UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
Post-Effective
Amendment No. 2
to
FORM
SB-2
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933FINDEX.COM,
INC.
(Name
of
Small Business Issuer in Its Charter)
|
Nevada
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7372
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88-0379462
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(State
or other Jurisdiction
Incorporation
or Organization)
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(Primary
Standard Industrial
Classification
Code Number)
|
(I.R.S.
Employer
Identification
Number)
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11204
Davenport Street, Suite 100
Omaha,
Nebraska 68154
(402)
333-1900
(Address
and Telephone Number of Principal Executive Offices and Principal Place of
Business)
Steven
Malone
President
and Chief Executive Officer
FINDEX.COM,
INC.
11204
Davenport Street, Suite 100
Omaha,
Nebraska 68154
(402)
333-1900
(Name,
Address and Telephone Number of Agent For Service)
Copies
to:
Michael
M. Membrado, Esq.
M.M.
Membrado, PLLC
115
East
57th
Street,
Suite 1006
New
York,
New York 10022
Approximate
Date of Proposed Sale to the Public: From time to time after the effective
date
of this registration statement until such time that all of the shares of
common
stock hereunder have been sold.
If
any of
the securities being registered on this form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, as
amended (the “Securities Act”) check the following box. [X]
If
this
form is filed to register additional securities for an offering pursuant
to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If
this
form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the
same
offering. [ ]
If
this
form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the
same
offering. [ ]
If
delivery of the prospectus is expected to be made pursuant to Rule 434, please
check the following box. [ ]
CALCULATION
OF REGISTRATION FEE
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TITLE
OF SECURITIES TO BE REGISTERED
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AMOUNT
TO BE REGISTERED(1)
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PROPOSED
MAXIMUM OFFERING
PRICE PER
SHARE
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PROPOSED
MAXIMUM AGGREGATE
OFFERING
PRICE
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AMOUNT
OF REGISTRATION
FEE
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||||||||||||||
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Common
Stock, par value
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|||||||||||||||||||
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$.001
per share
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24,341,666
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(2)
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$
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0.090
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(3)
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$
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2,190,750
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$
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277.57
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||||||||
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Common
Stock, par value
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|||||||||||||||||||
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$.001
per share
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10,937,500
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(4)
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$
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0.180
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(5)
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$
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1,968,750
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$
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249.44
|
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||||||||
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Common
Stock, par value
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|||||||||||||||||||
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$.001
per share
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10,937,500
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(4)
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$
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0.600
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(5)
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$
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6,562,500
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$
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831.47
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||||||||
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Common
Stock, par value
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|||||||||||||||||||
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$.001
per share
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125,000
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(4)
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$
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0.148
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(5)
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$
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18,500
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$
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2.34
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||||||||
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Common
Stock, par value
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|||||||||||||||||||
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$.001
per share
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250,000
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(4)
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$
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0.100
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(5)
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$
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25,000
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$
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3.17
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||||||||
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Common
Stock, par value
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|||||||||||||||||||
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$.001
per share
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150,000
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(4)
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$
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0.022
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(5)
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$
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3,300
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$
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0.42
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||||||||
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Common
Stock, par value
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|||||||||||||||||||
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$.001
per share
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600,000
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(4)
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$
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0.150
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(5)
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$
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90,000
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$
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11.40
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||||||||
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Total
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47,341,666
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$
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10,858,800
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$
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1,375.81
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(6)
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|||||||||||||
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(1)
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Pursuant
to Rule 416 under the Securities Act, this registration statement
also
covers such indeterminate number of additional shares of common
stock as
may be issuable upon exercise of warrants to prevent dilution resulting
from stock splits, stock dividends or similar transactions.
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(2)
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Represents
24,341,666 outstanding shares of our common stock held by our selling
stockholders.
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(3)
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Estimated
solely for purposes of calculating the registration fee in accordance
with
Rule 457(c) of the Securities Act, based on the average of the
closing bid
and asked prices for our common stock as reported on the OTC Bulletin
Board on November 19, 2004.
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(4)
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Represents
the number of shares of our common stock issuable upon exercise
of certain
warrants held by our selling stockholders.
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(5)
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Estimated
solely for purposes of calculating the registration fee in accordance
with
Rule 457(g) of the Securities Act, based on the stated exercise
price.
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(6)
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The
filing fee of $1,375.81 is offset by the $507.89 credit due to
the
Registrant based upon the prior withdrawn registration statement
on Form
SB-2 filed with the U.S. Securities & Exchange Commission (the “SEC”)
on August 2, 2001 pursuant
to Rule 457(p) of Regulation C, File No.: 333-66570, less (i) the
fee of $27.17 applied to the registration statement on Form S-8
filed with
the SEC on September 24, 2002, File No.: 333-100035 and (ii) the
fee of
$0.82 applied to the registration statement on Form S-8 filed with
the SEC
on November 8, 2002, File No.: 333-101092.
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The
registrant hereby amends this registration statement on such date or dates
as
may be necessary to delay its effective date until the registrant shall file
a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended or until the registration statement
shall become effective on such date as the Commission, acting pursuant to
Section 8(a), may determine.
This
prospectus is dated March 30, 2007
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The
information contained in this prospectus may be updated from
time to time
by way of post-effective amendment based on material intervening
developments. The selling stockholders may not sell these securities
until
this registration statement filed with the U.S. Securities
and Exchange
Commission is effective. This prospectus is not an offer to
sell these
securities and the selling stockholders are not soliciting
offers to buy
these securities in any state where the offer or sale of these
securities
is not permitted.
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PROSPECTUS
FINDEX.COM,
INC.
47,341,666
SHARES OF COMMON STOCK
OFFERED
BY SELLING STOCKHOLDERS
This
prospectus relates to the resale of up to 47,341,666 shares of our common
stock
by certain persons who are either our stockholders, holders of warrants to
purchase our common stock, or both. All of the shares of common stock are
being
offered for sale by the selling stockholders at prices established on the
OTC
Bulletin Board during the term of this offering, as will fluctuate from time
to
time, or as may otherwise be agreed upon in negotiated transactions. We will
not
receive any proceeds from the sale of our shares by the selling stockholders.
If
the warrants are exercised in full, we would receive proceeds of $8,668,050.
However, because the exercise price of some or all of the warrants may at
any
given time be above the current market price of our common stock, (i) they
may
never be exercised and, therefore, we may never actually receive these proceeds,
or (ii) if they are exercised, but not for some time, it would not be until
then
that we receive any such proceeds. We will use the proceeds from any exercise
of
warrants for general working capital purposes consistent with our business
strategy.
Our
common stock is quoted on the OTC Bulletin Board under the symbol “FIND”.
On March 29, 2007, the average of the bid and asked prices of our common
stock was $0.037 per share.
Each
of
the selling stockholders may be deemed to be an “underwriter,” as such term is
defined in the Securities Act.
An
investment in our common stock involves a high degree of risk. You should
only
invest in our common stock if you can afford to lose your entire investment,
and
you should read and consider the “risk factors” beginning on page 3 before
investing in our common stock.
Neither
the SEC nor any state securities commission has approved or disapproved these
securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The
date
of this prospectus is March 30, 2007.
FINDEX.COM,
INC.
11204
Davenport Street, Suite 100
Omaha,
Nebraska 68154
(402)
333-1900
The
following table of contents has been designed to help you find important
information contained in this prospectus. We have included subheadings to
aid
you in searching for particular information you might want to return to.
We
encourage you to read the entire prospectus.
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F-1
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-ii-
Unless
otherwise specified, the information in this prospectus is set forth
as
of March 30, 2007, and we anticipate that changes in our affairs will
occur
after such date. We have not authorized any person to give any information
or to
make any representations other than as contained in this prospectus
in
connection with the offer contained in this prospectus. If any person
gives you
any information or makes representations in connection with this offer,
do not
rely on it as information we have authorized. This prospectus is not
an offer to
sell our common stock in any state or other jurisdiction to any person
to whom
it is unlawful to make such offer.
This
summary highlights information found in greater detail elsewhere in this
prospectus. You should read the entire prospectus carefully, including
the “Risk
Factors” described in pages 3 through 11 and our consolidated
financial statements beginning on page F-1, before making any investment
in the
shares offered hereby.
ABOUT
OUR BUSINESS
We
develop, publish, market, distribute and directly sell off-the-shelf consumer
and organizational software products for PC,
Macintosh®
and PDA platforms. The common thread among our products is
a
customer constituency that shares a devotion to, or interest in, Christianity
and faith-based “inspirational” values. Our focus is on becoming
the largest worldwide provider of Bible study and related faith-based
software products through ongoing internal development of new products,
expansion and upgrade of existing products, and strategic product line
and/or
corporate acquisitions and licensing.
Our
faith-based software titles, all of which are proprietary, are currently
divided
among the following six categories:
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Bible
Study
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•
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Financial/Office
Management Products for Churches and other Faith-Based
Ministries
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•
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Print
& Graphic Products
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•
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Pastoral
Products
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•
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Children’s
Products
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•
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Language
Tutorial Products
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ABOUT
OUR COMPANY
We
were
incorporated in the State of Nevada in 1997 as EJH Entertainment, Inc., which
was later changed to FINdex.com, Inc. Beginning in 1997, and although we
were
not then a reporting company under the Securities Exchange Act of 1934, as
amended, our common stock was quoted on the OTC Bulletin Board. On March
7,
2000, we acquired all of the outstanding capital stock of Reagan Holdings,
Inc.,
a Delaware corporation. At the time of this transaction, Reagan Holdings
was
subject to the requirements of having to file reports pursuant to Section
13 of
the Securities Exchange Act, had recently audited financial statements and
was
current in its reporting obligations. As a result of this transaction, Reagan
Holdings, Inc. became our wholly-owned subsidiary and we became the successor
issuer to Reagan Holdings for reporting purposes pursuant to Rule 12g-3 of
the
Securities Exchange Act. See “Business - Corporate Formation, Legacy and
Subsidiaries”.
We
currently have two wholly-owned subsidiaries, neither of which have any
operations, employees or revenues. They include Findex.com, Inc., a Delaware
corporation, and Reagan Holdings, Inc., also a Delaware corporation.
Our
principal office is located at 11204 Davenport Street, Suite 100, Omaha,
Nebraska 68154. Our main telephone number is (402) 333-1900. See “Where You Can
Find Additional Information”.
THE
OFFERING BY THE SELLING STOCKHOLDERS
On
July
19, 2004, we entered into a certain Stock Purchase Agreement pursuant to
which
we agreed to issue and sell 21,875,000 restricted shares of our common stock
to
Barron Partners, LP, a New York based institutional investor, at a price
of
$0.08 per share. Under the terms of transaction, Barron Partners, LP also
received two common stock purchase warrants. The first warrant entitles the
holder, for a period of up to five years, to purchase up to 10,937,500 common
shares at a price of $0.18 per share, subject
to standard adjustment provisions. The second warrant entitles the
holder, also for a period of up to five years, to purchase up to 10,937,500
additional common shares at a price of $0.60 per share, also subject
to standard adjustment provisions. As part of the financing transaction,
we entered into a certain Registration Rights Agreement with Barron Partners,
LP
pursuant to which we committed to registering all of the shares issued as
part
of such transaction, including those issuable under each of the two warrants.
See “Selling Stockholders” and “Certain Relationships and Related Transactions”.
In
addition to the shares of our common stock issued to Barron Partners,
LP and the
common stock issuable upon exercise of the warrants issued to Barron
Partners,
LP, we are also registering the following:
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2,000,000
shares of our common stock issued as of November 16, 2004 upon
conversion
of $240,000 of previously outstanding debt securities;
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466,666 shares of our common stock issued as of December 31, 2004 upon conversion of $23,333 of previously outstanding debt securities; and |
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1,125,000
shares of our common stock issuable upon exercise of warrants
previously
issued to a number of our consultants/service providers.
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Under
this prospectus, the selling stockholders are offering a total of up
to
24,341,666 shares of our common stock, and 23,000,000 additional shares
of
common stock issuable upon exercise of the warrants described above.
On March 30, 2007, there were 49,788,317 shares of our common stock
outstanding. Upon the exercise of the warrants described above, the number
of
shares offered by this prospectus represents 65% of our total common
stock
outstanding on March 30, 2007.
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Total
common stock outstanding prior to this offering
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49,788,317
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Total
common stock offered for resale to the public in this
offering
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47,341,666
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Common
stock outstanding after this Offering
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72,788,317
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Percentage
of common stock outstanding following this offering that shares
being
offered for resale represent
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65
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%
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All
of
the shares covered by this prospectus are being registered to permit the
selling
stockholders and any of their respective successors-in-interest to offer
the
respective shares for resale from time to time. The selling stockholders
are not
required to sell their shares, and any sales of common stock by the selling
stockholders are entirely at their own discretion.
We
will
receive no proceeds from the resale of our common stock in this offering.
We
may, however, receive proceeds upon the exercise of some or all of the warrants.
If the warrants are exercised in full, we would receive $8,668,050 in proceeds.
However, because the exercise price of some or all of the warrants may at
any
given time be above the current market price of our common stock, (i) they
may
never be exercised and, therefore, we may never actually receive these proceeds,
or (ii) if they are exercised, but not for some time, it would not be until
then
that we receive any such proceeds. Any proceeds received upon the exercise
of
warrants will be used for general working capital purposes consistent with
our
business strategy. See “Use of Proceeds”.
TRADING
INFORMATION
Our
stock
trades on the OTC Bulletin Board under the symbol “FIND”. On March 29,
2007, the average of the bid and asked prices of our common stock was
$0.037 per
share.
An
investment in the common stock being offered for resale by the selling
stockholders is very risky. You should carefully consider the risk factors
described below, together with all other information in this prospectus
before
making an investment decision. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations. If any of the following risks manifest as actual problems for
us,
they would likely have a material adverse effect on our business, our financial
condition, including liquidity and profitability, and our results of
operations. In such case, the trading price of our common stock could decline,
and you may lose all or part of your investment.
GENERAL
BUSINESS RISKS
Our
liquidity and capital resources are very limited.
Our
ability to fund working capital and anticipated capital expenditures will
depend
on our future performance, which is subject to general economic conditions,
our
customers, actions of our competitors and other factors that are beyond our
control. Our ability to fund operating activities is also dependent upon
(i) the
extent and availability of bank and other credit facilities, (ii) our ability
to
access external sources of financing, and (iii) our ability to effectively
manage our expenses in relation to revenues. Although we believe that our
existing working capital, together with cash flow from operations, will be
adequate to meet our minimum anticipated liquidity requirements over the
next
twelve months, given our initiative toward rapid revenue growth and due to
our
need to service certain long-term liabilities, it is likely to become necessary
for us to raise additional capital to support growth and/or otherwise finance
potential acquisitions. Furthermore, there can be no assurance that our
operations or access to external sources of financing will continue to provide
resources sufficient to satisfy our liabilities arising in the ordinary course
of business, and while it may be possible to borrow funds as required, any
such
additional capital is likely to require that we sell and issue additional
equity
and/or convertible securities, including shares issuable upon exercise of
currently outstanding warrants, any of which issuances would have a dilutive
effect on holdings of existing shareholders. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources”.
There
is uncertainty as to our ability to continue as a going concern.
Our
audited financial statements for the year ended December 31, 2005 and unaudited
financial statements for the period ended September 30, 2006, including
the
footnotes thereto, call into question our ability to continue as a going
concern. This conclusion was drawn from the fact that, as of the date thereof,
we had negative current ratios and total liabilities in excess of total
assets.
Those factors, as well as ambiguities associated with our ability to secure
additional financing for continued operations, if necessary, created, at
the
time, an uncertainty regarding our ability to continue as a going concern,
and,
furthermore, there can be no assurance that we have effectively mitigated
against this risk, and that our financial statements, going forward, will
not
also call into question our ability to continue as a going concern. See
Note 20
in the Notes to the Consolidated Financial Statements for the year ended
December 31, 2005 and Note 10 in the Notes to the Condensed Consolidated
Financial Statements for the quarter ended September 30, 2006.
Our
accumulated deficit makes it harder for us to borrow
funds.
As
of September 30, 2006, and as a result of historical losses in prior years,
our accumulated deficit was $7,750,886. The fact that we maintain an
accumulated
deficit, as well as the extent of our accumulated deficit relative
to recent
earnings, negatively affects our ability to borrow funds because lenders
generally view an accumulated deficit as a negative factor in evaluating
creditworthiness. Any inability on our part to borrow funds if and
when
required, or any reduction in the favorability of the terms upon which
we are
able to borrow funds if and when required, including amount, applicable
interest
rate and collateralization, would likely have a material adverse effect
on our
business, our financial condition, including liquidity and profitability,
and
our results of operations. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources”.
We
face serious competition in our business segment.
The
market for our products is rapidly evolving and intensely competitive as
new
consumer software products and platforms are regularly introduced. Competition
in the consumer software industry is based primarily upon:
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brand
name recognition;
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availability
of financial resources;
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the
quality of titles;
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reviews
received for a title from independent reviewers who publish reviews
in
magazines, Websites, newspapers and other industry publications;
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•
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publisher’s
access to retail shelf space;
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•
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the
price of each title; and
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•
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the
number of titles then available.
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We
face
competition from other software publishers, all of which generally sell
through
the same combination of channels that we do, including chain store, secular,
Christian Bookseller’s Association, direct and online sales. Specifically, we
currently compete with Logos Research Systems, Inc., Biblesoft, Inc., Thomas
Nelson, Inc., WordSearch Bible Publishers and The Zondervan Corporation,
among
others.
To
remain
competitive in our market segment we rely heavily upon our product quality,
marketing and sales abilities, proprietary technology and product development
capability. However, some of our competitors have longer operating histories,
larger customer bases and greater financial, marketing, service, support,
technical and other resources than we do. Due to these greater resources,
certain of our competitors have the ability to undertake more extensive
marketing campaigns, adopt more aggressive pricing policies, pay higher
fees to
licensors and pay more to third-party software developers than we can.
Only a
small percentage of titles introduced into the software market achieve
any
degree of sustained market acceptance. If our titles, including special
editions, are not successful, our business, our financial condition, including
liquidity and profitability, and our results of operations will be negatively
impacted. Moreover, we believe that competition from new entrants will
increase
as the market for faith-based products and services continues to expand.
See
“Business - Competition”.
We
depend on only two titles for the overwhelming majority of our
revenue.
In
fiscal
year 2005, approximately 92% of our total revenue was derived from two
software
titles; QuickVerse®, comprising 66% of total revenue, and Membership
Plus®, comprising 26% of total revenue. We expect that these two
products will continue to produce a disproportionately large amount of
our
revenue for the foreseeable future. Due to this dependence on a limited
number
of titles, the failure of one or more titles or title versions to achieve
anticipated results would likely have a material adverse effect on our
business,
our financial condition, including liquidity and profitability, and our
results
of operations. See “Business - Our Products”.
We
have experienced, and may continue to experience, reduced revenues
and fluctuations in our quarterly operating
results due to delays in the
introduction and distribution of our
products.
A
significant portion of our revenue for any given quarter is generated
by the
sale of new titles and title versions introduced during that quarter
or shipped
in the immediately preceding quarter. Our inability to timely begin
volume
shipments of a new title or title version in accordance with our
internal
development schedule, as has repeatedly been the case in the past,
will cause
earnings fluctuations and will negatively impact our business, our
financial
condition, including liquidity and profitability, and our results
of operations.
Timely introduction of a new title or title version is largely contingent
upon
the timing of a variety of other factors. Included amongst these
are development
processes themselves, debugging, approval by third-party content
licensors and
duplication and packaging processes. Furthermore, the complexity
of
next-generation operating systems (such as Macintosh®
OS X and
Windows®
Mobile)
has resulted in longer development cycles, higher development expenditures
and
the need to more carefully monitor and plan development processes
associated
with these products.
We
cannot
be certain that we will be able to meet planned release dates for
some or all of
our new titles or title versions. In the past, we have experienced
significant
delays in our introduction of some new titles and title versions.
For instance,
delays in duplication, packaging and distribution caused our
QuickVerse®
2005 to
begin shipping in early-December 2004, long after the holiday season
had been
underway. As a result, we experienced fewer sales than we might otherwise
have
had the product been available before the holiday selling season
began, which we
believe had a material adverse effect on our results of operations
for the 2004
fourth quarter. Furthermore, we experienced a delay in our annual
release of
Membership Plus®
2007,
which had been scheduled to commence shipping in February 2006 but
which, due to
delays associated with the loss of one of our key developers, commenced
shipping
in October 2006. It is likely in the future that delays will continue
to occur
and that some new titles or title versions will not be released in
accordance
with our internal development schedule, having a negative impact
on our
business, our financial condition, including liquidity and profitability,
and
our results of operations in that period. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations -
Revenues”.
We
have experienced, and may continue to experience, reduced revenues
and
fluctuations in our quarterly operating
results due to the limited life cycle
of
our products.
The
average life cycle of a new title ranges anywhere from a few years
to
indefinitely, and the average life cycle of a new title version ranges
anywhere
from twelve to upwards of eighteen months, making our revenue and
operating
results difficult to predict and susceptible to substantial fluctuations
from
quarter to quarter. While there can be no assurance, we expect, based
on
historical experience, that a majority of sales for a new title or
title version
will occur within the first thirty to one hundred twenty days following
its
release, and that net revenue associated with the initial introduction
will
generally account for a disproportionately large percentage of total
net
revenues over the life of the title or title version. For example,
our
QuickVerse®
2006
began shipping in September 2005, nine months following the release
of
QuickVerse®
2005 and
three months following the release of QuickVerse®
2005
Platinum, resulting, we believe, in a product market overlap that
ultimately led
to fewer customer upgrades upon our initial release of QuickVerse®
2006.
