Ended December 31,
 
   
2012
   
2011
 
             
Revenues
  $ 12,368,920     $ 12,203,990  
Cost of revenues
    9,582,191       9,677,939  
Gross profit
    2,786,729       2,526,051  
Operating expenses:
               
Selling, general and administrative
    2,266,666       2,290,646  
Depreciation and amortization
    14,092       23,928  
      2,280,758       2,314,574  
Income from operations
    505,971       211,477  
Other income(expense):
               
Early lease termination fee
    (82,548 )     -  
Interest income
    9,425       3,669  
      (73,123 )     3,669  
Income before income taxes
    432,848       215,146  
Provision for income taxes
    11,155       12,243  
Net Income
    421,693       202,903  
Other comprehensive loss - foreign currency adjustment
    (20,978 )     (16,070 )
Comprehensive Income
  $ 400,715     $ 186,833  
                 
                 
Basic and diluted net income per share
  $ 0.18     $ 0.09  
 
See accompanying notes to consolidated financial statements.
 
 
F-4

 
 
HELIOS AND MATHESON INFORMATION TECHNOLOGY INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
                           
Additional
   
Accumulated
             
   
Preferred Stock
   
Common Stock
   
Paid-In
   
Other Comp
   
Accumulated
       
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Income
   
Deficit
   
Total
 
Balance, December 31, 2010
    -       -       2,330,438     $ 23,304     $ 37,855,740     $ (9,862 )   $ (34,203,948 )   $ 3,665,234  
Net Income
    -       -       -       -       -       -       202,903       202,903  
Foreign Exchange Translation
    -       -       -       -       -       (16,070 )     -       (16,070 )
Balance, December 31, 2011
    -       -       2,330,438       23,304       37,855,740       (25,932 )     (34,001,045 )     3,852,067  
Net Income
    -       -       -       -       -       -       421,693       421,693  
Foreign Exchange Translation
    -       -       -       -       -       (20,978 )     -       (20,978 )
Balance, December 31, 2012
    -       -       2,330,438     $ 23,304     $ 37,855,740     $ (46,910 )   $ (33,579,352 )   $ 4,252,782  
 
See accompanying notes to consolidated financial statements.
 
 
F-5

 
 
HELIOS AND MATHESON INFORMATION TECHNOLOGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Year Ended December 31,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
Net income
  $ 421,693     $ 202,903  
Depreciation and amortization
    14,092       23,928  
Provision for doubtful accounts
    (21,761 )     (135,034 )
Gain on Sale of Fixed Assets
    (2,488 )     -  
Changes in operating assets and liabilities:
               
Accounts receivable
    429,826       692,933  
Unbilled receivables
    24,918       (46,408 )
Prepaid expenses and other current assets
    (47,245 )     (13,680 )
Deposits
    42,641       (2,970 )
Accounts payable and accrued expenses
    66,513       (344,396 )
Deferred revenue
    -       (19,504 )
Net cash provided by operating activities
    928,189       357,772  
                 
Cash flows from investing activities:
               
Net Purchase of property and equipment
    (43,636 )     -  
Net cash used in investing activities
    (43,636 )     -  
Effect of foreign currency exchange rate changes on cash and cash equivalents
    (20,978 )     (16,070 )
Net increase in cash and cash equivalents
    863,575       341,702  
Cash and cash equivalents at beginning of period
    1,998,158       1,656,456  
Cash and cash equivalents at end of period
  $ 2,861,733     $ 1,998,158  
                 
Supplemental disclosure of cash flow information:
               
Cash paid during the period for interest
  $ -     $ -  
Cash paid during the period for income taxes, net of refunds
  $ 5,936     $ 5,350  
 
See accompanying notes to consolidated financial statements.
 