Furthermore, factors such as competition, market acceptance, seasonality
and
technological developmental and/or promotional expenses associated
with a title
or title version can shorten the life cycle of older titles and title
versions
and increase the importance of our ability to regularly release new
titles and
title versions. Consequently, if net revenue in a given period is
below
expectation, our business, our financial condition, including liquidity
and
profitability, and our results of operations for that period are
likely to be
negatively affected, as has repeatedly occurred in the
past.
Product
returns, price protections or price concessions that exceed our
anticipated reserves could result in worse than expected operating
results.
At
the
time we ship our products we establish reserves, including reserves
that
estimate the potential for future product returns and price concessions.
In the
past, particularly during title version transitions, we have had
to increase
price concessions to our wholesale retail customers. If consumer
demand for a
specific title or title version falls below expectations or significantly
declines below previous rates of retail sell-through, then a price
concession or
credit may be requested by our wholesale retail customers to spur
further retail
channel sell-through. Coupled with more competitive pricing, if product
returns,
price protections or price concessions exceed our reserves the
magnitude of quarterly fluctuations will increase and our operating
and
financial results will be negatively impacted. Furthermore, if we
incorrectly
assess the creditworthiness of any one of our wholesale customers
who take
delivery of our products on credit, we could be required to significantly
increase reserves previously established.
Typically
we experience the highest reserves at the end of the first quarter
and fourth
quarter and the lowest at the end of the third quarter. Historically,
actual
returns have been within management’s prior estimates, however, we cannot be
certain that any future write-offs exceeding reserves will not occur
or that
amounts written off will not have a material adverse effect on our
business, our
financial condition, including liquidity and profitability, and our
results of
operations. See “Management’s Discussion and Analysis of Financial Condition and
Results of Operations - Revenues”.
Errors
or defects in our software products may cause a loss of market acceptance
and
result in fewer sales and/or greater returns of our products.
Our
products are complex and may contain undetected errors or defects when first
introduced or as new versions are released. In the past, we have discovered
software errors in some of our new products and enhancements following
introduction into the market. Because our products are complex, we anticipate
that software errors and defects will be present in new products or releases
in
the future. To date we have not discovered any material errors, however,
future
errors and defects could result in adverse product reviews and a loss of,
or
delay in, market acceptance of our products.
We
may not have available funds to develop products that consumers
want.
The
Bible-study, inspirational content and organizational management software
markets are subject to rapid technological developments. Although the life
of
most of our titles may be quite long, the life of any given version tends
to be
relatively short, in many cases less than three years. To develop products
that
consumers, church and other faith-based organizations desire, we must
continually improve and enhance our existing products and technologies and
develop new products and technologies that incorporate these technological
developments. Our
inability to do this would likely have a material adverse effect on our
business, our financial condition, including liquidity and profitability,
and
our results of operations.
We
focus
our development and publishing activities principally on new versions of
our
existing titles. We cannot, however, be certain that we will have the financial
and technical resources available to continue to develop these new title
versions particularly since we must undertake these initiatives while remaining
competitive in terms of performance and price. This will require substantial
investments in research and development, often times well in advance of
the
widespread release of a product into the market and any revenues these
products
may generate.
Our
costs
for product development for the fiscal year ended December 31, 2005 were
higher
than the fiscal year ended December 31, 2004 and our product development
costs
may continue to increase in the future as a result of the higher costs
associated with releasing more software titles or new title versions across
multiple user interface platforms, and the complexity of developing such
titles
and title versions for next-generation systems, among other reasons. We
anticipate that our profitability will continue to be impacted by the levels
of
research and development expenditures relative to revenue and by fluctuations
relating to the timing of development in anticipation of future user interface
platforms.
The
loss of any of our key executives could have a material adverse effect
on our
business.
Our
success depends to a large degree upon the skills of our three key executives,
Steven Malone, Kirk R. Rowland and William Terrill. We presently do not
maintain
key person life insurance on any of our three key executives. Although
we have
employment agreements with each of our three key executives, there can
be no
assurance that we will be able to retain these executives or attract
and retain
additional key executives. The loss of any one of our three key executives
would
likely have a material adverse effect on our business, our financial
condition,
including liquidity and profitability, and our results of operations.
See
“Management - Directors and Executive Officers”.
The
successful development of our products depends on our ability to attract,
integrate, motivate and retain highly skilled
personnel.
Our
success depends to a large extent on our ability to attract, hire and
retain
skilled software developers, programmers and other highly skilled technical
personnel. The software industry is characterized by a high level of
employee
mobility and aggressive recruiting among competitors for personnel
with
programming, technical and product development skills. We may not be
able to
attract and retain skilled personnel or may incur significant costs
in order to
do so. If we are unable to attract additional qualified employees or
retain the
services of key personnel, our business, our financial condition, including
liquidity and profitability, and our results of operations could be
negatively
impacted.
Our
intellectual property may not be adequately
protected
from unauthorized use by others, which could increase our litigation
costs and
adversely affect our sales.
Our
copyrighted software content and the brand recognition associated
with our
related product trademarks are the most important assets that we
possess in our
ability to generate revenues and profits, and we rely very significantly
on
these intellectual property assets in being able to effectively compete
in our
market. There can be no assurance that these intellectual property
assets will
provide meaningful protection to us from unauthorized use by others,
which could
result in an increase in competing products and a reduction in our
own sales. If
we must pursue litigation in the future to enforce or otherwise protect
our
intellectual property rights, or to determine the validity and scope
of the
proprietary rights of others, we may not prevail and will likely
have to make
substantial expenditures and divert valuable resources in any case.
This is
particularly true given the fact that the copyrights that we own
to the source
code and other improvements made to our largest-selling products
since 1999 have
not been registered, which means that we may not rely upon the otherwise
existing advantage of a rebuttable presumption of ownership in the
event of, and
in connection with, any such litigation. See “Business - Intellectual Property”.
Our
exclusive rights to publish and sell our largest-selling titles are
limited to
non-secular channels.
Approximately
99% of our revenues in 2005, including those generated from sales
of
QuickVerse®
and
Membership Plus®,
by far
our two largest selling software titles, were derived from the publishing
and
sales of software titles to which we have only the exclusive license
to publish
and sell into non-secular channels. Although, as of the date hereof,
we do not
believe that any third parties have been granted rights in addition
to our own
to publish or sell these titles into secular channels, and we believe
that, even
if this has occurred or should occur in the future, the barriers
to entry
created by the extensive developments that we have made and now own to these
otherwise licensed titles would make it practically infeasible for
any third
party to effectively compete with us in relation to these products
in any
market, there can be no assurance that one or more competitors will
not emerge
at some point or that they will not adversely impact on our sales
and revenues.
See “Business - Intellectual Property”.
If
our products infringe any proprietary rights of others, a lawsuit
may be brought
against us that could require us to pay large legal expenses and
judgments and
redesign or discontinue selling one or more of our products.
We
are
not aware of any circumstances under which our products infringe
upon any valid
existing proprietary rights of third parties. Any infringement
claims, however,
whether or not meritorious, could result in costly litigation or
require us to
enter into royalty or licensing agreements. If we are found to
have infringed
the proprietary rights of others, we could be required to pay damages,
redesign
the products or discontinue their sale. Any of these outcomes,
individually or
collectively, could have a material adverse effect on our business,
our
financial condition, including liquidity and profitability, or
our results of
operations.
New
Internet access devices may change the way information is displayed
requiring us
to change our products.
Recent
increases in the use of Internet devices to access inspirational content
and the
continued development of Internet devices as a medium for the delivery of
network-based information, content and services may require us to change
our
products. Our success depends on our ability to understand the method upon
which
our search engines operate and our ability to service new and emerging devices
to access the Internet, such as browser phones, personal digital assistants,
and
other wireless devices. To the extent these new Internet access devices change
the way that information is displayed to the end-user or causes a change
in the
medium that is searched, we may be required to revise the methodology of
our
products. We cannot predict the impact that new devices will have on our
services across the entire spectrum of developing technologies, and any required
product adaptations may result in loss of revenue and goodwill, increased
expenses, and reduced operating margins.
Revenue
varies due to the seasonal nature of consumer software purchases.
Our
business is highly seasonal. More than 50% of our annual sales are expected
to
occur in the five months of September through January; the five months
of April
through August are generally our weakest, typically generating less than
30% of
our annual sales. The seasonal pattern is due primarily to the increased
consumer demand for software during the year-end holiday selling season
and the
reduced demand for software during the summer months. Our earnings vary
significantly and are materially affected by releases of popular titles
and
title versions and, accordingly, may not necessarily reflect the seasonal
patterns of the industry as a whole. We expect that operating results will
continue to fluctuate seasonally in the
future.
RISKS
ASSOCIATED WITH AN INVESTMENT IN OUR COMMON STOCK
We
may incur derivative liabilities in an as yet unknown amount in connection
with
our prior issuance of common stock warrants.
In
November 2004, in connection with a certain Stock Purchase Agreement, we
issued
two warrants to purchase an aggregate of 21,875,000 shares of our common
stock
to Barron Partners, LP. Subject to standard adjustment provisions, each warrant
provides for settlement in registered shares of our common stock and each,
for
the duration of any period in which there is not an effective registration
statement covering the shares underlying the warrants, may be settled in
a
cashless, net-share settlement. In accordance with applicable accounting
mandates, until each of the warrants issued to Barron Partners are either
fully
exercised or expire the derivative liability associated with these warrants
must
continuously be adjusted to fair value at each balance sheet date and
accordingly reassessed at each such time to determine whether the warrants
should be classified (or reclassified, as appropriate) as a liability or
as
equity. The fair value of each warrant was initially assessed at $2,187,500
using the Black-Scholes valuation method, with such fair value directly relating
and fluctuating in response to the share price of our common stock. At December
31, 2005, the fair value of the derivative liability was approximately
$2,062,000, and a fair value adjustment of approximately $34,000 was included
in
other expenses for our fiscal year then ended. At September 30, 2006, the
fair
value of the derivative liability was approximately $953,000 and a fair value
adjustment of approximately $1,110,000 was included in other income for our
fiscal quarter then ended. In the event that the fair value of the derivative
liability exceeds the amount of any cashless, net-share settlement under
the
warrants, we may find it necessary to compensate the holder through cash
payments, which would have a material adverse effect on our business, our
financial condition, including liquidity and profitability, and our results
of
operations, including a corresponding reduction in our net income and the
likelihood of a net loss for the year. See “Management’s Discussion and Analysis
of Financial Condition and Results of
Operations—Derivatives”.
Up
to 47,341,666 shares of our common stock are eligible for public sale as a
result of this registration which is likely to depress our stock
price.
When
this
registration statement was originally declared effective by the SEC on February
1, 2006, 24,341,666 shares of our common stock became eligible for immediate
resale on the public market and an additional 23,000,000 shares of our common
stock underlying warrants, upon their exercise, became eligible for immediate
resale on the public market. As a percentage of our total outstanding common
stock as of the date of the prospectus, this represents 64.8%. If a significant
number of shares are offered for sale simultaneously, which is likely to
occur,
it would have a depressive effect on the trading price of our common stock
on
the public market. Any such depressive effect may encourage short positions
and
short sales, which could place further downward pressure on the price of
our
common stock. Moreover, all of the shares sold in the offering are freely
transferable without restriction or further registration under the Securities
Act (except for any shares purchased by our “affiliates”, as defined in Rule 144
of the Securities Act), which could place even further downward pressure
on the
price of our common stock. Furthermore, should a simultaneous sell-off occur,
and due to the thinly-traded market for our common stock, stockholders may
have
difficulty selling shares of our common stock, at or above the price paid,
at a
fair market value or even at all. See “Selling Stockholders” and “Plan of
Distribution”.
Unless
an active trading market develops for our common stock, you may not be able
to
sell your shares.
We
are a
reporting company and our common stock is listed on the OTC Bulletin Board
(owned and operated by the Nasdaq Stock Market, Inc.), however, there is
no
active trading market for our common stock. There can be no assurance that
an
active trading market will ever develop for our common stock or, if it does
develop, that it will be maintained. Failure to develop or maintain an active
trading market will have a generally negative effect on the price of our
common
stock, and you may be unable to sell your shares or any attempted sale of
such
shares may have the effect of lowering the market price, and therefore your
investment could be a complete or partial loss.
Unless
and until we garner analyst research coverage, we are unlikely to create
long-term market value in our common stock.
Although
we are a reporting company and our common shares are listed on the OTC
Bulletin
Board, we are unaware of any investment banking firms, large or small,
that
currently provide analyst research coverage on our company and, given our
relatively small size within the public securities markets, it is unlikely
that
any investment banks will begin doing so in the near future. Without
continuing research coverage by reputable investment banks or similar firms,
it
is considerably more difficult, and unlikely, to attract the interest of
most
institutional investors, which are generally considered to be very important
in
achieving a desirable balance in shareholder composition and long-term
market
value in a stock. While we intend to continue to aggressively pursue
investor relations initiatives designed to create visibility for our company
and
common stock, and hope to garner analyst coverage in the future, there
can be no
assurance that we will succeed in this regard and any inability on our
part to
develop such coverage is likely to materially impede the realization of
long-term market value in our common stock.
Since
our common stock is thinly traded, it is more susceptible to extreme rises
or
declines in price, and you may not be able to sell your shares at or above
the
price you paid.
You
may
have difficulty reselling shares of our common stock, either at or above
the
price you paid, or even at a fair market value. The stock markets often
experience significant price and volume changes that are not related to the
operating performance of individual companies, and because our common stock
is
thinly traded, it is particularly susceptible to such changes. These broad
market changes may cause the market price of our common stock to decline
regardless of how well we perform as a company, and, depending on when you
determine to sell, you may not be able to obtain a price at or above the
price
you paid.
Trading
in our common stock on the OTC Bulletin Board may be limited thereby making
it
more difficult for you to resell any shares you may
own.
Our
common stock trades on the OTC Bulletin Board (owned and operated by the
Nasdaq
Stock Market, Inc.). The OTC Bulletin Board is not an exchange and, because
trading of securities on the OTC Bulletin Board is often more sporadic than
the
trading of securities listed on a national exchange or on the Nasdaq National
Market, you may have difficulty reselling any of the shares of our common
stock
that you purchase from the selling stockholders.
Our
common stock is subject to the “penny stock” regulations, which is likely to
make it more difficult to sell.
Our
common stock is considered a “penny stock,” which generally is a stock trading
under $5.00 and not registered on national securities exchanges or quoted
on the
Nasdaq National Market. The SEC has adopted rules that regulate broker-dealer
practices in connection with transactions in penny stocks. This regulation
generally has the result of reducing trading in such stocks, restricting
the
pool of potential investors for such stocks, and making it more difficult
for
investors to sell their shares. Prior to a transaction in a penny stock,
a
broker-dealer is required to:
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deliver
a standardized risk disclosure document that provides information
about
penny stocks and the nature and level of risks in the penny stock
market;
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provide
the customer with current bid and offer quotations for the penny
stock;
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explain
the compensation of the broker-dealer and its salesperson in the
transaction;
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provide
monthly account statements showing the market value of each penny
stock
held in the customer’s
account; and
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make
a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser’s written agreement
to the transaction.
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These
requirements may have the effect of reducing the level of trading activity
in
the secondary market for a stock that is subject to the penny stock rules.
Since
our common stock is subject to the penny stock rules, investors in our common
stock may find it more difficult to sell their shares. See “Market Information”.
Our
stock price could be volatile, and your investment could suffer a decline
in
value.
The
trading price of our common stock is likely to be highly volatile and could
be
subject to extreme fluctuations in price in response to various factors,
many of
which are beyond our control, including:
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the
trading volume of our shares;
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the
number of securities analysts, market-makers and brokers following
our
common stock;
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changes
in, or failure to achieve, financial estimates by securities analysts;
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new
products introduced or announced by us or our competitors;
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announcements
of technological innovations by us or our competitors;
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our
ability to produce and distribute retail packaged versions of our
software
in advance of peak retail selling seasons;
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actual
or anticipated variations in quarterly operating results;
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conditions
or trends in the consumer software and/or Christian products industries;
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announcements
by us of significant acquisitions, strategic partnerships, joint
ventures,
or capital commitments;
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additions
or departures of key personnel;
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sales
of our common stock; and
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stock
market price and volume fluctuations of publicly-traded, particularly
microcap, companies generally.
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The
volatility of our common stock is illustrated by reference to the fact that,
during fiscal year 2006, our trading price fluctuated from a low of $0.03
to a
high of $0.15 per share. See “Market Information”.
The
stock
market has recently experienced significant price and volume fluctuations.
Volatility in the market price for particular companies has often been
unrelated
or disproportionate to the operating performance of those companies. These
broad
market and industry factors may seriously harm the market price of our
common
stock, regardless of our operating performance. In addition, securities
class
action litigation has often been initiated following periods of volatility
in
the market price of a company’s securities. A securities class action suit
against us could result in substantial costs, potential liabilities and
the
diversion of management’s attention and resources from our business. Moreover,
and as noted above, our shares are currently traded on the OTC Bulletin
Board
and, further, are subject to the penny stock regulation. Price fluctuations
in
such shares are particularly volatile and subject to manipulation by
market-makers, short-sellers and option traders. See “Market Information”.
Future
sales of our common stock by our officers or directors may depress our stock
price.
Our
officers and directors are not contractually obligated to refrain from selling
any of their shares; therefore, our officers and directors may sell any shares
owned by them which are registered under the Securities Act, or which otherwise
may be sold without registration to the extent permitted by Rule 144 or other
exemptions. Because of the perception by the investing public that a sale
by
such insiders may be reflective of their own lack of confidence in our
prospects, the market price of our common stock could decline as a result
of a
sell-off following sales of substantial amounts of common stock by our officers
and directors into the public market, or even the mere perception that these
sales could occur.
Future
issuances of our common or preferred stock may depress our stock price and
dilute your interest.
We
may
want to issue additional shares of our common stock in future financings
and may
grant stock options to our employees, officers, directors and consultants
under
our stock incentive plan. Any such issuances could have the effect of depressing
the market price of our common stock and, in any case, would dilute the
interests of our common stockholders. In addition, we could issue serial
preferred stock having rights, preferences and privileges senior to those
of our
common stock, including the right to receive dividends and/or preferences
upon
liquidation, dissolution or winding-up in excess of, or prior to, the rights
of
the holders of our common stock. This could depress the value of our common
stock and could reduce or eliminate the amounts that would otherwise have
been
available to pay dividends on our common stock (which are unlikely in any
case)
or to make distributions on liquidation.
If
you require dividend income, you should not rely on an investment in our
common
stock.
Because
we have very limited cash resources and a substantial accumulated deficit
relative to recent earnings, we have not declared or paid any dividends on
our
common stock since our inception and we do not anticipate declaring or paying
any dividends on our common stock in the foreseeable future. Rather, we intend
to retain earnings, if any, for the continued operation and expansion of
our
business. It is unlikely, therefore, that holders of our common stock will
have
an opportunity to profit from anything other than potential appreciation
in the
value of our common stock held by them. If you require dividend income, you
should not rely on an investment in our common stock.
The
lack of a majority of independent directors on our board of directors may
affect
our ability to be listed on a national securities exchange.
We
are
not currently subject to the listing requirements of any national securities
exchange. The listing standards of the national securities exchanges require
that a company’s board of directors consist of a majority of directors who are
independent as defined by the Sarbanes-Oxley Act of 2002 and as defined by
applicable listing standards, and that the audit committee of the board of
directors must consist of at least two members, both of whom are
independent. Similarly, the compensation and nominating committees of
company boards of directors must also consist of independent directors.
Currently, we have, only a single director who meets the definition of an
“independent” director as defined by the Sarbanes-Oxley Act of 2002 and the
listing standards of the national securities exchanges. Despite our efforts
to
do so, we have not yet identified qualified and willing individuals to serve
as
additional independent directors. Two of our three directors are currently
serving as our executive officers and thereby do not qualify as independent.
There is no guarantee that we will be able to appoint an additional director
who
will satisfy these independence requirements. For so long as we remain
unable to appoint an additional independent director to our board, we will
be
unqualified to list any of our capital stock on a national securities exchange.
There
may exist a potential conflict of interest between us and each of our former
and
current counsel.
In
the
past we have issued, and we may continue in the future to issue, warrants
to
purchase our common stock as equity compensation for legal and other
services
rendered in connection with the preparation of our securities filings.
Specifically, we have issued certain warrants to Michael M. Membrado,
our
corporate and securities counsel, all of which currently remain outstanding
and
unexercised. Due to these issuances, there exists the potential for a
conflict
of interest between us and each of our current and former counsel insofar
as the
recipients may have been or may be motivated by personal interests that
are not
necessarily aligned with our own.
This
registration statement, as well as our other reports filed with the SEC and
our
press releases and other communications, contain forward-looking statements.
Forward-looking statements include all statements regarding our expected
financial position, results of operations, cash flows, dividends, financing
plans, strategy, budgets, capital and other expenditures, competitive positions,
growth opportunities, benefits from new technology, plans and objectives
of
management, and markets for stock. These forward-looking statements are based
largely on our expectations and, like any other business, are subject to
a
number of risks and uncertainties, many of which are beyond our control.
The
risks include those stated in the “Risk Factors” section of this registration
statement and economic, competitive and other factors affecting our operations,
markets, products and services, expansion strategies and other factors discussed
elsewhere in this registration statement and the other documents we have
filed
with the SEC. In light of these risks and uncertainties, there can be no
assurance that the forward-looking information contained in this registration
statement will in fact prove accurate, and our actual results may differ
materially from the forward-looking statements.
We
will
not receive any proceeds from the resale of our common stock pursuant
to this
offering. We may, however, receive proceeds upon the exercise of the
warrants,
the underlying common shares of which are being registered hereunder.
If all of
the warrants are exercised we estimate that we would realize net proceeds
of
approximately $8,018,578. Net proceeds are determined after deducting
all of the
expenses associated with this offering (estimated to be approximately
$649,472).
However, because the exercise price of some or all of the warrants may
at any
given time be above the current market price of our common stock, (i)
they may
never be exercised and, therefore, we may never actually receive these
proceeds,
or (ii) if they are exercised, but not for some time, it would not be
until then
that we receive any such proceeds.
If
all of
the warrants are exercised, we would realize $8,018,578 in net proceeds,
and
although there can be no assurance, we intend to use the net proceeds
from this
offering as follows:
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Product
Development
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2,000,000
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Marketing
and Promotion
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500,000
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Other
Working Capital Needs
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5,018,578
|
|||
|
New
Content License Acquisitions
|
500,000
|
|||
|
Total
Net Proceeds
|
$
|
8,018,578
|
The
amounts that we actually expend on each of the items listed above will
vary
significantly depending on a number of factors, including our future
results of
operations. As a result, we will retain broad discretion in the allocation
of
the net proceeds of this offering. Pending the use of any proceeds
as discussed
above, we intend to invest these funds in short-term, interest-bearing
investment-grade obligations or accounts.
This
information should be read in conjunction with our consolidated financial
statements for the period ended September 30, 2006 and the notes to those
consolidated financial statements.
Management
Overview
During
the third quarter of 2006 we released an upgrade to our flagship product,
QuickVerse®,
which
was one month earlier than our corresponding upgrade release of
QuickVerse®
in 2005.
In addition, this marked the second year in a row that we released an upgrade
to
the QuickVerse®
(Windows) product line that would reach the retail stores prior to the holiday
season beginning. QuickVerse®
2007 is
currently available in six editions, QuickVerse®
2007
Bible Suite, QuickVerse®
2007
Essentials, QuickVerse®
2007
Standard, QuickVerse®
2007
Expanded, QuickVerse®
2007
Deluxe and QuickVerse®
2007
Platinum. These QuickVerse®
2007
editions range in retail price from $39.95 to $799.95. The
QuickVerse®
2007 new
features include web dictionary support, integrated PDF files, integrated RSS
subscriptions and integrated web pages. We believe that the unique features
of
the new QuickVerse®
2007
editions will provide us with an opportunity to broaden our customer base as
our
products appeal not only to those just beginning their journey into Bible study
but also to the scholars who are searching for an in-depth knowledge of the
Bible.
During
the second quarter of 2006 we released QuickVerse®
2006
Macintosh®
Gold
Edition, with a suggested retail price of $349.95, which offers more content
to
Mac users than ever before. This edition offers 19 Bibles and 144 reference
titles, a retail value of over $4,000 if sold separately. We also released
the
Holman Christian Standard Bible®,
with a
suggested retail price of $29.95, which is sponsored by Broadman & Holman
Publishers. This Bible translation provides English-speaking people across
the
world with an accurate, readable Bible in contemporary English and equips
serious Bible students with an accurate translation for personal study,
private
devotions and memorization.
Finally,
during the first quarter of 2006, we released QuickVerse®
2006
Parable Edition, with a suggested retail price of $49.95, and
QuickVerse®
2006
Bible Suite, with a suggested retail price of $29.95. QuickVerse®
2006
Bible Suite appeals to those customers seeking their first Bible study
software.
QuickVerse®
2006
Parable Edition is sold exclusively at Parable®
retail
outlets and through Parable®’s
website,
at www.parable.com, and unlike other QuickVerse®
editions, QuickVerse®
2006
Parable contains exclusive Parable®
content
such as Books
That Change Lives
and
Standing
Firm Devotional.
Comparatively,
during the third quarter of 2005, we released QuickVerse®
2006
three months earlier than our upgrade release of QuickVerse®
in 2004.
During the second quarter of 2005, and for
the
first time in our operating history,
we
introduced QuickVerse®
to the
Macintosh Operating System in two editions, QuickVerse®
Macintosh
Black Box (includes
12 Bibles and 56 reference titles),
with a
suggested retail price of $99.95 and QuickVerse®
Macintosh
White Box (includes
9 Bibles and 40 reference titles),
with a
suggested retail price of $49.95. We also released an updated version of
Bible
Illustrator®
3.0
entitled Sermon Builder®
4.0,
with
a suggested retail price of $69.95.
Lastly,
during the first quarter of 2005, we released an upgrade to our top-selling
financial and data management software, Membership Plus®,
with a
suggested retail price of between $149.95 and $349.95, and introduced
QuickVerse®
2005
Essentials, with a suggested retail price of $49.95, and QuickVerse®
2005
Platinum, with a suggested retail price of $799.95.
Although
we did not release an upgrade version of Membership Plus®
during
the first three quarters of 2006, we did release one in our fourth quarter
of
2006. Furthermore, we anticipate the releases of enhanced versions of
QuickVerse®
Mobile
and QuickVerse®
Macintosh during our fourth quarter of 2006, as well as the introduction
of a
few new titles that will offer additional content to our QuickVerse®
users.
Despite
our decreased gross revenues during the nine months ended September 30,
2006,
and although there can be no assurance, we anticipate that revenues will
increase in real terms throughout the remainder of our 2006 fiscal year
based
upon our development schedule for the remainder of the fiscal year and
the
broadened content made available for our QuickVerse®
products.
|
Statement
of Operations for Nine Months Ended September 30
|
2006
|
2005
|
Change
|
|
%
|
||||||||||
|
Net
revenues
|
$
|
2,586,197
|
$
|
3,978,019
|
$
|
(1,391,822
|
)
|
35
|
%
|
||||||
|
Cost
of sales
|
1,361,157
|
1,410,191
|
(49,034
|
)
|
3
|
%
|
|||||||||
|
Gross
profit
|
$
|
1,225,040
|
$
|
2,567,828
|
$
|
(1,342,788
|
)
|
52
|
%
|
||||||
|
Total
operating expenses
|
(2,315,591
|
)
|
(3,183,446
|
)
|
867,855
|
27
|
%
|
||||||||
|
Loss
from operations
|
$
|
(1,090,551
|
)
|
$
|
(615,618
|
)
|
$
|
(474,933
|
)
|
77
|
%
|
||||
|
Registration
rights penalties
|
(49,314
|
)
|
(277,792
|
)
|
228,478
|
82
|
%
|
||||||||
|
Gain
(loss) on fair value adjustment of derivatives
|
1,109,548
|
(874,992
|
)
|
1,984,540
|
227
|
%
|
|||||||||
|
Other
expenses, net
|
(57,929
|
)
|
(12,009
|
)
|
(45,920
|
)
|
382
|
%
|
|||||||
|
Loss
before income taxes
|
$
|
(88,246
|
)
|
$
|
(1,780,411
|
)
|
$
|
1,692,165
|
95
|
%
|
|||||
|
Income
tax benefit
|
89,457
|
187,182
|
(97,725
|
)
|
52
|
%
|
|||||||||
|
Net
income (loss)
|
$
|
1,211
|
$
|
(1,593,229
|
)
|
$
|
1,594,440
|
100
|
%
|
Our
software products are highly seasonal. More than 50% of our annual sales
are
expected to occur in the five months of September through January; the
five
months of April through August are generally our weakest, historically
generating only approximately 29% of our annual sales.
Our
gross
profit decreased approximately $1,343,000 from a gross profit of approximately
$2,568,000 for the nine months ended September 30, 2005 to a gross profit
of
approximately $1,225,000 for the nine months ended September 30, 2006.
Further,
we incurred a loss from operations of approximately $1,091,000 for the
nine
months ended September 30, 2006, representing an increase of approximately
$475,000 in our loss from operations of approximately $616,000 for the
nine
months ended September 30, 2005. These negative results of operations
are
primarily attributable to the following:
For
the
nine months ended September 30, 2006:
|
▪
|
our
gross revenues decreased approximately $1,951,000 to approximately
$
2,794,000 for the nine months ended September 30, 2006 from
approximately
$4,745,000 for the nine months ended September 30, 2005. This
decrease is
primarily attributable to the following:
|
||
|
▪
|
an
overall net decrease in unit sales of our QuickVerse®
product line due to a reduction in the perceived value on the
part of
customers of certain upgrades based on the relative frequency
thereof;
|
||
|
▪
|
the
lack of product releases during the nine months ended September
30, 2006
as compared to the nine months ended September 30, 2005, including
our
annual release of Membership Plus®;
and
|
||
|
▪
|
the
decreased suggested retail price in those products that were
released
during the nine months ended September 30, 2006 compared to
those released
during the nine months ended September 30, 2005;
|
||
|
▪
|
our
cost of sales remained relatively high, only decreasing approximately
$49,000 from approximately $1,410,000 for the nine months ended
September
30, 2005 to approximately $1,361,000 for the nine months ended
September
30, 2006 due to the increased amortization of software development
costs;
|
||
|
▪
|
we
incurred liquidated damage penalties of approximately $49,000
in
connection with our failure to meet certain contractual registration
obligations; and
|
||
|
▪
|
our
interest expense increased approximately $45,000 for the nine
months ended
September 30, 2006 due to a loan agreement that was entered
into in order
to fund our working capital
deficit.
|
||
Our
net
income increased approximately $1,594,000 from a net loss of approximately
$1,593,000 for the nine months ended September 30, 2005 to a net income
of
approximately $1,000 for the nine months ended September 30, 2006. This
increase
is mainly attributed to the valuation gain of approximately $1,110,000
we
recognized from the fair value adjustment of our derivative liabilities
during
the nine months ended September 30, 2006. We do anticipate, however,
this
valuation gain to be temporary. If our stock price rebounds during the
fourth
quarter of 2006 to a level consistent with our stock price at December
2005, the
fair value of the derivative liabilities will increase and therefore,
the
valuation gain recognized during the nine months ended September 30,
2006 will
reverse and we will again reflect a year-to-date valuation loss (see
Derivatives).
Offsetting
to some degree the negative results of operations detailed above were
three
positive developments during the nine months ended September 30, 2006.
First,
our registration statement on Form SB-2, originally filed on November
22, 2004,
was declared effective by the SEC on February 1, 2006, and therefore,
the
liquidated damage penalties stopped accruing. Second, we released our
annual
upgrade of our QuickVerse®
(Windows) product line which will reach the retail stores prior to the
holiday
season beginning. Third, we were able to remain operating cash positive
despite
our decrease in gross revenues for the nine months ended September 30,
2006.
We
derive
revenues from the sale of packaged software products, product support
and
multiple element arrangements that may include any combination of these
items.
Revenue is recognized when persuasive evidence of an arrangement exists
(generally a purchase order), we have delivered the product, the fee
is fixed or
determinable and collectibility is probable. For our packaged software
products,
we typically recognize revenue from the sale when we ship the product.
We sell
some of our products on consignment to a limited number of resellers.
We
recognize revenue for these consignment transactions only when the end-user
sale
has occurred. Service revenue resulting from technical support plans
is
recognized over the life of the plan which is generally one year. Revenue
associated with advance payments from our customers is deferred until
we ship
the product or offer the support service. Revenue for software distributed
electronically via the Internet is recognized when the customer has been
provided with the access codes that allow the customer to take immediate
possession of the software on its hardware and evidence of the arrangement
exists For revenue arrangements involving multiple products or product
and
service packages, we allocate and defer revenue for the undelivered products
or
product and service packages based on their vendor-specific objective
evidence
of fair value, which is generally the price charged when that product
or product
and service package is sold separately.
We
reduce
product revenue for estimated returns and price protections that are
based on
historical experience and other factors such as the volume and price
mix of
products in the retail channel, trends in retailer inventory and economic
trends
that might impact customer demand for our products. Estimated returns
are also
based upon a percentage of total retail and direct sales. Direct sales
accounted
for approximately 61% of our 2005 fiscal year revenue. We account for
cash
considerations (such as sales incentives - rebates and coupons) that
we give our
customers as a reduction of revenue rather than as an operating expense.
Product
revenue is also reduced for the estimated redemption of end-user rebates
on
certain current product sales. We did not have any rebate programs
during the
nine months ended September 30, 2005 and 2006, respectively.
Trends
that our returns typically follow include (i) the seasonality of sales,
and (ii)
the fact that, generally, relatively higher return rates occur during
periods of
new title or title version releases. Historically, actual returns have
been
within management’s prior estimates, however, we cannot be certain that any
future write-offs exceeding reserves will not occur or that amounts written
off
will not have a material adverse effect on our business, our financial
condition, including liquidity and profitability, and our results of
operations.
Management continually monitors and adjusts these allowances to take
into
account actual developments and sales results in the marketplace. In
the past,
particularly during title and title version transitions, we have had
to increase
price concessions to our retail customers.
Product
returns from distributors and Christian bookstores are allowed primarily
in
exchange for new products or for credit towards purchases as part of
a
stock-balancing program. These returns are subject to certain limitations
that
may exist in the contract. Under certain circumstances, such as termination
or
when a product is defective, distributors and bookstores could receive
a cash
refund if returns exceed amounts owed. Returns from sales made directly
to the
consumer are accepted within 45 days of purchase and are issued a cash
refund.
Product returns, price protections or price concessions that exceed our
reserves
could materially adversely affect our business and operating results
and could
increase the magnitude of quarterly fluctuations in our operating and
financial
results. Although we released QuickVerse®
2007 in
late August 2006 to the Christian Booksellers Association retail channel,
we did
not implement a price protection program within the three months ended
September
30, 2006 on our QuickVerse®
2006
titles. Furthermore, we do no anticipate implementing a price protection
program
in the near future.
Software
products are sold separately, without an obligation of future performance
such
as upgrades, enhancements or additional software products, and are
sold with
post contract customer support services such as customer service and
technical
support assistance. In connection with the sale of certain products,
we provide
a limited amount of free technical support assistance to our customers.
We do
not defer the recognition of any revenue associated with sales of these
products, since the cost of providing this free technical support is
insignificant. The technical support is provided within one year after
the
associated revenue is recognized and free product enhancements (bug
fixes) are
minimal and infrequent. We accrue the estimated cost of providing this
free
support upon product shipment and include it in cost of sales.
Shipping
and handling costs in connection with our software products are expensed
as
incurred and included in cost of sales.
|
Revenues
for Three Months Ended September 30
|
2006
|
|
|
%
to Sales
|
|
|
|
2005
|
|
|
%
to Sales
|
|
|
|
Change
|
|
|
%
|
|||
|
Gross
revenues
|
$
|
910,896
|
100
|
%
|
$
|
1,233,389
|
100
|
%
|
$
|
(322,493
|
)
|
26
|
%
|
||||||||
|
Add
rebate adjustment
|
---
|
0
|
%
|
4,910
|
0
|
%
|
(4,910
|
)
|
100
|
%
|
|||||||||||
|
Less
reserve for sales returns and allowances
|
(84,769
|
)
|
-9
|
%
|
(214,690
|
)
|
-17
|
%
|
129,921
|
61
|
%
|
||||||||||
|
Net
revenues
|
$
|
826,127
|
91
|
%
|
$
|
1,023,609
|
83
|
%
|
$
|
(197,482
|
)
|
19
|
%
|
||||||||
|
Revenues
for Nine Months Ended September 30
|
2006
|
|
|
%
to Sales
|
|
|
|
2005
|
|
|
%
to Sales
|
|
|
|
Change
|
|
|
%
|
|||
|
Gross
revenues
|
$
|
2,793,594
|
100
|
%
|
$
|
4,744,759
|
100
|
%
|
$
|
(1,951,165
|
)
|
41
|
%
|
||||||||
|
Add
rebate adjustment
|
---
|
0
|
%
|
14,730
|
0
|
%
|
(14,730
|
)
|
100
|
%
|
|||||||||||
|
Less
reserve for sales returns and allowances
|
(207,397
|
)
|
-7
|
%
|
(781,470
|
)
|
-16
|
%
|
574,073
|
73
|
%
|
||||||||||
|
Net
revenues
|
$
|
2,586,197
|
93
|
%
|
$
|
3,978,019
|
84
|
%
|
$
|
(1,391,822
|
)
|
214
|
%
|
||||||||
Gross
revenues decreased approximately $322,000 from approximately $1,233,000
for the
three months ended September 30, 2005 to approximately $911,000 for
the three
months ended September 30, 2006 and decreased approximately $1,951,000
from
approximately $4,745,000 for the nine months ended September 30, 2005
to
approximately $2,794,000 for the nine months ended September 30, 2006.
We
believe that this decrease was primarily attributable to the lack of
product
releases during the nine months ended September 30, 2006 as compared
to the nine
months ended September 30, 2005, and most notably the prolonged delay
in our
annual release of Membership Plus®.
During
2005 and 2006, the following products were released during our first,
second and
third quarters, respectively:
First
Quarter 2005
|
▪
|
an
enhanced version of our top financial and data management
product,
Membership Plus®,
including Membership Plus®
Standard Edition, with a suggested retail price of
$149.95, and Membership
Plus®
Deluxe Edition, with a suggested retail price of
$349.95;
|
|
|
▪
|
an
enhanced version of QuickVerse®
2005 Essentials, with a suggested retail price of $49.95;
and
|
|
|
▪
|
QuickVerse®
2005 Platinum Edition, with a suggested retail price
of
$799.95.
|
Second
Quarter 2005
|
▪
|
QuickVerse®
2006 Macintosh, including QuickVerse®
2006 Macintosh Black Box Edition, with a suggested
retail price of $99.95,
and QuickVerse®
2006 Macintosh White Box Edition, with a suggested
retail price of $49.95;
and
|
|
|
▪
|
an
enhanced version of Bible
Illustrator®
3.0
entitled Sermon Builder®
4.0,
with a suggested retail price of
$69.95.
|
Third
Quarter 2005
|
▪
|
an
enhanced version of our flagship product, QuickVerse®,
including QuickVerse®
2006 Essentials with a suggested retail price of $49.95,
QuickVerse®
2006 Standard with a suggested retail price of $99.95,
QuickVerse®
2006 Expanded with a suggested retail price of $199.95,
QuickVerse®
2006 Deluxe with a suggested retail price of $299.95
and
QuickVerse®
2006 Platinum with a suggested retail price of
$799.95.
|
First
Quarter 2006
|
▪
|
QuickVerse®
2006 Parable Edition, with a suggested retail price
of $49.95;
and
|
|
|
▪
|
QuickVerse®
2006 Bible Suite, with a suggested retail price of
$29.95.
|
Second
Quarter 2006
|
▪
|
QuickVerse®
2006 Macintosh Gold Box Edition, with a suggested retail
price of $349.95;
and
|
|
|
▪
|
Holman
Christian Standard Bible®,
with a suggested retail price of
$29.95.
|
Third
Quarter 2006
|
▪
|
an
enhanced version of our flagship product, QuickVerse®,
including QuickVerse®
2007 Bible Suite with a suggested retail price of $39.95,
QuickVerse®
2007 Essentials with a suggested retail price of $59.95,
QuickVerse®
2007 Standard with a suggested retail price of $129.95,
QuickVerse®
2007 Expanded with a suggested retail price of $249.95,
QuickVerse®
2007 Deluxe with a suggested retail price of $349.95
and
QuickVerse®
2007 Platinum with a suggested retail price of $799.95.
|
Of
note,
and generally, the retail price points for our products released
during the nine
months ended September 30, 2006 were significantly less than
those released
during the nine months ended September 30, 2005. Furthermore,
due to the
unexpected loss of our primary developer for Membership Plus®
in May
2005, we have experienced a delay in our annual release of Membership
Plus®,
which
had historically been released in the month of February. Membership
Plus®
2007 was
released in October 2006, following the close of our third quarter.
Finally, we
believe we experienced a decrease in gross revenues due to the
annual early
releases of our flagship product, QuickVerse®,
which
in turn has resulted in an overall net decrease in unit sales.
QuickVerse®
2007
Windows was released in August 2006, eleven months following
our 2005
QuickVerse®
upgrade
release and QuickVerse®
2006
Windows was released in September 2005, nine months following
our 2004
QuickVerse®
upgrade
release. In the past, we have experienced greater sales within
the first and
second quarter of the fiscal year due to the then recent upgrade
releases of our
two main product lines, QuickVerse®
and
Membership Plus®.
During
each of the quarters ended September 30, 2005 and 2006, our sales
efforts were
focused on directly targeting end-users through telemarketing
and Internet
sales. Due to the consistency in our development schedule and
the annual
releases of our flagship product, QuickVerse®,
upgrade
sales are not increasing at a rapid rate. However, we anticipate
that revenues
will increase going forward as we continue to expand the content
available for
our QuickVerse®
products, develop new products for multiple platforms, and offer
our products at
a range of price points intended to appeal to various market
sub-segments.
Sales
returns and allowances decreased approximately $130,000 from
approximately
$215,000 for the three months ended September 30, 2005 to approximately
$85,000
for the three months ended September 30, 2006, and decreased
approximately
$574,000 from approximately $781,000 for the nine months ended
September 30,
2005 to approximately $207,000 for the nine months ended September
30 2006.
Sales returns and allowances also decreased as a percentage
of gross sales from
approximately 17% for the nine months ended September 30, 2005
to approximately
7% for the nine months ended September 30, 2006. While this
decrease reflects
lower actual returns during the nine months ended September
30, 2006, it is
mainly attributable to our relative lack of product releases
during this period.
Typically after a new product release, sales returns and allowances
trend upward
as distributors and retail stores return old product in exchange
for the new
product release. With QuickVerse®
2006
Windows shipping in September 2005 as compared to QuickVerse®
2005
Windows in December 2004, just nine months earlier, we experienced
a greater
increase in sales returns and allowances during the fourth
quarter of 2005.