 
F-6

 
 
HELIOS AND MATHESON INFORMATION
TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     SIGNIFICANT ACCOUNTING POLICIES

Description of Business and Basis of Presentation
 
Helios and Matheson Information Technology Inc. (“Helios and Matheson” or the “Company”) was incorporated in the state of New York in February of 1983 and became a public company in August of 1997.  In October of 2009, Helios and Matheson changed its state of incorporation from New York to Delaware.  The Company is headquartered in New York, New York and has offices in New York and Bangalore, India.  The Company provides a wide range of information technology (“IT”) consulting, custom application development and solutions to Fortune 1000 companies and other large organizations.  The Company supports all major computer technology platforms and supports client IT projects by using a broad range of third-party software applications.
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of Helios and Matheson Information Technology Inc. and its 100% owned subsidiary Helios and Matheson Global Services Private Limited (“HMGS”) from its date of acquisition on September 30, 2005.  All material inter-company accounts and transactions have been eliminated.
 
Certain amounts reported in previous years have been reclassified to conform to the fiscal 2012 presentation.
 
Accounting Standards Codification
 
The Financial Accounting Standards Board (“FASB”) issued a standard known as the FASB Accounting Standards Codification (“ASC”), which became the source of authoritative accounting and reporting standards in the United States, in addition to guidance issued by the Securities and Exchange Commission (“SEC”).  The ASC restructuring of accounting and reporting standards is designed to simplify user access to all authoritative U.S. Generally Accepted Accounting Principles (“GAAP”) by modifying the GAAP hierarchy to include only two levels of GAAP:  authoritative and non-authoritative.  The Company has adopted the disclosure and hierarchy requirements of this standard.
 
Accounting for Income Taxes
 
The Company adopted a FASB provision relating to Uncertainty in Income Taxes.  As a result of the implementation, there has been no material change to the Company’s tax position as the Company has not paid any corporate income taxes due to carry-forward of operating losses.  All tax benefits will likely not be recognized due to the substantial net operating loss carry-forwards.  With no tax due for the foreseeable future, the Company has determined that a policy to determine the accounting for interest or penalties related to the payment of tax is not necessary at this time.
 
Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws in effect when the differences are expected to reverse.  The measurement of deferred income tax assets is reduced, if necessary, by a valuation allowance for any tax benefits, which are not expected to be realized.  The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted.
 
Comprehensive Income (Loss)
 
Comprehensive income (loss) consists of two components, net income (loss) and other comprehensive income (loss).  Other comprehensive income (loss) refers to revenue, expenses, gains and losses that are recorded as an element of shareholder’s equity but are excluded from net income (loss).  The Company’s other comprehensive income (loss) is comprised of foreign currency translation adjustments.
 
 
F-7

 
 
HELIOS AND MATHESON INFORMATION
TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Foreign Currency Translation
 
Assets and liabilities denominated in non-U.S. currencies are translated at the rate of exchange prevailing on the date of the consolidated statement of financial condition and revenues and expenses are translated at average rates of exchange for the period.  Gains (losses) on translation of the consolidated financial statements are from the Company’s subsidiary where the functional currency is not the U.S. dollar.  Translation gains (losses) are reflected as a component of accumulated other comprehensive income (loss).  Gains (losses) on foreign currency transactions are included in the consolidated statements of operations.
 
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 period.  Actual results could differ from those estimates.
 
Going Concern
 
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 December 31, 2012, the Company had $2,861,733 of cash and cash equivalents on hand as compared to $1,998,158 of cash and cash equivalents at December 31, 2011.  For the year ended December 31, 2012 the Company reported net income of $421,693 as compared to net income of $202,903 for the year ended December 31, 2011. The ability of the Company to continue as a going concern is dependent on the Company continuing to achieve profitable operations in the future.
 
Earnings Per Share
 
The Company calculates earnings per share as specified by the FASB.  Basic earnings per share are calculated by dividing net earnings available to common shares by weighted average common shares outstanding.  Diluted earnings per share is calculated similarly, except that it includes the dilutive effect of the assumed exercise of securities except when it is anti-dilutive, including the effect of shares issuable under the Company’s incentive plans.
 