Furthermore, sales returns and allowance for the nine months
ended September 30,
2005 reflect the release of Membership Plus®
2005
compared to no release of the Membership Plus®
product
line for the nine months ended September 30, 2006. In addition,
due to the
extended time-line between the releases of the Membership Plus®
product
line, we have experienced fewer returns from retail stores
as there is no new
product with which to exchange the old product. During the
nine months ended
September 30, 2005 the following items contributed to the sales
returns and
allowances:
|
▪
|
price
protections afforded to consumers and retailers who
had purchased prior
versions of Membership Plus®
and
QuickVerse®
within
one year or less of our release of upgraded versions
of each of Membership
Plus®,
in February 2005, and QuickVerse®,
in September 2005. Historically, our product upgrades
have extended over
two to three years and therefore, price protections
were not issued;
|
|
|
▪
|
increased
prices associated with products introduced; and
|
|
|
▪
|
higher
actual returns on the Membership Plus®
2005 product line due to some then unresolved maintenance
issues and the
loss of our primary developer of Membership Plus®.
|
Overall,
we expect to release enhanced versions of our biggest-selling
products on an
annual basis generally going forward, and anticipate sales returns
and
allowances as a percentage of gross revenues to decrease over
time as a result
of increased stability in the functionality of our products,
decreasing reliance
on retail sales and increasing reliance on direct sales, which
have historically
resulted in fewer returns, and improved planning in the timing
of new product
version releases.
|
Cost
of Sales for Nine Months Ended September 30
|
2006
|
|
|
%
to Sales
|
|
|
2005
|
|
|
%
to Sales
|
|
|
Change
|
|
|
%
|
|
||||
|
Direct
costs
|
$
|
372,033
|
13
|
%
|
$
|
485,674
|
10
|
%
|
$
|
(113,641
|
)
|
23
|
%
|
||||||||
|
Less
reserve for sales returns and allowances
|
(30,810
|
)
|
-1
|
%
|
(116,940
|
)
|
-2
|
%
|
86,130
|
74
|
%
|
||||||||||
|
Amortization
of software development costs
|
600,959
|
22
|
%
|
524,989
|
11
|
%
|
75,970
|
14
|
%
|
||||||||||||
|
Royalties
|
256,737
|
9
|
%
|
300,000
|
6
|
%
|
(43,263
|
)
|
14
|
%
|
|||||||||||
|
Freight-out
|
76,218
|
3
|
%
|
111,188
|
2
|
%
|
(34,970
|
)
|
31
|
%
|
|||||||||||
|
Fulfillment
|
86,020
|
3
|
%
|
105,280
|
2
|
%
|
(19,260
|
)
|
18
|
%
|
|||||||||||
|
Cost
of sales
|
$
|
1,361,157
|
49
|
%
|
$
|
1,410,191
|
30
|
%
|
$
|
(49,034
|
)
|
3
|
%
|
Cost
of
sales consists primarily of royalties paid to third party providers
of
intellectual property and the direct costs and manufacturing overhead
required
to reproduce, package, fulfill and ship our software products. Direct
costs and
manufacturing overhead also include amortized software development
costs and
non-capitalized technical support wages. The direct costs and manufacturing
overhead decreased approximately $6,000 from approximately $1,110,000
for the
nine months ended September 30, 2005 to approximately $1,104,000
for the nine
months ended September 30, 2006 and increased as a percentage of
gross revenues
approximately 16% for the nine months ended September 30, 2006. The
overall
percentage increase resulted directly from amortization of software
development
costs. The amortization recognized during the nine months ended September
30,
2006 resulted from several new software releases in 2005 and 2006
including
Membership Plus®
2005,
QuickVerse®
2006
Macintosh, Sermon Builder®
4.0,
QuickVerse®
2006
Windows, QuickVerse®
2006
Mobile, QuickVerse®
2006
Bible Suite, QuickVerse®
2006
Macintosh Gold Edition, Holman Christian Standard Bible®
and
QuickVerse 2007®
Windows.
The shorter timeframes between our product upgrades along with the
increased
amount of product releases during the fiscal year 2005 led to the
increased
amount of amortization recognized. During the nine months ended September
30,
2005 we continued to amortize the December 2004 release of
QuickVerse®
2005
Windows, the February 2005 release of Membership Plus®
2005,
the June 2005 releases of QuickVerse®
Macintosh and Sermon Builder®
4.0, the
late September 2005 release of QuickVerse®
2006 and
the remainder of QuickVerse®
8.0 and
Membership Plus®
8.0. The
direct costs and manufacturing overhead percentage are expected to
continue at
these levels as more development projects are implemented in a shortened
timeframe.
Fulfillment
costs from a third-party warehouse and included in the manufacturing
overhead
costs noted above decreased approximately $19,000 from approximately
$105,000
for the nine months ended September 30, 2005 to approximately $86,000
for the
nine months ended September 30, 2006. This decrease is a direct result
of
decreased sales volume. Furthermore, our fulfillment center continues
to improve
its efficiency which has led to the lower rate in fulfillment
costs.
Similar
to the fulfillment costs, freight costs, included in the manufacturing
overhead
costs noted above, decreased approximately $35,000 from approximately
$111,000
for the nine months ended September 30, 2005 to approximately $76,000
for the
nine months ended September 30, 2006. This decrease, too, is related
to the
decrease in sales volume.
Royalties
paid to third party providers of intellectual property decreased
approximately
$43,000 from approximately $300,000 for the nine months ended September
30, 2005
to approximately $257,000 for the nine months ended September 30,
2006 and
increased approximately 3% as a percentage of gross revenues for
the nine months
ended September 30, 2006. The overall percentage increase in royalties
paid for
the nine months ended September 30, 2006 reflects the following:
|
▪
|
sales
of QuickVerse®
2005 editions to a liquidator in the first and third quarters
of 2006 and
no sales to a liquidator in the first and third quarters
of
2005;
|
|
|
▪
|
our
increased sales focus on the QuickVerse®
product line which have associated royalty fees;
|
|
|
▪
|
an
increase in retail sales for the QuickVerse®
2007 product line during the month of September 2006 compared
to only
upgrade sales for the QuickVerse®
2006 product line during the same time frame in 2005; and
|
|
|
▪
|
our
decreased sales focus on the Membership Plus®
product line, which has no associated royalty fees. We
have experienced a
delay in our annual upgrade release of Membership Plus®
2007 and, during the first quarter of 2005, we released
an upgrade to
Membership Plus®
in
February 2005.
|
The
royalty rate as a percentage of gross sales is expected to increase
in the
future as sales to new users are expected to increase, more development
projects
are implemented for new and/or enhanced products, and as we continue
to expand
the content available for our QuickVerse®
line of
products. Upgrade sales will remain only subject to royalties on
their content
additions.
We
expect
all cost of sales will increase in the future as we also anticipate
revenues
will increase going forward based upon our development schedule and
the
broadened content made available for our QuickVerse®
products.
Software
development costs are expensed as incurred as research and development
until
technological feasibility and marketability have been established,
at which time
development costs are capitalized until the software title is available
for
general release to customers. Software development is segregated
by title and
technology platform. Once a product has been successfully released,
subsequent
revisions and upgrades are deemed to constitute development, and,
accordingly,
the costs of the revision and upgrade are capitalized. Capitalized
costs are
amortized on a product-by-product basis using the greater of (i)
straight-line
amortization over the estimated life of the product or (ii) the ratio
of current
revenues from the product to the total projected revenue over the
life of the
product. Generally, we consider technological feasibility to have
been
established with the release of a “beta” version for testing.
Our
software development costs for the three and nine months ended September
30,
2005 and 2006 are summarized in the table below. These costs, consisting
primarily of direct and indirect labor and related overhead charges,
capitalized
during the three months ended September 30, 2005 and 2006, were approximately
$172,000 and approximately $174,000, respectively, and during the nine
months
ended September 30, 2005 and 2006, were approximately $766,000 and
approximately
$412,000, respectively. Accumulated amortization of these development
costs,
which were included in cost of sales, totaled approximately $161,000
and
approximately $143,000 for the three months ended September 30, 2005
and 2006,
respectively, and approximately $525,000 and approximately $601,000
for the nine
months ended September 30, 2005 and 2006, respectively. The overall
increase in
the amortization is a result of the shorter timeframes between our
product
upgrades along with the increased amount of product releases. Furthermore,
the
overall decrease in the capitalized costs reflects the decreased amount
of
product releases for the nine months ended September 30, 2006 as well
as that
during the nine months ended September 30, 2005 we were capitalizing
the
development costs related to our QuickVerse®
Macintosh product line which was our first product line for the Macintosh
platform.
|
Software
Development Costs for
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|||
|
Beginning
balance
|
$
|
487,849
|
$
|
931,103
|
$
|
707,067
|
$
|
701,289
|
|||||
|
Capitalized
|
173,728
|
171,990
|
412,108
|
766,151
|
|||||||||
|
Amortized
(Cost of sales)
|
143,361
|
160,642
|
600,959
|
524,989
|
|||||||||
|
Ending
Balance
|
$
|
518,216
|
$
|
942,451
|
$
|
518,216
|
$
|
942,451
|
|||||
|
Research
and development expense (General and administrative)
|
$
|
47,393
|
$
|
63,164
|
$
|
131,013
|
$
|
130,407
|
|||||
|
Sales,
General and Administrative Costs for Nine Months Ended September
30
|
2006
|
|
|
%
to Sales
|
|
|
2005
|
|
|
%
to Sales
|
|
|
Change
|
|
|
%
|
|||||
|
Selected
expenses:
|
|||||||||||||||||||||
|
Commissions
|
$
|
151,499
|
5
|
%
|
$
|
611,653
|
13
|
%
|
$
|
(460,154
|
)
|
75
|
%
|
||||||||
|
Advertising
and direct marketing
|
156,537
|
6
|
%
|
419,217
|
9
|
%
|
(262,680
|
)
|
63
|
%
|
|||||||||||
|
Sales
and marketing wages, reclassified
|
272,648
|
10
|
%
|
266,966
|
6
|
%
|
5,682
|
2
|
%
|
||||||||||||
|
Total
sales and marketing
|
$
|
580,684
|
21
|
%
|
$
|
1,297,836
|
27
|
%
|
$
|
(717,152
|
)
|
55
|
%
|
||||||||
|
Research
and development
|
131,013
|
5
|
%
|
130,407
|
3
|
%
|
606
|
0
|
%
|
||||||||||||
|
Personnel
costs
|
564,825
|
20
|
%
|
572,688
|
12
|
%
|
(7,863
|
)
|
1
|
%
|
|||||||||||
|
Legal
|
83,539
|
3
|
%
|
157,970
|
3
|
%
|
(74,431
|
)
|
47
|
%
|
|||||||||||
|
Accounting
|
48,505
|
2
|
%
|
22,031
|
0
|
%
|
26,474
|
120
|
%
|
||||||||||||
|
Rent
|
74,260
|
3
|
%
|
57,387
|
1
|
%
|
16,873
|
29
|
%
|
||||||||||||
|
Telecommunications
|
28,967
|
1
|
%
|
42,605
|
1
|
%
|
(13,638
|
)
|
32
|
%
|
|||||||||||
|
Corporate
services
|
54,000
|
2
|
%
|
73,972
|
2
|
%
|
(19,972
|
)
|
27
|
%
|
|||||||||||
|
Investor
services
|
55,000
|
2
|
%
|
---
|
0
|
%
|
55,000
|
0
|
%
|
||||||||||||
|
Other
general and administrative costs
|
270,231
|
10
|
%
|
361,997
|
8
|
%
|
(91,766
|
)
|
25
|
%
|
|||||||||||
|
Total
general and administrative
|
$
|
1,310,340
|
47
|
%
|
$
|
1,419,057
|
30
|
%
|
$
|
(108,717
|
)
|
8
|
%
|
||||||||
With
gross revenues decreasing approximately $1,951,000 from our nine months ended
September 30, 2005 to our nine months ended September 30, 2006, total sales,
general and administrative costs also decreased approximately $826,000 from
approximately $2,717,000 for the nine months ended September 30, 2005 to
approximately $1,891,000 for the nine months ended September 30, 2006. Of
the
total sales, general and administrative costs, sales and marketing expenses
decreased approximately $717,000 from approximately $1,298,000 for the nine
months ended September 30, 2005 to approximately $581,000 for the nine months
ended September 30, 2006. Included in sales expenses, third-party telemarketing
commissions decreased approximately $460,000 from approximately $612,000
for the
nine months ended September 30, 2005 to approximately $152,000 for the nine
months ended September 30, 2006, and decreased as a percentage of gross revenues
from approximately 13% to approximately 5% for the nine months ended September
30, 2005 and 2006, respectively. This decrease is mainly attributed to the
lack
of product releases during the nine months ended September 30, 2006, as well
as
the use of our own in-house direct telemarketing sales team which was developed
specifically to reduce our reliance on third-party telemarketing services.
Advertising
and direct marketing costs decreased approximately $263,000 from approximately
$419,000 for the nine months ended September 30, 2005 to approximately
$156,000
for the nine months ended September 30, 2006 and decreased as a percentage
of
gross revenues from approximately 9% to approximately 6% for the nine months
ended September 30, 2005 and 2006, respectively. The decrease in advertising
and
direct marketing costs reflect that there was no upgrade release to the
Membership Plus®
product
line in the nine months ended September 30, 2006 as compared to the Membership
Plus®
2005
release in the nine months ended September 30, 2005, as well as an overall
decrease in the number of product releases during the nine months ended
September 30, 2006 compared to that of the nine months ended September
30, 2005.
Advertising and direct marketing costs are expected to increase in future
periods as we continue to enhance our product visibility online, increase
and
focus more on our direct marketing efforts, and increase the scope and
frequency
of our print advertising campaigns in order to maximize sales associated
with
new products and product enhancements throughout the coming year. Wages
associated with our sales team and marketing team have been reclassified
and are
included in the total sales and marketing costs. The reclassified sales
and
marketing wages increased approximately $6,000 from approximately $267,000
for
the nine months ended September 30, 2005 to approximately $273,000 for
the nine
months ended September 30, 2006. This increase is attributed to our recent
expansion of our marketing team, and we expect these wages to increase
in future
periods as we expand our in-house direct telemarketing sales team.
Research
and development costs include direct production costs (including labor
directly
associated with the development projects), indirect costs (including allocated
fringe benefits, payroll taxes, facilities costs and management supervision),
and other direct costs (including costs of outside consultants, purchased
software to be included in the software product being developed, travel
expenses, material and supplies, and other direct costs). Software development
costs related to third-party developers and direct labor expensed as research
and development (see table above) amounted to approximately $63,000 for
the
three months ended September 30, 2005 compared to approximately $47,000
for the
three months ended September 30, 2006 and approximately $130,000 for the
nine
months ended September 30, 2005 compared to approximately $131,000 for
the nine
months ended September 30, 2006. The slight increase in 2006 reflects the
capitalization of less research and development costs for the nine months
ended
September 30, 2006 as compared to the nine months ended September 30, 2005.
During the nine months ended September 30, 2005, we were capitalizing the
development costs related to our QuickVerse®
Macintosh product line, which was our first product line for the Macintosh
platform. In addition, during the nine months ended September 30, 2005
we had
more development projects underway compared to the nine months ended September
30, 2006 as well as more research and development costs associated with
maintenance issues on titles after they were released to the general
public. Research and development expenses are expected to increase in future
periods as we continue to expand our internal development team, add new
products
and product versions, and as we continue to expand the array of platforms
upon
which our products are made available.
Total
personnel costs decreased approximately $8,000, from approximately $573,000
for
the nine months ended September 30, 2005, to approximately $565,000 for
the nine
months ended September 30, 2006. In addition, direct salaries and wages
decreased approximately $60,000, from approximately $1,208,000 to approximately
$1,148,000, over the same period. The decrease in direct salaries and wages
was
a result of losing our main developer for our Membership Plus®
product
line as well as the loss of our marketing manager. Due to a cost cutting
initiative, we also lost our Vice President of Sales and Marketing and
an
individual on our product development staff. However, we do anticipate
direct
salaries and wages to increase in the future, as we are still focused on
expanding our sales team, including additions to our own telemarketing
sales
team, our marketing staff and further expansion of our product development
staff. As a percentage of gross revenues, direct salaries and wages increased
approximately 16% from approximately 25% for the nine months ended September
30,
2005 to approximately 41% for the nine months ended September 30, 2006.
As
a
result of having restructured our health benefits plans in October 2005,
our
employment-related health care costs have decreased approximately $20,000
from
approximately $105,000 for the nine months ended September 30, 2005 to
approximately $85,000 for the nine months ended September 30, 2006. In
July
2005, we initiated a Simple IRA retirement plan for our employees and for
those
who participated we decided to match up to 3% of the employee’s annual gross
pay. Therefore, we anticipate that our costs related to this benefit will
increase in future periods as more employees take advantage of the retirement
plan.
The
capitalization of direct and indirect labor and related overhead charges
as
software development costs (see “Cost of Sales” above) decreased by
approximately $144,000 from approximately $370,000 for the nine months
ended
September 30, 2005 to approximately $226,000 for the nine months ended
September
30, 2006. This decrease reflects the development of our QuickVerse®
Macintosh product line during the nine months ended September 30, 2005,
which
was our first product line for the Macintosh platform. It is anticipated
that
personnel costs will continue to increase in future periods as operating
capital
is available and deployed to further fund the staffing requirements of
our
product development, direct sales teams and marketing staff.
Direct
legal costs decreased approximately $74,000 for the nine months ended
September
30, 2006 as a result of this registration statement, originally filed
on
November 22, 2004, having been declared effective by the SEC on February
1,
2006, thereby curtailing the previously ongoing SEC review and comment
process.
It is anticipated that legal costs will increase in future periods
as we
continue to meet our ongoing SEC reporting and corporate governance
obligations,
possibly raise additional capital, and pursue our business plan for
growth by
potentially acquiring other companies or product lines and potentially
selling
off others.
Accounting
and audit related expenses increased approximately $26,000 for the
nine months
ended September 30, 2006 as a result of engaging a new principal
accounting firm
for our fiscal year end 2005 audit. It is anticipated that accounting
costs will
continue to increase in the future as we expect that our fees payable
to the new
principal accounting firm, which we expect to utilize on an ongoing
basis, will
generally be higher than those payable to our former accounting
firm.
Rent
costs increased approximately $17,000 for the nine months ended September
30,
2006 as a result of periodic percentage increase provisions in our
leases
agreements. It is anticipated that rent cost will continue to increase
similarly
in the future as our lease agreement for our office/warehouse
facilities
in Omaha, Nebraska extends through May 2007 and our lease agreement
for our
office space in Naperville, Illinois extends through March 2007.
Telecommunications
costs decreased approximately $14,000 for the nine months ended September
30,
2006 as a result of our having switched our local and long-distance
carriers
beginning in February 2005. Our call volume enabled us to change
our service to
dedicated T-1 lines which in turn reduced our long-distance charges.
We also
invested in internet protocol phones for our remote locations which
reduced the
overall local and long distance charges in our Illinois and Iowa
locations.
Furthermore, we experienced a decrease in call volume in the technical
support
and customer service departments for the nine months ended September
30, 2006
due to the delayed Membership Plus®
upgrade
release. We anticipate our call volume to increase during the fourth
quarter of
2006 and the first quarter of 2007 as Membership Plus®
2007 was
released in October 2006.
Corporate
service fees decreased approximately $20,000 for the nine months
ended September
30, 2006 resulting from the expiration of an independent consulting
agreement
and the resultant ability on our part to cease carrying the associated
expense
for a 2004 issuance to such consultant of a warrant to purchase 600,000
shares
of common stock which had been allocated over the term of the agreement.
We
currently engage the services of an independent consultant for purposes
of
investor relations and therefore expect these fees to increase in
future periods
as their activities on our behalf ramp-up and become an increasingly
important
aspect of our corporate objectives.
Finally,
investor services fees increased approximately $55,000 for the nine
months ended
September 30, 2006 as we entered into an investor relations service
agreement in
April 2006. These fees are related to the hiring of an investor relations
firm
and the expense for the issuance of a total of 500,000 restricted
shares of
common stock allocated over the term of the investor relations contract.
We
anticipate these fees to increase in future periods.
As
of
September 30, 2006, and in connection with a July 19, 2004 private
placement
with Barron Partners, LP and a certain Registration Rights Agreement,
as
amended, we had accrued a total of approximately $490,000 (284 days
at $1,726
per day) in penalties under the terms of the Registration Rights
Agreement, of
which we paid $150,000 prior to April 7, 2006. On April 7, 2006,
we signed a
two-year promissory note for $336,000 together with simple interest
at the rate
of 8% per annum with Barron Partners for the unpaid registration
rights
penalties. The note agreement calls for monthly installments for
the first
twelve months of $10,000, beginning May 1, 2006 and $20,000 per month
thereafter. The accrual of and payment on the registration rights
penalties has
had a material adverse effect on our business, our financial condition,
including liquidity and profitability, and our results of operations,
including
a corresponding decrease in our net income of approximately $49,000
for the nine
months ended September 30, 2006.
In
May
2004, we issued a three-year warrant to purchase up to 600,000 shares
of our
common stock to a consultant. This warrant may be exercised on a cashless
basis
at the option of the holder at a price per share of $0.15. In November
2004, we
issued two five-year warrants to purchase an aggregate of 21,875,000
shares of
our common stock in connection with a certain Stock Purchase Agreement
completed
with Barron Partners, LP on July 19, 2004. The first warrant entitles
the holder
to purchase up to 10,937,500 shares of our common stock at a price
of $0.18 per
share, and the second warrant entitles the holder to purchase up to
10,937,500
additional shares of our common stock at a price of $0.60 per share.
Each
warrant is subject to standard adjustment provisions and each provides
for
settlement in registered shares of our common stock and may, at the
option of
the holder, be settled in a cashless, net-share settlement. These warrants
have
been accounted for as a liability according to the guidance of EITF
00-19,
Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled
in, a
Company’s Own Stock.