Cash Equivalents
 
The Company considers all highly liquid financial instruments with original maturities of three months or less when purchased to be cash equivalents.
 
Fair Value of Financial Instruments
 
The carrying value of financial instruments (principally consisting of cash, cash equivalents and accounts receivable) approximates fair value because of their short maturities.
 
Property and Equipment
 
Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets, which range from three to ten years.
 
Long-Lived Assets
 
When impairment indicators are present, the Company reviews the carrying value of its assets in determining the ultimate recoverability of their unamortized values using analyses of future undiscounted cash flows expected to be generated by the assets.  If such assets are considered impaired, the impairment recognized is measured by the amount by which the carrying amount of the asset exceeded its fair value.  Assets to be disposed of are reported at the lower of the carrying amount or fair value, less cost to sell.
 
 
F-8

 
 
HELIOS AND MATHESON INFORMATION
TECHNOLOGY INC.
NOTES TO 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.
 
Accounts Receivable and Allowance for Doubtful Accounts
 
Accounts receivable are stated at amounts due from clients, net of an 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 client 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 client 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.
 
Segment Information
 
The disclosure of segment information is not required as the Company operates in only one business segment.
 
Stock-Based Compensation
 
No non-employee equity instruments were granted in 2012 or 2011.

At December 31, 2012, the Company has a stock based compensation plan, which is described as follows:

The Company adopted a stock option Plan and award plan (the “Plan”) that 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 184,000 shares of common stock (subject to adjustment pursuant to customary anti-dilution provisions).  Stock options that have been issued from the plan vest over a period between one to four years.

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

Stock options, subject to certain restrictions, may be exercisable any time after full vesting for a period not to exceed ten years from the date of grant.  Such period is to be established by the Company in its discretion on the date of grant.  Stock options terminate in connection with the termination of employment.
 
 
F-9

 
 
HELIOS AND MATHESON INFORMATION
TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.   For the three and twelve months ended December 31, 2012 and December 31, 2011 the Company recorded stock based compensation expense of $0.

The fair value of options at the date of grant was estimated using the Black-Scholes model with the following assumptions:

   
2012
   
2011
 
Expected life (years)
    4.00       4.00  
Risk free interest rate
    0.53 %     0.54 %
Expected volatility
    1.03       1.35  
Weighted average fair value per option
  $ 0.00
(1)
  $ 0.00
(1)
 
(1) There were no options granted by the Company for the 12 months ended Decmber 31, 2012 and 2011.
 
2.   NET INCOME PER SHARE
 
The following table sets forth the computation of basic and diluted net income per share for the years ended December 31, 2012 and 2011.
 
   
Year Ended December 31,
 
   
2012
   
2011
 
Numerator for basic net income per share
           
Net income
  $ 421,693     $ 202,903  
Net income available to common stockholders
  $ 421,693     $ 202,903  
                 
Numerator for diluted net income per share
               
Net income available to common stockholders & assumed conversion
  $ 421,693     $ 202,903  
                 
Denominator:
               
Denominator for basic and diluted income per share - weighted-average shares
    2,330,438       2,330,438  
                 
Basic and diluted net income per share:
               
Net income per share
  $ 0.18     $ 0.09  
 
All options and warrants outstanding during 2012 and 2011 were not included in the computation of net income per share because the options were either not outstanding or the options were not exercisable based on current market conditions.
 
 
F-10

 
 
HELIOS AND MATHESON INFORMATION
TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
3.  PROPERTY AND EQUIPMENT
 
Property and equipment, at cost, consists of the following:
 
   
December 31,
 
   
2012
   
2011
 
Equipment and leaseholds
  $ 121,036     $ 218,045  
Software
    167,337       166,705  
Furniture and fixtures
    34,186       91,305  
Automobiles
    -       21,889  
      322,559       497,944  
Less accumulated depreciation and amortization
    269,842       477,259  
    $ 52,717     $ 20,685  
 
4.  CONTRACTUAL OBLIGATIONS AND COMMITMENTS
 
The Company has the following commitment as of December 31, 2012: operating lease obligations.  The Company has one operating lease for its corporate headquarters located in New York. As of December 31, 2012, the Company does not have any “Off Balance Sheet Arrangements”.

The Company’s contractual obligations at December 31, 2012, are comprised of the following:
 
    Payments Due by Period  
Contractual Obligations
  Total     Less Than 1 Year     1-3 Years     3-5 Years    
More Than
5 Years
 
                               
Operating Lease Obligations                              
Rent (1)     680,472       157,032       314,064       209,376       -  
                                         
Total   $ 680,472     $ 157,032     $ 314,064     $ 209,376     $ -  
 
 
(1)
The Company has a New York facility with a lease at Empire State Building with a term expiring April 30, 2017 and requiring annual payments of $157,032 during 2013.
 
5.   ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
Accounts payable and accrued expenses consist of the following:
 
   
December 31,
 
   
2012
   
2011
 
Accounts payable
  $ 176,438     $ 253,716  
Payroll
    801,405       572,668  
Other accrued expenses
    193,406       278,352  
    $ 1,171,249     $ 1,104,736  

 
F-11

 
 
HELIOS AND MATHESON INFORMATION
TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
6.   INCOME TAXES
 
The Company accounts for income taxes using the liability method.
 
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
 
Deferred tax assets and (liabilities) consist of the following:
 
   
December 31,
 
   
2012
   
2011
 
Licensing revenues
  $ (6,000 )   $ (2,000 )
Accounts receivable reserve
    36,000       54,000  
Depreciation and amortization
    263,000       265,000  
Investments
    928,000       928,000  
Other
    209,000       201,000  
Net operating losses
    5,738,000       5,481,000  
      7,168,000       6,927,000  
Valuation allowance
    (7,168,000 )     (6,927,000 )
    $ -     $ -  
 
Internal Revenue Code Section 382 places a limitation on the utilization of Federal net operating loss and other credit carry-forwards when an ownership change, as defined by the tax law, occurs.  Generally, this occurs when a greater than 50 percentage point change in ownership occurs.  On September 5, 2006, Helios 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 Code Section 382 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.
 
At December 31, 2012, the Company has federal net operating loss carry-forwards of approximately $16.4 million, which will begin to expire in 2020.  The New Jersey net operating loss carry-forwards of approximately $2.6 million will begin to expire in 2020. The full utilization of the deferred tax assets in the future is dependent upon the Company’s ability to generate taxable income; accordingly, a valuation allowance of an equal amount has been established.  During the years ended December 31, 2012 and 2011, the valuation allowance increased by approximately $241,000 and $86,000, respectively.
 
Significant components of the provision for income taxes are as follows:
 
   
Year Ended December 31,
 
   
2012
   
2011
 
Current:
           
Federal
  $ -     $ -  
State and local
    11,155       12,243  
Total Current
  $ 11,155     $ 12,243  
Deferred:
               
Federal
    -       -  
State and local
    -       -  
Total Deferred
    -       -  
    $ 11,155     $ 12,243  
 
 
F-12

 
 
HELIOS AND MATHESON INFORMATION
TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
A reconciliation between the federal statutory rate and the effective income tax rate for the years ended December 31, 2012 and 2011 is as follows:
 
   
2012
   
2011
 
Federal statutory rate
    34.0 %     34.0 %
State and local taxes net of federal tax benefit
    1.7       3.7  
Non-deductible expenses
    (2.3 )     (1.6 )
Provision to return adjustments
    -       -  
Change in valuation allowance
    (30.8 )     (30.4 )
Total
    2.6 %     5.7 %
 
7.   RETIREMENT PLAN
 
The Company sponsors a defined contribution plan under Section 401(k) of the Internal Revenue Code for its employees.  Participants can make elective contributions subject to certain limitations.  Under the plan, the Company can make matching contributions on behalf of all participants.  There were no such contributions made by the Company in 2012 and 2011.
 