In
accordance with the accounting mandate, the derivative liability associated
with
these warrants has been, and shall continue to be, until each is either
fully
exercised or expires, adjusted to fair value at each balance sheet
date and is
accordingly reassessed at each such time to determine whether the warrants
should be classified (or reclassified, as appropriate) as a liability
or as
equity. Under EITF 00-19, a decrease in our stock price results in
a decrease in
the fair value of the derivative liability and a valuation gain to
be recognized
in our income statement whereas an increase in our stock price results
in an
increase in the fair value of the derivative liability and a valuation
loss to
be recognized in our income statement. At September 30, 2006, the fair
value of
the derivative liability was approximately $953,000, fair value adjustments
of
approximately $328,000 and approximately $875,000 have been included
in other
expenses for the three and nine months ended September 30, 2005, respectively,
and fair value adjustments of approximately $237,000 and approximately
$1,110,000 have been included in other income for the three and nine
months
ended September 30, 2006, respectively. If
our
stock price rebounds in the future to a level consistent with our stock
price at
December 2005, the fair value of the derivative liability will increase
and
therefore, the valuation gain recognized during the three and nine
months ended
September 30, 2006 will decrease and/or reverse and we could potentially
reflect
a valuation loss.
Amortization
expenses remained steady at approximately $133,000 and approximately
$399,000
for the three and nine months ended September 30, 2005 and 2006, respectively.
The software license acquired from TLC in July of 1999 (the “1999 license”) is
amortized over a 10 year useful life. Amortization expenses for 2005
and 2006
reflect the continual amortization of the software license as well as
the
amortization of our website, www.quickverse.com, which we launched during
the
second quarter of 2004.
Our
effective tax rate differs from the statutory federal rate due to differences
between income and expense recognition prescribed by the Internal Revenue
Code
and Generally Accepted Accounting Principles. We utilize different methods
and
useful lives for depreciating property and equipment. Changes in estimates
(reserves) are recognized as expense for financial reporting but are
not
deductible for income tax purposes.
We
have
recognized a net deferred tax asset whose realization depends on
generating
future taxable income. At September 30, 2006, management adjusted
the amount of
valuation allowance based on the assessment that we will produce
sufficient
income in the future to realize the economic benefit of our net deferred
tax
asset. The resulting deferred tax liability reflects income taxes
payable in
future periods on the net deductible differences related to the 1999
license. We
currently have net operating loss carryforwards, for income tax purposes,
of
approximately $8,468,000. The carryforwards are the result of income
tax losses
generated in 2000 ($2,086,000 expiring in 2020), 2001 ($5,191,000
expiring in
2021), 2002 ($235,000 expiring in 2022) and 2005 ($956,000 expiring
in 2025). We
will need to achieve a minimum annual taxable income, before deduction
of
operating loss carryforwards, of approximately $527,000 to fully
utilize the
current loss carryforwards. Although there can be no assurance, we
believe this
is achievable through careful expense management and continued introduction
of
new products and enhanced versions of our existing
products.
Although
there can be no assurance, we expect the deductible temporary differences
(reserves) to reverse sometime beyond the next fiscal year.
Our
primary needs for liquidity and capital resources are the funding
of our
continued operations, which includes the ongoing internal development
of new
products, expansion and upgrade of existing products, and marketing
and sales.
We believe our future cash provided by operations will be sufficient
to fund our
continued operations. However, our pursuit of future strategic product
line
and/or corporate acquisitions and licensing opportunities will require
funding
from outside sources. Funding from outside sources may include but
is not
limited to the exercise of outstanding warrants and pursuit of other
financing
options such as commercial loans, common stock and/or preferred stock
issuances
and convertible notes. At this time, we have no legally committed
funds for
future capital expenditures including software development.
|
Working
Capital at September 30
|
2006
|
|||
|
Current
assets
|
$
|
658,101
|
||
|
Current
liabilities
|
$
|
2,866,445
|
||
|
Retained
deficit
|
$
|
(7,750,886
|
)
|
As
of
September 30, 2006, we had approximately $658,000 in current assets,
approximately $2,866,000 in current liabilities and a retained deficit
of
approximately $7,751,000. We had net income of approximately $26,000
for the
three months ended September 30, 2006 and net income of approximately
$1,000 for
the nine months ended September 30, 2006, respectively. For the three
and nine
months ended September 30, 2006, we had registration rights penalties
of $-0-
and approximately $49,000, respectively, and a related gain of approximately
$237,000 and approximately $1,110,000, respectively, from the fair
value
adjustment of derivatives. See “Results Of Operations” above.
|
Cash
Flows for Nine Months Ended September 30
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
%
|
|
||||
|
Cash
flows provided by operating activities
|
$
|
291,051
|
$
|
479,934
|
$
|
(188,883
|
)
|
39
|
%
|
||||||
|
Cash
flows (used) by investing activities
|
$
|
(425,063
|
)
|
$
|
(750,851
|
)
|
$
|
325,788
|
43
|
%
|
|||||
|
Cash
flows provided (used) by financing activities
|
$
|
15,444
|
$
|
(30,604
|
)
|
$
|
46,048
|
150
|
%
|
Net
cash
provided by operating activities was approximately $291,000 for the
nine months
ended September 30, 2006, and approximately $480,000 for the nine
months ended
September 30, 2005. The decrease was primarily due to a decrease
in the amounts
received from customers resulting from decreased sales and a temporary
decrease
in payments to trade vendors and content providers.
Net
cash
used in investing activities was approximately $425,000 for the nine
months
ended September 30, 2006 and approximately $751,000 for the nine
months ended
September 30, 2005. The decrease was mainly the result of capitalizing
fewer
costs associated with software development.
Net
cash
provided by financing activities was approximately $15,000 for the
nine months
ended September 30, 2006, and net cash used by financing activities
was
approximately $31,000 for the nine months ended September 30, 2005.
Both years
reflect payments made on long-term notes payable. However, the nine
months ended
September 30, 2006 reflect proceeds received from a note payable.
As
part
of the July 19, 2004 financing transaction with Barron Partners,
LP, we entered
into a certain Registration Rights Agreement pursuant to which
we became
committed to registering all of the shares issued as part of
such transaction,
including those issuable under each of two warrants. On November
22, 2004 we
originally filed this registration statement, which covers
the shares issued to
Barron Partners, as well as the shares underlying the warrants
issued to Barron
Partners. On February 1, 2006, the SEC declared this registration
statement
effective. Due to continued delays in effectiveness of this
registration
statement however (due principally to ongoing efforts made
necessary by our
determination to restate certain of our historical financial
information), and
in accordance with the Registration Rights Agreement, we accrued
a total of
approximately $490,000 (284 days at $1,726 per day) in penalties,
of which we
had paid $150,000 prior to April 7, 2006. On April 7, 2006,
we issued a two-year
promissory note for $336,000 together with simple interest
at the rate of 8% per
annum to Barron Partners for the unpaid registration rights
penalties. The note
agreement calls for monthly installments for the first twelve
months of $10,000,
beginning May 1, 2006 and $20,000 per month thereafter. The
accrual and payment
on the registration rights penalties has had a material adverse
effect on our
business, our financial condition, including liquidity and
profitability, and
our results of operations, including a corresponding $49,000
decrease in our net
income for the nine months ended September 30, 2006.
On
July
20, 2006, we entered into a loan agreement with an individual,
for the principal
sum of $150,000, to fund an existing working capital deficit.
The loan was
evidenced by a convertible secured promissory note bearing
interest at a rate of
10% per thirty-day period with the principal, together with
all accrued
interest, due on or before September 18, 2006. In further consideration
of the
loan, we issued the lender a three-year common stock purchase
warrant to acquire
up to an aggregate of 100,000 shares of our common stock at
an exercise price of
$0.07 per share. On September 19, 2006, we entered into a Modification
and
Extension Agreement in connection with this note. As of the
original maturity
date and in accordance with the original terms of the loan
agreement, we repaid
fifty percent of the original principal ($75,000). This Modification
and
Extension Agreement extended the repayment term of the balance
of the
outstanding principal under the loan agreement ($75,000), as
well as the
interest payable thereon and on the principal previously repaid,
until October
20, 2006. In consideration for the extension of the maturity
date, we agreed to
pay an amount equal to one percentage point on the principal
that remains
outstanding ($750). On October 19, 2006, in connection with
the above-mentioned
loan, we repaid in full the remaining principal ($75,000),
the interest payable
on the original principal amount of $150,000 ($35,416.67) and
the consideration
payable for the extension of the maturity date ($750).
We
have
been unsuccessful in previous attempts to secure bank financing
due to our
internal financial ratios and negative working capital position
and do not
expect that we will be successful in securing any such financing
unless and
until our ratios in this regard improve. Although we have,
in the past, secured
financing on our open accounts receivable, we were unable to
pursue that option
because of a lien placed upon our accounts receivable, together
with all of our
other assets, in connection with the security interest granted
to the lender for
the July 20, 2006 loan. As of October 19, 2006, however, this
loan was retired
in full and financings secured against our open accounts receivable
may once
again, therefore, be a possible option for us in satisfying
our future financing
needs.
We lease
office space/warehouse facilities in Omaha, Nebraska under
an operating lease
with a third-party with terms extending through 2007. We
are responsible for all taxes, insurance and utility expenses
associated
with this lease. There is no lease renewal option contained
in the lease.
We lease
office space in Naperville, Illinois under an operating lease
with a third-party
with terms extending through March 2006. We are responsible for all
insurance expenses associated with this lease.
At
September 30, 2006, the future minimum rental payments required
under these
leases are as follows:
|
2006
|
$
|
20,333
|
||
|
2007
|
31,248
|
|||
|
Total
future minimum rental payments
|
$
|
51,581
|
We lease
telephone equipment under a capital lease expiring in November
2009. The asset
and liability under the capital lease are recorded at the present
value of the
minimum lease payments. The asset is depreciated over a 5 year
life. Minimum
future lease payments under capital leases as of September 30,
2006 for each of
the next five years and in the aggregate are:
|
2006
|
$
|
3,432
|
||
|
2007
|
13,726
|
|||
|
2008
|
13,726
|
|||
|
2009
|
12,582
|
|||
|
2010
|
---
|
|||
|
Total
minimum lease payments
|
43,466
|
|||
|
Less:
Amount representing interest
|
7,282
|
|||
|
Total
obligations under capital lease
|
36,184
|
|||
|
Less:
Current installments of obligations under capital
lease
|
10,023
|
|||
|
Long-term
obligation under capital lease
|
$
|
26,161
|
New
Accounting Pronouncements
In
the
past, we have applied Accounting Principles Board (“APB”) Opinion No. 25,
Accounting
for Stock Issued to Employees,
and
related interpretations in accounting as allowed by SFAS No 123,
Accounting
for Stock Based Compensation,
for
various forms of share-based awards including incentive and nonqualified
stock
options and stock appreciation rights attached to stock options;
and therefore,
no compensation cost had been recognized. However, in December
2004, the FASB
issued SFAS No 123 (R), Share-Based
Payment,
which
replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No.
123 (R)
requires compensation costs related to share-based payment transactions
to be
recognized in the financial statements. With limited exceptions,
the amount of
compensation cost will be measured based on the fair value on the
grant date of
the equity or liability instruments issued. Compensation cost will
be recognized
over the period that the service is provided for that award. This
new standard
became effective for us in the first quarter of fiscal year 2006.
In
February 2006, the FASB issued Statement No. 155, Accounting
for Certain Hybrid Financial Instruments - an amendment of FASB
Statements No.
133 and 140.
The
Statement permits fair value remeasurement for any hybrid financial
instrument
that contains an embedded derivative that otherwise would require
bifurcation.
The new Statement also requires companies to identify interests
in securitized
financial assets that are freestanding derivatives or contain embedded
derivatives that would have to be accounted for separately. This
new Statement
is effective for fiscal years beginning after September 15, 2006
with early
adoption permitted. We do not expect the adoption of SFAS 155 to
have a material
impact on our business, our financial condition, including liquidity
and
profitability, or our results of operations.
In
March
2006, the FASB issued Statement No. 156, Accounting
for Servicing of Financial Assets, an amendment of Statement No.
14 (SFAS
156).
SFAS
156 requires all separately recognized servicing assets and servicing
liabilities to be initially measured at fair value, if practicable,
and permits
an entity to subsequently measure those servicing assets and servicing
liabilities at fair value. SFAS 156 is effective for fiscal years
beginning
after September 15, 2006. We do not expect the adoption of SFAS
156 to have a
material impact on our business, our financial condition, including
liquidity
and profitability, or our results of operations.
In
April
2006, the FASB issued Staff Position FIN 46(R)-6, Determining
Variability to be Considered in Applying FIN 46(R).
FIN
46(R)-6 states that the variability to be considered in applying
FIN 46(R) shall
be based on an analysis of the design of the entity following a
two-step
process. The first step is to analyze the nature of the risks in
the entity. The
second step would be to determine the purpose(s) for which the
entity was
created and determine the variability (created by the risks identified
in Step
1) the entity is designed to create and pass along to its interest
holders. The
guidance in this FASB Staff Position is effective prospectively
beginning July
1, 2006, although companies have until December 31, 2006 to elect
retrospective
applications. We do not expect FIN 46(R)-6 to have a material impact
on our
business, our financial condition, including liquidity and profitability,
or our
results of operations.
In
July
2006, the FASB released FIN 48, Accounting
for Uncertainty in Income Taxes - an interpretation of SFAS 109.
This
interpretation clarifies the accounting for uncertainty in income
taxes
recognized in accordance with SFAS 109. This interpretation prescribes
a
recognition threshold and measurement attribute for financial statement
recognition and measurement of a tax position taken or expected
to be taken in a
tax return. It also provides guidance on derecognition, classification,
interest
and penalties, interim periods and disclosure. FIN 48 is effective
for fiscal
years beginning after December 15, 2006. We will adopt FIN 48 as
of January 1,
2007 and we do not expect the adoption to have a material impact
on our
business, our financial condition, including liquidity and profitability,
or our
results of operations.
In
September 2006, the FASB issued Statement No. 157, Fair
Value Measurements, which
defines fair value, establishes a framework for measuring fair
value in
generally accepted accounting principles, and expands disclosures
about fair
value measurements. This Statement applies under other accounting
pronouncements
that require or permit fair value measurements, but does not require
any new
fair value measurements. SFAS 157 is effective for financial statements
issued
for fiscal years beginning after November 15, 2007. We are currently
assessing
the potential impact that adoption of SFAS 157 will have on our
financial
statements.
In
September 2006, the FASB issued Statement No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans—an
amendment of FASB Statements No. 87, 88, 106, and 132(R) (“SFAS
158”).
This
Statement requires an employer to recognize the overfunded or underfunded
status
of a defined benefit postretirement plan (other than a multiemployer
plan) as an
asset or liability in its statement of financial position and to
recognize
changes in that funded status in the year in which the changes
occur through
comprehensive income of a business entity or changes in unrestricted
net assets
of a not-for-profit organization. This Statement also requires
an employer to
measure the funded status of a plan as of the date of its year-end
statement of
financial position, with limited exceptions. SFAS 158 is effective
for financial
statements issued for fiscal years ending after December 15, 2006.
We do not
expect the adoption of SFAS 158 to have a material impact on our
business, our
financial condition, including liquidity and profitability, or
our results of
operations.
The
following discussion should be read together with our consolidated
financial statements for the period ended December 31, 2005 and the notes
to the
consolidated financial statements.
|
Statement
of Operations for Years Ended December 31
|
2005
|
2004
|
Change
|
|
%
|
||||||||||
|
Net
revenues
|
$
|
5,337,342
|
$
|
5,322,842
|
$
|
14,500
|
0
|
%
|
|||||||
|
Cost
of sales
|
|
1,973,944
|
|
1,721,298
|
|
252,646
|
15
|
%
|
|||||||
|
Gross
profit
|
|
3,363,398
|
|
3,601,544
|
|
(238,146
|
)
|
-7
|
%
|
||||||
|
Total
operating expenses
|
|
(4,425,429
|
)
|
|
(4,177,705
|
)
|
|
(247,724
|
)
|
6
|
%
|
||||
|
Other
income
|
|
14,855
|
|
1,012,744
|
|
(997,889
|
)
|
-99
|
%
|
||||||
|
Other
adjustments
|
|
(436,686
|
)
|
|
(154,569
|
)
|
|
(282,117
|
)
|
183
|
%
|
||||
|
Loss
on fair value adjustment of derivatives
|
|
(33,797
|
)
|
|
(291,672
|
)
|
|
257,875
|
-88
|
%
|
|||||
|
Other
expenses
|
|
(12,898
|
)
|
|
(42,148
|
)
|
|
29,250
|
-69
|
%
|
|||||
|
Loss
before income taxes
|
|
(1,530,557
|
)
|
|
(51,806
|
)
|
|
(1,478,751
|
)
|
2854
|
%
|
||||
|
Provision
for income taxes
|
|
(50,709
|
)
|
|
1,015,859
|
|
(1,066,568
|
)
|
-105
|
%
|
|||||
|
Net
income (loss)
|
$
|
(1,581,266
|
)
|
$
|
964,053
|
$
|
(2,545,319
|
)
|
-264
|
%
|
Despite
a
modest increase in our gross revenue, our net loss before income
taxes increased
approximately $1,479,000 from a loss of approximately $52,000 for
the year ended
December 31, 2004 to a loss of approximately $1,531,000 for the year
ended
December 31, 2005. Further, we incurred a net loss of approximately
$1,581,000
for the year ended December 31, 2005, representing a reduction of
approximately
$2,545,000 in our net income of approximately $964,000 for the year
ended
December 31, 2004. These negative results of operations are primarily
attributable to the following:
| 1) |
For
the year ended December 31, 2004:
|
a) write
downs of each the following:
| § |
a
reserve for rebates payable from a change in accounting estimate
of
approximately $142,000 (and recognized as an adjustment to
revenue);
|
| § |
actual
rebates payable of approximately $61,000 due to an overstatement
(and
recognized as an adjustment to revenue); and
|
| § |
obsolete
inventory of approximately $32,000 (which is included in
cost of
sales);
|
b) we
recognized a gain of approximately $1,000,000 from extinguishment
of debt
(classified as other income) which resulted from our having settled
with various
vendors and content providers for lump-sum payments at reduced amounts
of
balances previously owed;
c)
we
recognized an expense of approximately $155,000 (classified as other
adjustments) related to a settlement with an institutional private
equity
investor; and
d) we
recognized a loss of approximately $292,000 related to the fair value
adjustment
of derivatives.
|
2)
|
For
the year ended December 31, 2005:
|
a)
our
cost
of sales increased approximately $253,000 from the year ended December
31, 2004
despite an increase in net sales year over year of only $14,500,
due for the
most part to an increase of approximately $231,000 in amortization
expense
related to software development costs resulting from the increased
number of
development projects completed and shipped in late 2004 and 2005
(including
QuickVerse®
2005 in
December 2004, Membership Plus®
2005 in
February 2005, QuickVerse®
Macintosh in June 2005, QuickVerse®
2006 in
September 2005, and QuickVerse®
2006
Mobile in October 2005);
b) our
bad
debt expense (included in total operating expenses) increased approximately
$114,000 from the year ended December 31, 2004 due primarily to our
inability to
collect on a balance due of $42,000 from a single liquidation customer.
In
addition, we wrote off approximately $58,000 related to uncollectible
receivables arising out of a sales campaign that we initiated in
2005 which
focused on offering new churches a beginning line of credit of approximately
$500, and which has since been discontinued;
c) we
incurred liquidated damage penalties of approximately $437,000 in
connection
with our continued failure to meet certain contractual registration
obligations
(which are included in other adjustments);
d) our
legal
expenses (included in general and administrative) increased approximately
$117,000 from the year ended December 31, 2004 attributable in large
part to
ongoing matters associated with fulfillment of our contractual registration
obligations and related restatements of certain of our historical
financial
statements; and
e) we
recognized a loss of approximately $34,000 related to the fair value
adjustment
of derivatives.