8.  CONCENTRATION OF CREDIT RISK
 
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and accounts receivable.  The Company maintains its cash balances on deposit with a limited number of financial institutions in amounts which may exceed federally insured limits.  Historically, the Company has not experienced any related cash-in-bank losses.  For the twelve months ended December 31, 2012, the Company had three clients which accounted for 88% of revenues.  For the twelve months ended December 31, 2011 the Company had three clients which accounted for 76% of revenues.  No other client represented greater than 10% of the Company’s revenues for such periods.  The three clients represented approximately 85.73% of accounts receivable as of December 31, 2012.  Three clients represented approximately 69% of accounts receivable as of December 31, 2011.
 
9.  LEASES
 
The Company leases office space under a non-cancelable operating lease.  The future minimum payments for all non-cancelable operating leases as of December 31, 2012 are as follows:
 
2013
  $ 157,032  
2014
    157,032  
2015
    157,032  
2016
    157,032  
2017
    52,344  
Total minimum future lease payments
  $ 680,472
(1)
 
(1) The Company has a New York facility with a lease term expiring April 30, 2017.
 
Office leases are subject to escalations based on increases in real estate taxes and operating expenses, all of which are charged to rent expense.  Rent expense for the years ended December 31, 2012 and 2011 was approximately $237,316 and $393,798, respectively.
 
 
F-13

 
 
HELIOS AND MATHESON INFORMATION
TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
10. STOCK OPTION PLAN

The Company adopted a Stock Option Plan (the “Plan”) that 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 184,000 shares of common stock (subject to adjustment pursuant to customary anti-dilution provisions).  Stock options that have been issued from the plan vest over a period between one to four years.


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

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

Information with respect to options under the Company’s Plan is as follows:
 
         
Weighted
 
   
Number of
   
Average
 
   
Shares
   
Exercise Price
 
Balance - December 31, 2010
    13,700     $ 11.85  
Granted during 2011
    -       -  
Exercised during 2011
    -       -  
Forfeitures during 2011
    (5,700 )     8.08  
Balance - December 31, 2011
    8,000       14.55  
Granted during 2012
    -       -  
Exercised during 2012
    -       -  
Forfeitures during 2012
    (8,000 )     14.55  
Balance - December 31, 2012
    -     $ -  
 
No stock options were granted during the twelve months ended December 31, 2012.  No Stock options were exercisable at December 31, 2012 and 8,000 stock options were exercisable at December 31, 2011 with weighted average exercise prices of $14.55.
 
The following table summarizes the status of the stock options outstanding and exercisable at December 31, 2012:
 
Stock Options Outstanding
 
Exercise Price
Range
   
Weighted
Average
Exercise Price
   
Number of
Options
   
Weighted-
Remaining
Contractual Life (years)
   
Number of
Stock
Options
Exercisable
 
                           
$12.00 $24.00     $ 0.00       0       0       0  
                    0               0  
 
At December 31, 2012, the Company had 136,375 shares of common stock reserved in connection with the Stock Option Plan.
 
 
F-14

 
 
HELIOS AND MATHESON INFORMATION
TECHNOLOGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. QUARTERLY RESULTS (UNAUDITED)
 
The following is a summary of the quarterly results of operations for the years ended December 31, 2012 and 2011:
 
   
Quarter Ended
 
(in thousands, except per share amounts)
 
March 31,
2012
   
June 30,
2012
   
September 30,
2012
   
December 31,
2012
 
Revenues
  $ 2,679     $ 2,960     $ 3,404     $ 3,325  
Gross profit
    640       701       750       695  
Income from operations
    102       102       146       156  
Net income
    14       101       143       164  
Net income per share
                               
Basic and diluted net income per share
  $ 0.01     $ 0.04     $ 0.06     $ 0.07  
 
   
Quarter Ended
 
(in thousands, except per share amounts)
 
March 31,
2011
   
June 30,
2011
   
September 30,
2011
   
December 31,
2011
 
Revenues
  $ 3,249     $ 2,990     $ 3,135     $ 2,830  
Gross profit
    619       547       629       731  
(Loss)/income from operations
    (112 )     22       66       236  
Net (loss)/income
    (117 )     17       64       239  
Net (loss)/income per share
                               
Basic and diluted net (loss)/income per share
  $ (0.05 )   $ 0.01     $ 0.03     $ 0.10  
 
 
F-15

 
 
HELIOS AND MATHESON INFORMATION
TECHNOLOGY INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
12. TRANSACTIONS WITH RELATED PARTY

In September 2010, the Company entered into a Memorandum of Understanding with Helios and Matheson Parent (the “HMIT MOU”) pursuant to which Helios and Matheson Parent has agreed to make available to the Company facilities of dedicated Off-shore Development Centers (“ODCs”) and also render services by way of support in technology, client engagement, management and operating the ODCs for the Company. Helios and Matheson Parent has been providing recruitment services to Helios and Matheson Information Technology Inc. and has not charged a fee for these services. Helios and Matheson Parent also makes investments in deepening the client relationships which take the form of providing knowledge transition free of cost to clients and volume/business commitment based discounts. The investment made by Helios and Matheson Parent in this regard during the twelve months ended December 31, 2012 is approximately $203,000.  The amount payable to Helios and Matheson Parent for services rendered under the HMIT MOU was $430,722 and $540,448 for the twelve months ended December 31, 2012 and 2011, respectively and is included as a component of cost of revenue. All payments to Helios and Matheson Parent under the MOU are made after collections are received from clients. The amount paid to Helios and Matheson Parent for services rendered under the HMIT MOU was $308,778 and $615,621 for the twelve months ended December 31, 2012 and 2011, respectively.

13. LEGAL PROCEEDINGS

On April 5, 2011, the Company filed a Complaint in the Superior Court of New Jersey, Union County against Toranco-Clark Associates LLC, its former landlord, for breach of its lease agreement in the amount of $22,000.  On June 17, 2011, Toranco-Clark Associates LLC filed a Counterclaim against the Company in the amount of $24,000 for alleged breach of the lease agreement. The ultimate outcome of this matter is uncertain at this time.

During 2011, Rosen and Associates, P.C. asked for a payment of $23,680. for services it allegedly performed for the Company. No action has been filed by Rosen and Associate, P.C.

14. SUBSEQUENT EVENTS
 
Management completed an analysis of all subsequent events occurring after December 31, 2012, the balance sheet date, through March 4, 2013, the date upon which the year-end consolidated financial statements were issued, and determined the following disclosures to be necessary or appropriate:
 
 
·
Dividend: The Board of the Company declared a dividend of $0.09 per share of the Company's common stock amounting to a payout of $209,739.42. The dividend is payable on March 5, 2013 to shareholders of record on February 18, 2013.
 
 
F-16

 
 
HELIOS AND MATHESON INFORMATION
TECHNOLOGY INC.
 
Schedule II – Valuation and Qualifying Accounts
 
         
Additions
             
          (1)     (2)              
Description
 
Balance at
Beginning of
Period
   
Charged to
Costs and
Expenses
   
Charged to
Other Accounts
Describe
     
Deductions -
Describe
     
Balances at
End of Period
 
Reserves and allowances deducted from asset accounts:
                                     
For the year ended December 31, 2012
                                     
Allowance for doubtful accounts
  $ 77,590     $ (21,761 )   $ (23,408 ) (b)   $ -       $ 32,421  
For the year ended December 31, 2011
                                           
Allowance for doubtful accounts
  $ 212,624     $ (135,034 )   $ -       $ -       $ 77,590  
For the year ended December 31, 2010
                                           
Allowance for doubtful accounts
  $ 220,879     $ (36,320 )   $ 61,471   (b)   $ (33,406 ) (a)   $ 212,624  
 
(a) Uncollectible accounts written off during 2010.
 