Offsetting
to some degree the negative results of operations detailed above
were two
positive developments during the year ended December 31, 2005. First,
non-cash
expenses related to equity-based compensation for services decreased
by
approximately $179,000 for the year ended December 31, 2005 as a
result of our
not having issued any. Second, interest expense for the year ended
December 31,
2005 decreased, by approximately $42,000, from the year ended December
31, 2004,
due to a reduction in trade payables coupled with an increase in
timely
payments.
|
Revenues
for Years Ended December 31
|
2005
|
|
|
%
to Sales
|
|
|
2004
|
|
|
%
to Sales
|
|
|
Change
|
|
|
%
|
|
||||
|
Gross
sales
|
$
|
6,309,017
|
100
|
%
|
$
|
5,786,427
|
100
|
%
|
$
|
522,590
|
9
|
%
|
|||||||||
|
Add
rebate adjustment
|
19,640
|
0
|
%
|
203,313
|
4
|
%
|
(183,673
|
)
|
0
|
%
|
|||||||||||
|
Less
reserve for sales returns and allowances
|
(991,315
|
)
|
-16
|
%
|
(666,898
|
)
|
-12
|
%
|
(324,417
|
)
|
49
|
%
|
|||||||||
|
Net
sales
|
$
|
5,337,342
|
84
|
%
|
$
|
5,322,842
|
92
|
%
|
$
|
14,500
|
0
|
%
|
Gross
revenues increased approximately $523,000 from approximately $5,786,000
for the
year ended December 31, 2004 to approximately $6,309,000 for the year
ended
December 31, 2005. We believe that this increase was attributable primarily
to
the following product releases throughout the year:
First
Quarter 2005
|
▪
|
an
enhanced version of our top financial and data management
product,
Membership Plus®,
including Membership Plus®
Standard Edition (retail price: $149.95) and Membership
Plus®
Deluxe Edition (retail price of $349.95); and
|
|
|
▪
|
an
enhanced version of QuickVerse®
2005 Essentials (retail price: $49.95) and QuickVerse®
2005 Platinum Edition (retail price: $799.95).
|
Second
Quarter 2005
|
▪
|
our
first product release on the Macintosh®
Operating System platform, QuickVerse®
Macintosh, including QuickVerse®
Macintosh White Box edition, (retail price: $49.95) and
QuickVerse®
Macintosh Black Box edition (retail price: $99.95) and
;
|
|
|
▪
|
an
enhanced version of Bible Illustrator®
3.0 titled Sermon Builder®
4.0 (retail price: $69.95), which marked the first update
to this program
in over six years.
|
Third
Quarter 2005
|
▪
|
an
upgrade to our flagship product, QuickVerse®
(three months earlier within the calendar year than our
2004 upgrade
release of this product, and the first QuickVerse®
upgrade
release in over five years that was shipped early enough
to be in retail
stores prior to the beginning of the holiday sales season),
including
QuickVerse®
2006 Starter Edition (retail price: $9.95), QuickVerse®
2006 Parable®
Edition (retail price: $49.95), QuickVerse®
2006 Bible Suite (retail price: $29.95), QuickVerse®
2006 Essentials (retail price: $49.95), QuickVerse®
2006 Standard (retail price: $99.95), QuickVerse®
2006 Expanded (retail price: $199.95), QuickVerse®
2006 Deluxe (retail price: $299.95), and QuickVerse®
2006 Platinum (retail price:
$799.95).
|
Fourth
Quarter 2005
|
▪
|
an
upgrade to our four editions of QuickVerse®
2006 Mobile, including Standard (retail price: $29.95),
Deluxe (retail
price: $39.95), Platinum Edition (retail price: $69.95),
and Life
Application Study Bible (retail price:
$39.95).
|
During
the year ended December 31, 2004, our product releases included Membership
Plus®
8.0
(retail price: $199.95 to $299.95), QuickVerse®
2005 PDA
(retail price: $14.95 to $39.95), and QuickVerse®
2005
(retail price: $99.95 to $299.95). Of note, and generally, the retail
price
points for the products released during the year ended December 31,
2004 were
significantly less than those released during the year ended December
31, 2005.
Furthermore, due to delays in programming, duplication, packaging
and
distribution, QuickVerse®
2005
began shipping in early-December 2004, several months after the holiday
sales
season had already begun. Due to these delays, we believe that we
lost otherwise
realizable sales revenues of approximately $500,000 for the year
ended December
31, 2004.
During
each of the years ended December 31, 2004 and 2005, our sales efforts
were
focused on directly targeting end-users through telemarketing and
Internet
sales, resulting in more consistent sales. While sales into the retail
market
(both CBA and secular) have continued to increase, they have not
returned to our
historically high levels. Upgrade sales, however are not increasing
at a rapid
rate due to the consistency in our development schedule and the annual
releases
of our flagship product, QuickVerse®.
We
anticipate that revenues will continue to increase through 2006 the
following
year as we continue to expand the content available for our
QuickVerse®
products, develop new products for multiple platforms, as well as
offer our
products at a range of price points intended to appeal to various
market
sub-segments.
Sales
returns and allowances increased approximately $324,000 from approximately
$667,000 for the year ended December 31, 2004 to approximately $991,000
for the
year ended December 31, 2005, and increased as a percentage of gross
sales from
approximately 12% for the year ended December 31, 2004 to approximately
16% for
the year ended December 31, 2005. This increase is largely attributable
to the
following:
|
▪
|
price
protections afforded to consumers and retailers who had
purchased prior
versions of Membership Plus®
and
QuickVerse®
within
one year or less of our release of upgraded versions of
each of Membership
Plus®,
in February 2005, and QuickVerse®,
in September 2005. Historically, our product upgrades have
extended over
two to three years and therefore, price protections were
not
issued;
|
|
|
▪
|
a
single return from a liquidator of approximately $42,000
during the fourth
quarter of the year ended December 31, 2005, which although
we were not
obligated to accept, we did accept based on a conclusion
that it was in
our best interest to do so;
|
|
|
▪
|
the
unexpected loss of our primary developer for Membership
Plus®
in
May 2005, together with certain unresolved maintenance
issues at the time
led to higher actual returns on the Membership Plus®
2005 product line; and
|
|
|
▪
|
increased
price points associated with recently introduced
products.
|
As
a
result of the overall increase in sales returns and allowances, we
have
increased our reserves from approximately $100,000 to approximately
$125,000 to
cover estimated retail channel inventory levels. Moreover, we expect
to release
enhanced versions of our biggest-selling products on an annual basis
generally
going forward, and anticipate sales returns and allowances as a percentage
of
gross revenues to decrease over time as a result of increased stability
in the
functionality of our products, decreasing reliance on retail sales
and
increasing reliance on direct sales, which have historically resulted
in fewer
returns, and improved planning in the timing of new product version
releases.
For
the
year ended December 31, 2004, and due to a change in accounting estimate
of
approximately $142,000, we wrote down a reserve for rebates payable.
Due to
overstatements of approximately $20,000 and $61,000, we additionally
wrote down
actual rebates payable, both of which are included as an adjustment
to revenue
(in accordance with EITF Issue No. 01-09) for the years ended December
31, 2005
and 2004, respectively.
|
Cost
of Sales For Years Ended December 31
|
2005
|
|
|
%
to Sales
|
|
|
|
2004
|
|
|
%
to Sales
|
|
|
|
Change
|
|
|
%
|
|
||
|
Direct
costs
|
$
|
601,156
|
13
|
%
|
$
|
579,946
|
15
|
%
|
$
|
21,210
|
4
|
%
|
|||||||||
|
Less
reserve for sales returns and allowances
|
(148,245
|
)
|
-3
|
%
|
(99,255
|
)
|
-3
|
%
|
(48,990
|
)
|
49
|
%
|
|||||||||
|
Amortization
of software development costs
|
806,531
|
17
|
%
|
575,480
|
15
|
%
|
231,051
|
40
|
%
|
||||||||||||
|
Royalties
|
471,651
|
10
|
%
|
417,604
|
11
|
%
|
54,047
|
13
|
%
|
||||||||||||
|
Freight-out
|
171,904
|
4
|
%
|
172,634
|
4
|
%
|
(730
|
)
|
0
|
%
|
|||||||||||
|
Fulfillment
|
70,947
|
1
|
%
|
74,889
|
2
|
%
|
(3,942
|
)
|
-5
|
%
|
|||||||||||
|
Cost
of sales
|
$
|
1,973,944
|
42
|
%
|
$
|
1,721,298
|
44
|
%
|
$
|
252,646
|
15
|
%
|
Cost
of
sales consists primarily of royalties paid to third party providers of
intellectual property and the direct costs and manufacturing overhead required
to reproduce, package, fulfill and ship the software products. Direct costs
and
manufacturing overhead also include the amortized software development
costs and
the non-capitalized technical support wages. The direct costs and manufacturing
overhead increased approximately $198,000 from approximately $1,304,000
for the
year ended December 31, 2004 to approximately $1,502,000 for the year ended
December 31, 2005 and decreased slightly as a percentage of gross revenues
approximately 1% for the year ended December 31, 2005. The overall increase
resulted directly from amortization of software development costs. The
amortization recognized during the year ended December 31, 2005 resulted
from
several new software releases in 2005 including Membership Plus®2005,
QuickVerse®
Macintosh, Sermon Builder®
4.0,
QuickVerse®
2006 and
QuickVerse®
2006
Mobile. The shorter timeframes between our product upgrades during the
year of
2005 as compared to 2004, especially QuickVerse®
2005 and
QuickVerse®
2006,
also led to the increased amount of amortization recognized. During the
year
ended December 31, 2004 we continued to amortize the costs associated with
QuickVerse®
8.0
along with Membership Plus®
8.0, the
updated release of QuickVerse®
PDA 2005
and the release of QuickVerse®
2005.
The
slight decrease in the percentage of cost of sales reflects the continual
software development cycle of enhancing our two major product lines within
a one
year timeframe or less and the increased amortization of those software
development costs. The direct costs and manufacturing overhead percentage
are
expected to continue at the 2005 levels as working capital remains more
consistent and as more development projects are implemented in a shortened
timeframe. Fulfillment costs from a third-party warehouse and included
in the
manufacturing overhead costs noted above decreased approximately $4,000
from
approximately $75,000 for the year ended December 31, 2004 to approximately
$71,000 for the year ended December 31, 2005 as a direct result of having
moved
our retail fulfillment operations to a new outside entity in late October
2004.
Furthermore, our fulfillment center continues to improve its efficiency
which
has led to a decrease in fulfillment, as well as freight, costs. The
write down
of a distinct category of obsolete inventory of approximately $32,000
is
included in the direct costs and manufacturing overhead for the year
ended
December 31, 2004.
Royalties
paid to third party providers of intellectual property increased approximately
$54,000 from approximately $418,000 for the year ended December 31, 2004
to
approximately $472,000 for the year ended December 31, 2005 and decreased
approximately 1% as a percentage of gross revenues for the year ended
December
31, 2005. The overall increase in royalties paid for the year ended December
31,
2005 reflects the following:
|
▪
|
the
release of the QuickVerse®
2005 editions in early December 2004;
|
|
|
▪
|
the
release of three additional QuickVerse®
2005 editions , QuickVerse®
Essentials, QuickVerse®
Platinum, and QuickVerse®
Macintosh;
|
|
|
▪
|
the
release of Sermon Builder®
4.0 in June 2005, which was an update to Bible Illustrator®
3.0, and the first update to Bible Illustrator®
3.0 in over six years (including not only technological updates
but
content additions);
|
|
|
▪
|
the
release of the QuickVerse®
2006 editions in September of 2005, which was three months
earlier in the
calendar year than was the case in 2004, and which allowed
us to
capitalize much more upon the holiday selling season;
and
|
|
|
▪
|
the
release of the QuickVerse®
2006 Mobile editions in October of 2005.
|
During
the year ended December 31, 2004, we renegotiated several royalty contracts
which resulted, in some cases, in a higher royalty rate but more content.
The
royalty rate as a percentage of gross sales is expected to increase in
the
future as sales to new users are expected to increase, more development
projects
are implemented for new and/or enhanced products, and as we continue
to expand
the content available for our QuickVerse®
line of
products.
The
slight decrease in cost of sales as a percentage of gross sales reflects
the
fact that our sales results continue to be largely influenced by our
reliance on
direct marketing initiatives aimed at our consumers rather than retail
distribution initiatives, and that upgrade sales are only subject to
royalties
on their content additions.
Software
development costs are expensed as incurred as research and development
until
technological feasibility and marketability have been established, at
which time
development costs are capitalized until the software title is available
for
general release to customers. Software development is segregated by title
and
technology platform. Once a product has been successfully released, subsequent
revisions and upgrades are deemed to constitute development, and, accordingly,
the costs of the revision and upgrade are capitalized. Capitalized costs
are
amortized on a product-by-product basis using the greater of (i) straight-line
amortization over the estimated life of the product or (ii) the ratio
of current
revenues from the product to the total projected revenue over the life
of the
product. Generally, we consider technological feasibility to have been
established with the release of a beta version for testing.
Our
software development costs for the years ended December 31, 2004 and
2005 are
summarized in the table below. These costs, consisting primarily of direct
and
indirect labor and related overhead charges, and capitalized during the
years
ended December 31, 2004 and 2005, were approximately $692,000 and approximately
$812,000, respectively. Accumulated amortization of these development
costs,
which were included in cost of sales, totaled approximately $575,000
and
approximately $807,000 for the years ended December 31, 2004 and 2005,
respectively. The increase in both the capitalization and amortization
is a
direct result of the increase in the number of development
projects.
|
Software
Development Costs For Years Ended December 31
|
2005
|
2004
|
||||
|
Beginning
balance
|
$
|
701,289
|
$
|
584,706
|
||
|
Capitalized
|
812,309
|
692,063
|
||||
|
Amortized
(cost of sales)
|
806,531
|
575,480
|
||||
|
Ending
balance
|
$
|
707,067
|
$
|
701,289
|
||
|
Research
and development expense (General and administrative)
|
$
|
216,397
|
$
|
64,653
|
|
Sales,
General and Administrative Costs for Years Ended December
31
|
2005
|
|
|
%
to Sales
|
|
|
2004
|
|
|
%
to Sales
|
|
|
Change
|
|
|
%
|
|
||||
|
Selected
expenses:
|
|||||||||||||||||||||
|
Commissions
|
$
|
695,914
|
15
|
%
|
$
|
814,623
|
21
|
%
|
$
|
(118,709
|
)
|
-15
|
%
|
||||||||
|
Advertising
and direct marketing
|
577,317
|
12
|
%
|
466,138
|
12
|
%
|
111,179
|
24
|
%
|
||||||||||||
|
Total
sales and marketing
|
$
|
1,273,231
|
27
|
%
|
$
|
1,280,761
|
33
|
%
|
$
|
(7,530
|
)
|
-1
|
%
|
||||||||
|
Research
and development
|
$
|
216,397
|
5
|
%
|
$
|
64,653
|
2
|
%
|
$
|
151,744
|
235
|
%
|
|||||||||
|
Personnel
costs
|
1,237,706
|
26
|
%
|
1,310,506
|
34
|
%
|
(72,800
|
)
|
-6
|
%
|
|||||||||||
|
Legal
|
187,499
|
4
|
%
|
71,003
|
2
|
%
|
116,496
|
164
|
%
|
||||||||||||
|
Accounting
|
27,735
|
1
|
%
|
10,709
|
0
|
%
|
17,026
|
159
|
%
|
||||||||||||
|
Rent
|
82,172
|
2
|
%
|
75,555
|
2
|
%
|
6,617
|
9
|
%
|
||||||||||||
|
Telecommunications
|
53,092
|
1
|
%
|
149,443
|
4
|
%
|
(96,351
|
)
|
-64
|
%
|
|||||||||||
|
Corporate
services
|
73,972
|
2
|
%
|
87,223
|
2
|
%
|
(13,251
|
)
|
-15
|
%
|
|||||||||||
|
Administration
|
18,762
|
0
|
%
|
118,474
|
3
|
%
|
(99,712
|
)
|
-84
|
%
|
|||||||||||
|
Other
general and administrative costs
|
535,332
|
11
|
%
|
422,272
|
11
|
%
|
113,060
|
27
|
%
|
||||||||||||
|
Total
general and administrative
|
$
|
2,432,667
|
51
|
%
|
$
|
2,309,838
|
59
|
%
|
$
|
122,829
|
5
|
%
|
|||||||||
With
gross revenues increasing approximately $523,000 from 2004 to 2005, total
sales,
general and administrative costs also increased approximately $115,000
from
approximately $3,591,000 for the year ended December 31, 2004 to approximately
$3,706,000 for the year ended December 31, 2005. Of the total sales, general
and
administrative costs, sales and marketing expenses decreased approximately
$8,000 from approximately $1,281,000 for the year ended December 31, 2004
to
approximately $1,273,000 for the year ended December 31, 2005. Included
in sales
expenses, third-party telemarketing commissions decreased approximately
$119,000
from approximately $815,000 for the year ended December 31, 2004 to
approximately $696,000 for the year ended December 31, 2005, and decreased
as a
percentage of gross revenues from approximately 21% to approximately 15%
for the
year ended December 31, 2004 and 2005, respectively. This decrease is attributed
to the use of our own in-house direct telemarketing sales team which was
developed specifically to reduce our reliance on third-party telemarketing
services. Advertising and direct marketing costs increased approximately
$111,000 from approximately $466,000 for the year ended December 31, 2004
to
approximately $577,000 for the year ended December 31, 2005 and remained
consistent as a percentage of gross revenues at approximately 12% over
both
years. The net increase in advertising and direct marketing costs year
over year
is the combined result of our continuing efforts to enhance our product
visibility online, to increase and focus more on our direct marketing efforts,
and our having increased the scope and frequency of our print advertising
campaigns in order to maximize sales associated with the new product
enhancements of Membership Plus®
2005,
the three new QuickVerse®
editions
(QuickVerse®
Platinum, Macintosh and Essentials), the updated Sermon Builder®
4.0,
QuickVerse®
2006,
and QuickVerse®
2006
Mobile during the year ended December 31, 2005.
Research
and development costs include direct production costs (including labor
directly
associated with the development projects), indirect costs (including
allocated
fringe benefits, payroll taxes, facilities costs and management supervision),
and other direct costs (including costs of outside consultants, purchased
software to be included in the software product being developed, travel
expenses, material and supplies, and other direct costs). Software development
costs related to third-party developers and direct labor expensed as
research
and development (see table above) amounted to approximately $65,000 for
the year
ended December 31, 2004 compared to approximately $216,000 incurred for
the year
ended December 31, 2005. The increase in 2005 reflects more research
and
development costs associated with maintenance issues on titles following
release
as well as experimentation and development in connection with new system
platforms for future products. Research and development expenses are
expected to
increase in future periods as we add new products and product versions,
and as
we continue to expand the array of platforms upon which are products
are made
available.
Total
personnel costs decreased approximately $73,000, from approximately $1,310,000
for the year ended December 31, 2004, to approximately $1,238,000 for the
year
ended December 31, 2005 despite the fact that direct salaries and wages
increased approximately $80,000, from approximately $1,523,000 to approximately
$1,603,000, over the same period. The increase in direct salaries and wages
was
a direct result of expanding our sales and marketing team, including the
addition of our own telemarketing sales team, and expanding our product
development staff. As a percentage of gross revenues, direct salaries and
wages
decreased approximately 1% from approximately 26% for the year ended December
31, 2004 to approximately 25% for the year ended December 31, 2005. The
direct
salaries and wages include approximately $67,000 and $-0- in expense for
upper
management year-end bonus accrual for the years ended December 31, 2004
and
2005, respectively. Furthermore, we recognized approximately $14,000 of
expense
in connection with the issuance to various employees of 635,000 restricted
common shares during the year ended December 31, 2004. As a result of having
restructured our health benefits plans in October 2004, our employment-related
health care costs decreased approximately $15,000 from approximately $155,000
for the year ended December 31, 2004 to approximately $140,000 for the
year
ended December 31, 2005. The capitalization of direct and indirect labor
and
related overhead charges as software development costs (see “Cost of Sales”
above) increased by approximately $16,000 from approximately $379,000 for
the
year ended December 31, 2004 to approximately $395,000 for the year ended
December 31, 2005. This increase is due to the addition of development
staff and
an increase in new development projects. It is anticipated that personnel
costs
will continue to increase in future periods as operating capital is available
and deployed to further fund staffing requirements of our product development
and direct sales teams.
Direct
legal costs increased approximately $117,000 for the year ended December
31,
2005 as a result of ongoing registration initiatives with the SEC,
increased
current reporting requirements on Form 8-K, increased compliance initiatives
associated with the Sarbanes-Oxley Act of 2002, and preparation for
our first
annual meeting of shareholders in over six years. This year over year
change was also due in part to the fact that approximately $44,000
of legal
costs for the year ended December 31, 2004 were related to the stock
offering
costs incurred in July 2004, the related preparation of a 14C information
statement related to an increase in our authorized capital stock, and
the
preparation and filing of a related registration statement, all of
which was
recorded as a reduction to additional paid-in capital. It is anticipated
that
legal costs will continue at increased levels as we continue to meet
our ongoing
SEC reporting and corporate governance obligations, possibly raise
additional
capital, and pursue our business plan for growth by potentially acquiring
other
companies or product lines.
Accounting
and audit related expenses increased approximately $17,000 for the
year ended
December 31, 2005 as a result of continuing delays in the effectiveness
of a
registration statement, due principally to efforts made necessary by
our
determination to restate certain of our historical financial information.
It is
anticipated that accounting costs will continue to increase in the
future, and
that such increases may be substantial. Our expectation in this regard
derives
from the fact that we have recently engaged a new principal accounting
firm for
our year end 2005 audit, and we expect that our fees payable to such
firm, which
we expect to utilize on an ongoing basis, will generally be higher
than those
payable to our former auditors.
Rent
costs increased approximately $7,000 for the year ended December 31,
2005 as a
result of provisions in our leases calling for periodic percentage
increases.
Telecommunications
costs decreased approximately $96,000 for the year ended December 31,
2005
resulting from switching our local and long-distance carriers. Our
increased
call volume enabled us to change our service to dedicated T-1 lines
which in
turn reduced the long-distance charges. We also invested in internet
protocol
phones for our remote locations which reduced the overall local and
long
distance charges in our Illinois and Iowa locations. The increased
call volume
in the technical support and customer service departments resulted
from the
multiple product releases in 2005 including Membership Plus®2005,
QuickVerse®
Macintosh, Sermon Builder®
4.0,
QuickVerse®
2006 and
QuickVerse®
2006
Mobile.
Corporate
service fees decreased approximately $13,000 for the year ended December
31,
2005 resulting from the expiration of an independent consulting agreement
and
the resultant ability on our part to cease carrying the associated
expense for a
2004 issuance to such consultant of a warrant to purchase 600,000 shares
of
common stock which had been allocated over the term of the agreement.
Administration
expenses decreased approximately $100,000 for the year ended December
31, 2005
due to our not having incurred interest and penalty fees on back payroll
taxes
as we had during the year ended December 31, 2004.
Finally,
bad debt expense increased approximately $114,000 for the year ended
December
31, 2005 due primarily to our inability to collect on a balance due
of $42,000
from a single liquidation customer. In addition, we wrote off approximately
$58,000 related to uncollectible receivables arising out of a sales
campaign
that we initiated in 2005 which focused on offering new churches a
beginning
line of credit of approximately $500, and which has since been discontinued.