(b) Uncollectible accounts charged off against specific accruals for the purpose
 
 
S-1

 
 
EXHIBIT INDEX
 
Exhibit
Number
  Description of 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 SEC on March 31, 2010.
     
3.2
 
Bylaws of Helios and Matheson Information Technology Inc., incorporated by reference to Exhibit 3.2 to the form 10-K, as previously filed with SEC on March 31, 2010.
     
4.1
 
Specimen common stock certificate, incorporated by reference to Exhibit 4.1 to the form 10-K, as previously filed with SEC on March 31, 2010.
     
10.1
 
Securities Purchase Agreement between the Company and Helios and Matheson Information Technology Ltd. dated as of August 4, 2010, incorporated by reference to Exhibit 10.1 on Form 8-K, as previously filed with the SEC on August 6, 2010.
     
10.1.1
 
Amended and Restated 1997 Stock Option and Reward Plan, incorporated by reference to Annex J to the Company’s Definitive Proxy Statement, as previously filed with the SEC on June 27, 2005. †
     
10.1.2
 
Amendment No. 1 to the Registrant’s Amended and Restated 1997 Stock Option and Award Plan, incorporated by reference to Exhibit 10.2 on Form 8-K, as previously filed with the SEC on June 9, 2006. †
     
10.1.3
 
Amendment No. 2 to the Registrant’s Amended and Restated 1997 Stock Option and Award Plan, incorporated by reference to Exhibit 10.1.3 to the Form 10-K for the period ended December 31, 2006, as previously filed with the SEC on March 29, 2007. †
     
10.1.4
 
Form of Restricted Stock Award Grant and Notice Agreement between the Registrant and each of its Non-Employee Directors, incorporated by reference to Exhibit 10.9 to the Form 10-Q for the nine months ended September 30, 2005, as previously filed with the SEC on November 14, 2005. †
     
10.1.5
 
Form of Non-Qualified Stock Option Agreement between the Registrant and each of its Non-Employee Directors incorporated by reference to Exhibit 10.10 to the Form 10-Q for the nine months ended September 30, 2005, as previously filed with the SEC on November 14, 2005. †
     
10.2
 
Memorandum of Understanding, dated as of September 22, 2010, between the Registrant and Helios and Matheson Information Technology Limited, incorporated by reference to Exhibit 10.2 to Form 10-Q for the nine months ended September 30, 2010, as previously filed with the SEC on November 15, 2010.
     
10.3
 
Form of Indemnification Agreement between the Registrant and certain of its Directors and its Chief Executive Officer, incorporated by reference to Exhibit 10.12 to the Form 10-Q for the period ended September 30, 2003 as previously filed with the SEC on November 14, 2003. †
     
10.4
 
Professional Services Agreement by and between the Registrant and IonIdea, Inc., dated as of August 1, 2012. †
     
21
 
Helios and Matheson Information Technology, Inc. (formerly Helios and Matheson North America Inc) List of Subsidiaries, incorporated by reference to Exhibit 21 to the Form 10-K for the period ended December 31, 2009, as previously filed with SEC on March 31, 2010.
     
23.2
 
Consent of Mercadien, P.C., Certified Public Accountants.
     
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
     
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
 
 
 

 
 
32.1
 
Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
 
Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS
 
XBRL Instance Document.
     
101.SCH
 
XBRL Taxonomy Extension Schema.
     
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase.
     
101.LAB
 
XBRL Taxonomy Extension Label Linkbase.
     
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase.
     
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase.
 
 

† Management contract or compensation plan.