During
the year ended December 31, 2004, we recognized an approximately $1,000,000
gain
from extinguishment of debt which is included in other income. The
extinguishment of debt is a direct result from one-time settlement arrangements
with various vendors and content providers for lump-sum payments ranging
from
approximately 17% to approximately 60% of balances owed at the time.
Vendors who
were offered the settlement had previously provided services and/or goods
to us,
and the content providers were owed royalties from us in connection with
our
prior sales of product. We do not anticipate this to be a recurring event
in the
future. Below is a list of the vendors and content providers who we settled
with:
|
▪
|
American
Bible Society (content provider)
|
|
|
▪
|
David
Epstein (content provider)
|
|
|
▪
|
Depository
Trust Company (corporate services)
|
|
|
▪
|
Explorer’s
Bible Study (content provider)
|
|
|
▪
|
Genesis
Marketing Group (sales services)
|
|
|
▪
|
Historical
Exegetical Electronic Publishing (content provider)
|
|
|
▪
|
Innovative
Church Marketing Group (advertising services)
|
|
|
▪
|
Interactive
Pictures Corporation (content provider)
|
|
|
▪
|
InterVarsity
Press (content provider)
|
|
|
▪
|
Ivy
Hill/Warner Media Services (manufacturing
services)
|
|
▪
|
Lernout
& Hauspie Speech Products (content provider)
|
|
|
▪
|
MicroBytes,
Inc. (CD duplication services)
|
|
|
▪
|
Moody
Publishers (content provider)
|
|
|
▪
|
National
Council of the Churches of Christ in the United States
of America (content
provider)
|
|
|
▪
|
NavPress
Publishing Group (content provider)
|
|
|
▪
|
Oxford
University Press (content provider)
|
|
|
▪
|
Pillsbury,
Madison & Sutro LLP (legal services)
|
|
|
▪
|
Rutledge
Hill Press (content provider)
|
|
|
▪
|
Sonopress
(manufacturing services)
|
|
|
▪
|
Standard
Publishing (content provider)
|
|
|
▪
|
The
Lockman Foundation (content provider)
|
|
|
▪
|
World
Publishing (content provider)
|
During
the year ended December 31, 2004, we additionally incurred approximately
$155,000 in expenses related to a settlement agreement with Swartz
Private
Equity, an institutional private equity investor, for early termination
of the
agreement. As part of a settlement agreement, we issued 295,692 shares
of common
stock and paid a cash lump sum of $125,000. The shares were valued
at $0.10 per
share. This has been included in other adjustments.
On
July
19, 2004, we completed an equity financing in the amount of $1,750,000
through a
private placement with Barron Partners, LP in which Barron Partners
purchased
21,875,000 restricted shares of common stock and received two warrants
to
purchase up to an additional 21,875,000 shares of common stock.
As part of the
financing transaction, we also entered into a certain Registration
Rights
Agreement with Barron Partners pursuant to which we became committed
to
registering all of the shares issued as part of such transaction,
including
those issuable under the warrants. Upon receipt of the requisite
stockholder
approval to increase the number of authorized common shares so
as to allow us to
deliver the warrants, effectively obtained and effectuated as of
November 10,
2004, we had 30 days within which to file a registration statement
on Form SB-2
covering the shares issued to Barron Partners, as well as the shares
underlying
the warrants issued to Barron Partners. Accordingly, this registration
statement
was filed on November 22, 2004. In accordance with the terms of
the Registration
Rights Agreement, as amended, we had another 150 days, until April
22, 2005, to
cause this registration statement to be declared effective by the
SEC, with any
delays in meeting this obligation resulting in our being liable
to Barron
Partners in an amount equal to $630,000 per year, pro-rated for
the duration of
any such delay, which amounts to $1,726 per day. As of December
31, 2005, we had
accrued a total of approximately $437,000 (253 days at $1,726 per
day) in
penalties under the terms of the Registration Rights Agreement,
inclusive of an
adjustment made pursuant to an agreement reached with Barron Partners
in April
2005, wherein, in relation to the associated accruing penalties,
we agreed to
pay Barron Partners an amount in cash equal to $100,000 to toll
the accrual of
further penalties until June 21, 2005. Although this amount has
been paid in
full, in two equal installments of $50,000 on each of April 22,
2005 and July 8,
2005, penalties in the amount of $1,726 per day continued to accrue
from June
21, 2005 until this registration statement was declared effective
by the SEC on
February 1, 2006. We had experienced continued delays in effectiveness
of this
registration statement due principally to ongoing efforts made
necessary by our
determination to restate certain of our historical financial information.
The
amount paid by us to date ($260,000 as of March 30, 2007) to satisfy
this
obligation has had a material adverse effect on our business, our
financial
condition, including liquidity and profitability, and our results
of operations,
including a corresponding reduction in our net income and the net
loss for the
year ended December 31, 2005.
In
November 2004, we issued two warrants to purchase an aggregate
of 21,875,000
shares of our common stock in connection with a certain Stock
Purchase Agreement
completed with Barron Partners, LP on July 19, 2004. The
first warrant entitles
the holder to purchase up to 10,937,500 shares of our common
stock at a price of
$0.18 per share, and the second warrant entitles the holder
to purchase up to
10,937,500 additional shares of our common stock at a price
of $0.60 per share.
Each warrant is subject to standard adjustment provisions
and each provides for
settlement in registered shares of our common stock and may,
at the option of
the holder, be settled in a cashless, net-share settlement.
These warrants have
been accounted for as a liability according to the guidance
of EITF 00-19,
Accounting
for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a
Company’s Own Stock.
In
accordance with the accounting mandate, the derivative liability
associated with
these warrants has been and shall continue to be, until each
is either fully
exercised or expires, adjusted to fair value at each balance
sheet date and is
accordingly reassessed at each such time to determine whether
the warrants
should be classified (or reclassified, as appropriate) as
a liability or as
equity. The fair value of each warrant was initially assessed
at $2,187,500
($4,375,000 total) using the Black-Scholes valuation method.
At December 31,
2004 and 2005, the fair value of the derivative liability
was approximately
$1,969,000 and $2,062,000, respectively, and a fair value
adjustment of
approximately $292,000 and $34,000, respectively, has been
included in other
expenses for the years then ended.
Amortization
expense increased approximately $12,000 for the year ended December 31, 2005.
The software license acquired from TLC in July of 1999 is amortized over
a 10
year useful life. Amortization expense for 2005 reflects the continual
amortization of the software license as well as the amortization of our new
Website, www.quickverse.com, which we launched during the second quarter
of
2004.
Our
effective tax rate differs from the statutory federal rate due to differences
between income and expense recognition prescribed by the Internal Revenue
Code
and Generally Accepted Accounting Principles. We utilize different methods
and
useful lives for depreciating property and equipment. Changes in estimates
(reserves) are recognized as expense for financial reporting but are not
deductible for income tax purposes.
We
have
recognized a net deferred tax asset whose realization depends on generating
future taxable income. At December 31, 2005, management adjusted the
amount of
valuation allowance based on the assessment that we will produce sufficient
income in the future to realize the
economic benefit of our net deferred tax asset. The resulting deferred
tax liability reflects income taxes payable in future periods on the
net
deductible differences related to the 1999 license. We currently have
net
operating loss carryforwards, for income tax purposes, of approximately
$8,462,000. The carryforwards are the result of income tax losses generated
in
2000 ($2,338,000 expiring in 2020), 2001 ($5,168,000 expiring in 2021)
and 2005
($956,000 expiring in 2025). We will need to achieve a minimum annual
taxable
income, before deduction of operating loss carryforwards, of approximately
$527,000 to fully utilize the current loss carryforwards. We believe
this is
achievable through careful expense management and continued introduction
of new
products and enhanced versions of our existing products.
Although
there can be no assurance, management expects the deductible temporary
differences (reserves) to reverse sometime beyond the next fiscal year.
Our
primary needs for liquidity and capital resources are the funding of our
continued operations, which includes the ongoing internal development of
new
products and expansion and upgrade of existing products. We believe our
future
cash provided by operations will be sufficient to fund our continued operations.
However, our pursuit of future strategic product line and/or corporate
acquisitions and licensing will require funding from outside sources. Funding
from outside sources may include but are not limited to the exercise of
outstanding warrants and pursuit of other financing options such as commercial
loans, common stock and/or preferred stock issuances and convertible notes.
At
this time, we have no legally committed funds for future capital expenditures
including software development.
|
Working
Capital at December 31
|
|
|
2005
|
|
|
|
2004
|
|
|
|
Change
|
|
|
%
|
|
|
Current
assets
|
$
|
867,750
|
$
|
1,551,447
|
$
|
(683,697
|
)
|
-44
|
%
|
||||||
|
Current
liabilities
|
$
|
3,893,447
|
$
|
3,351,893
|
$
|
541,554
|
16
|
%
|
|||||||
|
Retained
deficit
|
$
|
(7,752,097
|
)
|
$
|
(6,170,831
|
)
|
$
|
(1,581,266
|
)
|
26
|
%
|
As
of
December 31, 2005, we had $867,750 in current assets, $3,893,447 in current
liabilities and a retained deficit of $7,752,097. We had a loss before
income
taxes of $1,530,557 and a net loss after income taxes of $1,581,266 for
the year
ended December 31, 2005. Non-recurring expenses for 2005 included registration
rights penalties totaling approximately $437,000and a related loss of
approximately $34,000 from the fair value adjustment of derivatives.
See
“Results Of Operations” above. By contrast, as of December 31, 2004 we had
$1,551,447 in current assets, $3,351,893 in current liabilities and a
retained
deficit of $6,170,831. Operating expenses for 2004 included approximately
$149,000 in non-cash expenses related to shares of common stock and warrants
issued for services, and approximately $30,000 in non-cash expenses related
to
shares of common stock issued in connection with a settlement agreement.
Other
income for 2004 included approximately $1,000,000 from extinguishment
of debt,
and other expenses for 2004 included a loss of approximately $292,000
from the
fair value adjustment of derivatives.
|
Cash
Flows for Years Ended December 31
|
|
|
2005
|
|
|
|
2004
|
|
|
|
Change
|
|
|
Cash
flows provided (used) by operating activities
|
$
|
612,345
|
$
|
(643,668
|
)
|
$
|
1,256,013
|
|||||
|
Cash
flows (used) by investing activities
|
$
|
(801,422
|
)
|
$
|
(746,932
|
)
|
$
|
(54,490
|
)
|
|||
|
Cash
flows provided (used) by financing activities
|
$
|
(32,722
|
)
|
$
|
1,690,291
|
$
|
(1,723,013
|
)
|
Net
cash
used by operating activities was approximately $644,000 for the year ended
December 31, 2004, while net cash provided by operating activities was
approximately $612,000 for the year ended December 31, 2005. The increase
was
primarily due to an increase in the amounts received from customers resulting
from increased sales coupled with a decrease in the amount paid out to suppliers
and employees.
Net
cash
used in investing activities was approximately $747,000 for the year ended
December 31, 2004 and approximately $801,000 for the year ended December
31,
2005. The increase was mainly the result of our having capitalized costs
associated with software development. Further, during the year ended December
31, 2005, the restriction on the cash held in reserve by our merchant banker
was
lifted, thereby freeing up additional cash not previously accessible by us.
Net
cash
provided by financing activities was approximately $1,690,000 for the year
ended
December 31, 2004, while net cash used by financing activities was approximately
$33,000 for the year ended December 31, 2005. The 2004 result reflects final
settlement on our accounts receivable line of credit, payment made on long-term
note payables, stock offering costs associated with the Barron Partners,
LP
equity financing, and the proceeds received from convertible debentures and
the
issuance of stock to Barron Partners. The 2005 result reflects payments made
on
long-term note payables.
As
part
of the July 19, 2004 financing transaction with Barron Partners, LP, we entered
into a certain Registration Rights Agreement pursuant to which we became
committed to registering all of the shares issued as part of such transaction,
including those issuable under each of two warrants. On November 22, 2004
we
filed a registration statement on Form SB-2 covering the shares issued to
Barron
Partners, as well as the shares underlying the warrants issued to Barron
Partners. In accordance with the terms of the Registration Rights Agreement,
as
amended, we had another 150 days, until April 22, 2005, to cause such
registration statement to be declared effective by the SEC, with any delays
in
meeting this obligation resulting in our being liable to Barron Partners
in an
amount equal to $630,000 per year, pro-rated for the duration of any such
delay,
which amounts to $1,726 per day. As of December 31, 2005, we had accrued
a total
of approximately $437,000 (253 days at $1,726 per day) in penalties under
the
terms of the Registration Agreement, inclusive of an adjustment made pursuant
to
a tentative verbal agreement reached with Barron Partners in April 2005,
wherein, in relation to the associated accruing penalties, we agreed to pay
Barron Partners an amount in cash equal to $100,000 to toll the accrual of
further penalties until June 21, 2005. Although this amount has been paid
in
full, in two equal installments of $50,000 on each of April 22, 2005 and
July 8,
2005, penalties in the amount of $1,726 per day continued to accrue from
June
21, 2005 until the registration statement was declared effective on February
1,
2006 by the SEC. We had experienced continued delays in effectiveness of
the
registration statement due principally to ongoing efforts made necessary
by our
determination to restate certain of our historical financial information.
The
amount paid by us to date ($150,000 as of March 31, 2006) to satisfy this
obligation, and the continued delays in our ability to cause the registration
statement to be declared effective coupled with additional amounts which
we are
required to pay, has had a material adverse effect on our business, our
financial condition, including liquidity and profitability, and our results
of
operations, including a corresponding reduction in our net income and the
net
loss for the year.
We
lease
office space/warehouse facilities in Omaha, Nebraska under an operating lease
with a third-party with terms extending through 2007. We are responsible
for all
taxes, insurance and utility expenses associated with this lease. There is
no
lease renewal option contained in the lease.
We
lease
office space in Naperville, Illinois under an operating lease with a third-party
with terms extending through March 2007. We are responsible for all insurance
expenses associated with this lease.
At
December 31, 2005, the future minimum rental payments required under these
leases are as follows:
|
2006
|
$
|
81,331
|
||
|
2007
|
31,248
|
|||
|
Total
future minimum rental payments
|
$
|
112,579
|
We
lease
telephone equipment under a capital lease expiring in November 2009. The
asset
and liability under the capital lease are recorded at the present value of
the
minimum lease payments. The asset is depreciated over a 5 year life. Minimum
future lease payments under capital leases as of December 31, 2005 for each
of
the next five years and in the aggregate are:
|
2006
|
$
|
13,726
|
||
|
2007
|
13,726
|
|||
|
2008
|
13,726
|
|||
|
2009
|
12,582
|
|||
|
2010
|
---
|
|||
|
Total
minimum lease payments
|
53,760
|
|||
|
Less:
Amount representing interest
|
10,788
|
|||
|
Total
obligations under capital lease
|
42,972
|
|||
|
Less:
Current installments of obligations under capital lease
|
9,185
|
|||
|
Long-term
obligation under capital lease
|
$
|
33,787
|
New
Accounting Pronouncements
In
the
past, we have applied Accounting Principles Board (“APB”) Opinion No. 25,
Accounting
for Stock Issued to Employees,
and
related interpretations in accounting as allowed by SFAS No 123, Accounting
for Stock Based Compensation,
for
various forms of share-based awards including incentive and nonqualified
stock
options and stock appreciation rights attached to stock options; and therefore,
no compensation cost had been recognized. However, in December 2004, the
FASB
issued SFAS No 123 (R), Share-Based
Payment,
which
replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123 (R)
requires compensation costs related to share-based payment transactions to
be
recognized in the financial statements. With limited exceptions, the amount
of
compensation cost will be measured based on the fair value on the grant date
of
the equity or liability instruments issued. Compensation cost will be recognized
over the period that the service is provided for that award. This new standard
will be effective for us the first quarter of fiscal 2006. We did not grant
any
form of share-based awards during the year ended December 31,
2005.
Our
critical accounting policies, including the assumptions and judgments underlying
them, are more fully described in the Notes to the Financial Statements. We
have
consistently applied these policies in all material respects. These policies
primarily address matters of expense recognition and revenue recognition,
including amortization of software development cost and the calculation for
reserve of returns. Investors are cautioned that these policies are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially. Below are the accounting policies that
we
believe are the most critical in order to gain an understanding of our financial
results and condition.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with Generally
Accepted Accounting Principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
the
accompanying notes. Significant estimates used in the consolidated financial
statements include the estimates of (i) doubtful accounts, sales returns, price
protection and rebates, (ii) provision for income taxes and realizability of
the
deferred tax assets, (iii) the life and realization of identifiable intangible
assets, and (iv) provisions for obsolete inventory. The amounts we will
ultimately incur or recover could differ materially from current estimates.
Royalty
Agreements
We
have entered into certain agreements whereby we are obligated to
pay royalties for content of software published. We generally pay royalties
based on a percentage of sales on respective products or on a fee per unit
sold
basis. We expense software royalties as product costs during the period in
which the related revenues are recorded.
Accounts
Receivable
Accounts
receivable arise in the normal course of business. It is the policy of
management to continuously review the outstanding accounts receivable, as well
as the bad debt write-offs experienced in the past, and establish an allowance
for doubtful accounts for uncollectible amounts. Individual accounts are charged
against the allowance when they are deemed uncollectible.
Inventory
Inventory,
including out on consignment, consists primarily of software media, manuals
and
related packaging materials and is recorded at the lower of cost or market
value, determined on a first-in, first-out, and adjusted on a per-item, basis.
Intangible
Assets
In
accordance with SFAS No. 142, Goodwill
and Other Intangible Assets,
intangible assets with an indefinite useful life are not amortized. Intangible
assets with a finite useful life are amortized on the straight-line method
over
the estimated useful lives. All intangible assets are tested for impairment
annually during the fourth quarter.
Software
Development Costs
In
accordance with SFAS No. 86,
Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed,
software development costs are expensed as incurred until technological
feasibility and marketability has been established, generally with release
of a
beta version for customer testing. Once the point of technological feasibility
and marketability is reached, direct production costs (including labor directly
associated with the development projects), indirect costs (including allocated
fringe benefits, payroll taxes, facilities costs, and management supervision),
and other direct costs (including costs of outside consultants, purchased
software to be included in the software product being developed, travel
expenses, material and supplies, and other direct costs) are capitalized until
the product is available for general release to customers. We amortize
capitalized costs on a product-by-product basis. Amortization for each period is
the greater of the amount computed using (i) the straight-line basis over the
estimated product life (generally from 12 to 18 months), or (ii) the ratio
of
current revenues to total projected product revenues.
Capitalized
software development costs are stated at the lower of amortized costs or net
realizable value. Recoverability of these capitalized costs is determined at
each balance sheet date by comparing the forecasted future revenues from the
related products, based on management’s best estimates using appropriate
assumptions and projections at the time, to the carrying amount of the
capitalized software development costs. If the carrying value is determined
not
to be recoverable from future revenues, an impairment loss is recognized equal
to the amount by which the carrying amount exceeds the future
revenues.
SFAS
No.
2, Accounting
for Research and Development Costs,
establishes accounting and reporting standards for research and development.
In
accordance with SFAS No. 2, costs we incur to enhance our existing products
after general release to the public (bug fixes) are expensed in the period
they
are incurred and included in research and development costs.
We
capitalize costs related to the development and maintenance of our Website
in
accordance with FASB’s EITF Issue No. 00-2, Accounting for Website
Development Costs. Under EITF Issue No. 00-2, costs expensed as incurred
are as follows:
|
•
|
planning
the Website,
|
|
•
|
developing
the applications and infrastructure until technological feasibility
is
established,
|
|
|
•
|
developing
graphics such as borders, background and text colors, fonts,
frames, and
buttons, and
|
|
|
•
|
operating
the site such as training, administration and
maintenance.
|
Capitalized
costs include those incurred to:
|
•
|
obtain
and register an Internet domain
name,
|
|
•
|
develop
or acquire software tools necessary for the development
work,
|
|
|
•
|
develop
or acquire software necessary for general Website
operations,
|
|
•
|
develop
or acquire code for web
applications,
|
|
•
|
develop
or acquire (and customize) database software and software
to integrate
applications such as corporate databases and accounting
systems into web
applications,
|
|
|
•
|
develop
HTML web pages or templates,
|
|
|
•
|
install
developed applications on the web server,
|
|
|
•
|
create
initial hypertext links to other Websites or other locations
within the
Website, and
|
|
|
•
|
test
the Website applications.
|
We
amortize Website development costs on a straight-line basis over the estimated
life of the site, generally 36 months.
Revenue
Recognition
We
derive
revenues from the sale of packaged software products, product support and
multiple element arrangements that may include any combination of these items.
We recognize software revenue for software products and related services in
accordance with American Institute of Certified Public Accountants Statement
of
Position (“SOP”) 97-2, Software
Revenue Recognition,
as
modified by SOP 98-9, Modification
of SOP 97-2, With Respect to Certain Transactions.
We
recognize revenue when persuasive evidence of an arrangement exists (generally
a
purchase order), we have delivered the product, the fee is fixed or determinable
and collectibility is probable.
In
some
situations, we receive advance payments from our customers. We defer revenue
associated with these advance payments until we ship the products or offer
the
support.
In
accordance with EITF Issue No. 01-9, Accounting for Consideration Given by a
Vendor to a Customer or a Reseller of the Vendor’s Product, we generally
account for cash considerations (such as sales incentives - rebates and coupons)
that we give to our customers as a reduction of revenue rather than as an
operating expense.
We
reduce
product revenue for estimated returns and price protections that are based
on
historical experience and other factors such as the volume and price mix of
products in the retail channel, trends in retailer inventory and economic trends
that might impact customer demand for our products. We also reduce product
revenue for the estimated redemption of end-user rebates on certain current
product sales. Our rebate reserves are estimated based on the terms and
conditions of the specific promotional rebate program, actual sales during
the
promotion, the amount of redemptions received and historical redemption trends
by product and by type of promotional program.
We
record
the amounts we charge our customers for the shipping and handling of our
software products as product revenue and we record the related costs as cost
of
sales on our consolidated statements of operations.
Derivatives
We
account for warrants issued with shares of common stock in a private placement
according to EITF Issue 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in,
a
Company’s Own Stock.
In
accordance with accounting mandate, the derivative liability associated with
the
warrants has been and shall continue to be adjusted to fair value (calculated
using the Black Scholes method) at each balance sheet date and is accordingly
reassessed at each such time to determine whether the warrants should be
classified (or reclassified, as appropriate) as a liability or as equity. The
corresponding fair value adjustment is included in the consolidated statements
of operations as other expenses as the value of the warrants increases from
an
increase in our stock price at the balance sheet date and as other income as
the
value of the warrants decreases from a decrease in our stock price.
Income
Taxes
We
utilize SFAS No. 109,
Accounting for Income Taxes,
which
requires the use of the asset and liability method of accounting for income
taxes. Under this method, deferred income taxes are provided for the temporary
differences between the financial reporting basis and the tax basis of our
assets and liabilities. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled.
We
develop, publish, market, distribute and directly sell off-the-shelf consumer
and organizational software products for PC, Macintosh®
and PDA
platforms. We develop our software products through in-house initiatives
supplemented by outside developers. We market and distribute our software
products principally through direct marketing and Internet sales programs,
but
also through secular and non-secular wholesale retailers.
We
were
incorporated in the State of Nevada on November 7, 1997 as EJH Entertainment,
Inc. On December 4, 1997, a predecessor corporation with the same name as our
own but domiciled in Idaho was merged with and into us. Although the
predecessor Idaho corporation was without material assets or operations as
of
the time of the merger, since being organized in 1968, it had historically
been
involved in mining and entertainment businesses unrelated to our current
business.
Beginning
in 1997, and although we were not then a reporting company under the Securities
Exchange Act, our common stock was quoted on the OTC Bulletin Board (originally
under the symbol “TIXX”, which was later changed to “TIXXD”). On May 13, 1999,
we changed our name to FINdex.com, Inc. On March 7, 2000, in an effort to
satisfy a newly imposed NASD Rule eligibility requirement that companies
quoted
on the OTC Bulletin Board be fully reporting under the Securities Exchange
Act
(thereby requiring recently audited financial statements) and current in
their
filing obligations, we acquired, as part of a share exchange in which we
issued
150,000 shares of our common stock, all of the outstanding capital stock
of
Reagan Holdings, Inc., a Delaware corporation. At the time of this transaction,
Reagan Holdings was subject to the requirements of having to file reports
pursuant to Section 13 of the Securities Exchange Act, had recently audited
financial statements and was current in its reporting obligations. Having
no
operations, employees, revenues or other business plan at the time, however,
it
was a public shell company. As a result of this transaction, Reagan Holdings,
Inc. became our wholly-owned subsidiary and we became the successor issuer
to
Reagan Holdings for reporting purposes pursuant to Rule 12g-3 of the Securities
Exchange Act. Shortly thereafter, we changed our stock symbol to “FIND.” Though
it does not currently have any operations, employees, or revenues, Reagan
Holdings remains our wholly-owned subsidiary.
In
addition to Reagan Holdings, we also have one other wholly-owned subsidiary,
Findex.com, Inc. (i.e. the same name as our own), a Delaware
corporation. Like Reagan Holdings, this entity, too, does not currently have
any
operations, employees or revenues. This subsidiary resulted from an acquisition
on April 30, 1999 pursuant to which we acquired all of the issued and
outstanding capital stock of FINdex Acquisition Corp., a Delaware corporation,
from its then stockholders in exchange for 4,700,000 shares of our common
stock,
which, immediately following the transaction, represented 55% of our total
outstanding common stock. Our purpose for this acquisition was to broaden
our
then-existing stockholder base, an important factor in our effort to develop
a
strong market for our common stock. On May 12, 1999, in exchange for the
issuance of 457,625 shares of FINdex Acquisition Corp. common stock, FINdex.com,
Inc., another Delaware corporation (originally incorporated in December 1995
as
FinSource, Ltd.), was merged with and into FINdex Acquisition Corp., with
FINdex
Acquisition Corp. remaining as the surviving entity. Our purpose for this
merger
was to acquire a proprietary financial information search engine for the
Internet which was to serve as the cornerstone for a Web-based development-stage
business, but which has since been abandoned. As part of the certificate
of
merger relating to this transaction, FINdex Acquisition Corp. changed its
name
to FINdex.com, Inc. We currently own 4,700,000 shares of FINdex.com, Inc.
(the
Delaware corporation), representing 100% of its total outstanding common
stock.
The
common thread among our current software products is their target constituency,
consumers that share a devotion to or interest in Christianity and faith-based
“inspirational” values. Our focus is to become the largest worldwide provider of
Bible study and related faith-based software products as well as to continue
our
double-digit sales growth across all distribution channels and our double-digit
market share growth in all of our current product categories. We plan for
the
continued broadening of our product lines through marketing and sales
initiatives, ongoing internal development of new products, expansion and
upgrade
of existing products and strategic product line and/or corporate acquisitions
and licensing. Specifically, our development strategy
includes:
Creating
and Maintaining Diversity in Our Product Titles, Platforms and Market
Demographic
We
are
committed to creating and maintaining a diversified mix of titles and title
versions to mitigate our operating risks, and broaden market appeal within
our
demographic. Therefore, we strive to develop and publish titles and title
versions spanning a wide range of categories, including Bible study, financial
and church management, pastoral products, children’s software and language
tutorials. We may also design our software for use on multiple platforms
in
order to reach a greater potential audience. There are a number of factors
that
we take into consideration when determining the appropriate platform for
each of
our titles and title versions, including, amongst others, economic cost,
the
platform’s user demographics and the competitive landscape at the time of a
title or title version’s release.
Creating,
Acquiring and Maintaining Strong Brands
We
attempt to focus our development and publishing activities principally
around
software products that are, or have the potential to become, titles and
title
versions possessing sustainable consumer appeal and brand recognition.
To that
end, we are continually in pursuit of intellectual property licensing
opportunities with respect to software titles and title versions that are
strategically aligned with our existing product line and focus. We have
entered
into a number of such strategic relationships with the owners of various
forms
of intellectual property which have allowed us to acquire the rights to
publish
content and develop titles and title versions based upon such intellectual
properties. In addition, we may acquire intellectual property licenses
in the
future for products outside of our current area of focus.
Our
development strategy further includes the pursuit of acquisition and
related
strategic growth opportunities involving other companies that sell faith-based
merchandise and services. As part of this strategy, we may acquire businesses
that (i) only recently commenced operations, (ii) are development-stage
enterprises in need of additional funds to expand into new products or
markets,
or (iii) are established businesses that may be experiencing financial
or
operating difficulties and need additional capital. We may also pursue
other
strategic growth opportunities, including, but not limited to, the acquisition
of new product lines, content licensing, proprietary technology licensing
or
acquisitions, asset acquisitions, or acquisitions of other operating
businesses,
provided, however, that any such opportunities fit our corporate growth
strategy
and provide immediate or near term added value and provide a measurable
increase
in our existing customer base or a new, related customer base to which
we can
cross-market our products and produce greater revenues and/or earnings.
Furthermore, although we have no current intentions or plans to do so,
we have
not ruled out the pursuit of transactional opportunities in areas outside
the
faith-based market demographic.
There
are
significant risks and complexities associated with any such growth opportunities
and/or acquisitions including but not limited to due diligence investigation,
comparative investigation, comparative analysis, financing, operational
transitions, and growth control or abatement. Because acquisition and
related
opportunities may occur in relation to businesses at various stages of
development, the task of comparative investigation and analysis of such
business
opportunities is likely to be extremely difficult and complex. In connection
with our pursuit of such opportunities, we are also likely to incur significant
transition and integration costs, ongoing operations costs, legal and
accounting
costs, including the legal fees for preparing acquisition documentation,
due
diligence investigation costs and the costs of preparing reports and
filings
with the SEC.
Disciplined
Product Selection and Development Processes
The
success of our business depends, in significant part, on our ability to
develop
titles and title versions that will generate appreciable unit volume sales
while
simultaneously meeting our high quality standards. We use a formal control
process for the selection, development, production and quality assurance
of our
titles and title versions. We apply this process to products under development
with external, as well as internal, resources. This control process includes
upfront concept evaluation as well as in-depth reviews of each project
on
numerous levels and at various intervals during the development process
by a
team that includes our senior management and a number of our key technical,
marketing and product development personnel.
Internal
and External Development Groups
We
develop our titles and title versions using a strategic combination of
our
internal development group and external, independently contracted developers,
a
team of which are located in the former Soviet Union and several others
of which
are located in the United States.
We
strive
to provide our in-house team the independence and flexibility needed to
foster
creativity and teamwork. Employing an in-house development team provides
us with
the following advantages:
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our
developers work collaboratively, sharing development techniques,
software
tools, software engines and useful experience, to form a strong
collective
and creative environment;
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the
ability to re-focus efforts quickly to meet the changing needs
of key
projects;
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more
control over product quality, scheduling and costs; and
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our
developers are not subject to the competing needs of other software
publishers.
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In
March
2004, we opened an in-house development office in Naperville, Illinois.
We
select
our external developers based on their track record and expertise in producing
titles and title versions within certain categories. This selection process
allows us to strengthen and leverage the particular expertise of our internal
and external development resources, as well as to scale up and down as
necessary, to maximize the productivity of our development budget.
We
are
committed to the ongoing development of our existing software as well as
the
development of new software titles and title versions. Our product development
methodology is modeled around elements of the consumer packaged goods and
software industry. Within this model, our management assesses the current
market
and establishes a direction for each of our products, while key personnel
monitor quality, delivery schedules, development milestones and budget.
Prior to
final approval, whether developed internally or externally by our third-party
developers, we test all new titles and title versions for bugs.
The
manufacturing time and gross margin percentages for each of our products
can
vary significantly from platform to platform. For each of our products
we
establish and periodically review an individual product development timeline
and
expenditure budget, taking into consideration, among others, the following
business factors:
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prior
year or season selling rates for existing and competitive products;
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known
or estimated growth rates for existing and competitive
products;
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new
market opportunities for products, product categories, or product
platforms;
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competitive
products and known competitive strategies;
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general
consumer market and consumer economic sentiments including
past, present,
and projected future conditions and/or events;
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technological
changes, improvements, new platforms, and platform market share
shifts;
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general
distribution channels and customer feedback;
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current
and perceived corporate cash flow;
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availability
and limitations related to knowledgeable/expert talent and
workforce;
and
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known
or projected risks associate with each of these
factors.
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Our
total
product development costs incurred during the years ended December 31,
2004 and
2005 were approximately $757,000 and approximately $1,029,000, respectively,
of
which capitalized costs accounted for approximately $692,000 and approximately
$812,000, respectively and expensed costs accounted for $65,000 and
approximately $217,000, respectively.
Our
focus
is to become the largest worldwide provider of Bible study and related
faith-based software products. To that end, we utilize a brand structure and
market our largest selling titles and title versions under the distinct key
brand: QuickVerse®
and
Membership Plus®.
We
support this strategy through the regularly scheduled introduction of new titles
and title versions featuring this brand. In the year ended December 31, 2005
we
released a total of seventeen titles and title versions for PC,
Macintosh®
and PDA
platforms. Through the year ended 2006, we released a total of approximately
eleven titles and title version for PC, Macintosh®
and PDA
platforms.
Our
faith-based software titles and title versions are currently divided among
the
following six categories:
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Bible
Study
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Financial/Office
Management Products for Churches and other Faith-Based
Ministries
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Print
& Graphic Products
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Pastoral
Products
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Children’s
Products
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Language
Tutorial Products.
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For
the
fiscal year ended December 31, 2005, approximately 66% of our revenues were
derived from sales of our flagship QuickVerse®,
an
industry-leading Bible-study software now in its 18th
year and
11th
version,
which is available in an array of content package variations ranging in retail
price from $9.95 to $799.95. Originally introduced into the market in 1989,
QuickVerse®
has sold
over a million copies since its introduction and is currently believed by
us to
be the market leader in its category.
QuickVerse®
simplifies biblical research, allowing users to view multiple reference
materials, including Bibles, dictionaries, commentaries and encyclopedias,
side-by-side on the computer screen. A built-in “QuickSearch” feature enables
the user to highlight a word or Bible verse and find all of its occurrences
in a
particular text. Advanced search options enable users to search by word,
phrase
or verse across multiple books offering search options that locate all
forms of
a given search word without the need for embedded symbols. For example,
a search
for the word “rise”, will yield the words “arise”, “risen”, “rising”, and
“rise”. QuickVerse®
2007,
our latest version, is currently available in six CD-Rom editions for PC.
Each
edition of QuickVerse®
contains
several Bible translations (e.g.,
the
King James Version, the American Standard Version, etc.) along with numerous
reference titles (e.g.,
dictionaries, commentaries, encyclopedias, etc.).
The
QuickVerse®
family
of products for PC includes:
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QuickVerse®
Bible Suite (which contains 8 Bibles and 40 reference titles,
retail
price: $39.95);
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QuickVerse®
Essentials Edition (which includes 10 Bibles and 44 reference
titles,
retail price: $59.95);
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QuickVerse®
Standard Edition (which includes 15 Bibles and 63 reference titles,
retail
price: $129.95);
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QuickVerse®
Expanded Edition (which includes 17 Bibles and 100 reference
titles,
retail price: $249.95);
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QuickVerse®
Deluxe Edition (which includes 23 Bibles and 154 reference titles,
retail
price: $349.95); and
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QuickVerse®
Platinum Edition (which includes 25 Bibles and 272 reference
titles,
retail price: $799.95).
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Furthermore,
for QuickVerse®
2007 we
introduced the QuickVerse®
2007
Upgrade Download (retail price: $29.95), which is an update to the
QuickVerse®
engine
for those with prior QuickVerse®
versions
(QuickVerse 8.0 Essentials or above). Each QuickVerse®
purchase
includes access to additional books and content, which can be unlocked
or
downloaded and made accessible for an additional fee.
QuickVerse®
Mobile,
an industry-leading Mobile Bible-study software, is compatible on both
Pocket
PC®
and
Palm®
OS
operating systems, and is currently in its 4th
year
and 4th
version.
This program provides the same simplified access and many of the personal
Bible
study features found in the desktop QuickVerse®
versions. QuickVerse®
Mobile
2007 is currently available in three editions as a download and in CD-Rom.
Each
edition of QuickVerse®
Mobile
2007 contains several Bible translations (e.g.,
the
King James Version, the American Standard Version, etc.) along with numerous
reference titles (e.g.,
dictionaries, commentaries, encyclopedias, etc.).
The
QuickVerse®
Mobile
2007 family of products includes:
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Standard
Edition (which includes 3 Bibles and 6 reference titles, retail
price:
$29.95);
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Deluxe
Edition (which includes 6 Bibles and 9 reference titles, retail
price:
$39.95); and
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Platinum
Edition (which includes 8 Bibles and 13 reference titles, retail
price:
$69.95).
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Each
edition contains 125 scripture reading plans and provides the user with
the
ability to create their own.
During
the fiscal year 2005, we introduced QuickVerse®
Macintosh, which is compatible with Macintosh®
OS X
10.3 or higher operating systems. This program is available in three
editions
and provides access to several Bible translations (e.g.,
the
King James Version, the American Standard Version, etc.) along with numerous
reference titles (e.g.,
dictionaries, commentaries, encyclopedias, etc.).
The
QuickVerse®
Macintosh
family of products includes:
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QuickVerse®
White Box Edition (which includes 9 Bibles and 40 reference
titles, retail
price: $59.95);
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QuickVerse®
Black Box Edition (which includes 12 Bibles and 56 reference
titles,
retail price: $129.95); and
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QuickVerse®
Gold Box Edition (which includes 19 Bibles and 143 reference
titles,
retail price: $349.95).
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Each
QuickVerse®
Macintosh product contains numerous “Search Panel” features, including
user-defined book categorization, desktop books, download books, interactive
workbooks and daily reading plans, as well as an exclusive “Preview Drawer”,
allowing users to have an unlimited number of books open at any
time.
QuickVerse®
customers include (i) individuals devoted to or otherwise interested in
studying
Christianity and (ii) religious and other spiritual organizations including
schools, churches and other faith-based ministries.
In
addition to QuickVerse®,
we also
develop and market certain other Bible study software packages. These include
the Vine’s®
Complete
Collection, the Warren Wiersbe®
Collection, the John MacArthur®
Collection, the Life Application Bible Commentary®
Collection, the Willmington Guide to the Bible®
Collection, and the Fisherman Study Guide®
Collection. Although our prices are subject to change from time to time,
these
titles currently range in retail price from $9.95 to $249.95 per unit.
Financial/Office
Management Products for Churches and other Christian Faith-Based
Ministries
For
the
fiscal year ended December 31, 2005, approximately 26% of our revenues were
derived from sales of Membership Plus®,
an
industry-leading church management software now in its 11th
version.
Membership Plus®
2007 is
available in each of a standard and a deluxe package at retail prices of
$199.95
and $399.95 respectively. Each of these product packages provides church
database, financial management and church productivity tools, including those
designed to streamline church office accounting, tasks and scheduling, track
membership and contributions, organize membership databases, and provide
efficiency in producing targeted mailings, attendance reports and IRS-compliant
contribution receipts. The deluxe package is equipped with a broader
functionality and range of features, including, for example, a number of
templates for legal agreements frequently used by these types of organizations
and a fund based accounting function.
Membership
Plus®
is
designed to serve the unique needs of churches, “para-church” organizations and
ministries, and non-profit entities. The term “para-church” has been developed
by the religious community to refer to religious organizations which have
some
of the characteristics of a church, but which are not what most people
would
generally consider to constitute a church, including a defined congregation.
Some “para-church” organizations are treated as churches for some reasons, and
as religious organizations which are not churches for others. A few examples
of
a “para-church” organization are Campus Crusade for Christ, Promise
Keepers®,
and
Josh McDowell Ministry.
Over
80,000 churches and faith-based organizations have purchased Membership
Plus®
since
its introduction in 1990. Membership Plus®
2007,
our latest version, is currently available in two CD-Rom editions: Membership
Plus®
Standard
and Membership Plus®
Deluxe.
We have approximately 50,000 registered users for this product.
We
currently sell/distribute ClickArt Christian Publishing®
Suite
III (retail price: $39.95), which is a full desktop publishing package
containing over 13,000 Christian images, icons, maps, Catholic and Jewish
imagery and ethnically diverse, family-oriented illustrations to be used in
the
creation of a wide range of printed materials including newsletters, bulletins,
posters, fliers, mailings, calendars, and reports. We also publish/distribute
ClickArt Christian Graphics Deluxe®
(retail
price: $29.95), which contain faith-based and Christian graphical images that
can be used in the production of other content related projects. We also
distribute several titles produced and distributed by SummitSoft Corporation
a
publisher of productivity software for professional and home users, including
Logo Design Studio (retail price: $29.95), Essential Office Font Pack (retail
price: $19.99), 2500 True Type Fonts (retail price: $19.99) and the Wedding
Planner (retail price: $39.95).
Although
our prices are subject to change from time to time, our print and graphic
products range in price from $9.99 to $39.99 per unit. In the aggregate,
and for
the fiscal year ended December 31, 2005, 2% of our revenues were derived
from
sales of these products.
Pastoral
Products
We
currently produce and distribute/sell a line of pastoral products designed
to
assist faith-based ministries in streamlining sermon development and research
tasks and in organizing responsibilities. These titles include the following:
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Sermon
Builder®
4.0 Deluxe (retail price: $69.95), which is a database compilation
of
illustrations, anecdotes, quotations, proverbs and bits of humor
from
general topics like children and angels to specific Bible passages,
which
users can use to bring messages to a congregation or classroom.
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Ministry
Notebook®
2.0 (retail price: $29.95), which is an organizational tool for
users to
keep better track of ministry-related paperwork including sermons,
prayer
requests, personal libraries, telephone contacts, and expense reports.
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Today’s
Best Sermons®
(retail price: $99.95), which is a three volume collection of the
best
sermons from the Preaching
Today
monthly audiotape series, which users can use to gain spiritual
refreshment and strengthen their
preaching.
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Although
our prices are subject to change from time to time, our pastoral products
range
in price from $29.95 to $99.95 per unit. In the aggregate, and for the fiscal
year ended December 31, 2005, 3% of our revenues were derived from sales
of
these products.
Children’s
Products
We
currently produce and distribute/sell a line of children’s CD-Rom products
designed to appeal to faith-conscious families interested in
spiritually-enriched entertainment and play-along educational content.
Collectively, these titles include Jonah and the Whale®
(retail
price: $5.97), Noah and the Ark®
(retail
price: $5.97), Daniel in the Lion’s Den®
(retail
price: $5.97), The Story of Creation®
(retail
price: $5.97), and American History Explorer®
(retail
price: $29.95). In addition, we also distribute the DVD video Junior’s
Giants®
(retail
price: $12.95) produced by Divine Comedy Productions.
Although
our prices are subject to change from time to time, our children’s products
range in price from $5.97 to $33.97 per unit. In the aggregate, and for the
fiscal year ended December 31, 2005, less than 1% of our revenues were derived
from sales of these products.
Language
Tutorial Products
We
currently produce tutorial software programs for learning Greek and Hebrew,
languages frequently studied in conjunction with a Bible-study curriculum or
by
biblical scholars. Each of these two programs, Greek Tutor®
and
Hebrew Tutor®
(retail
price: $49.95 each), covers all of the essential language development skills,
including letters, vocabulary and grammar. Although our prices are subject
to
change from time to time, our language tutorial products range in price from
approximately $10.00 to $69.95 per unit. In the aggregate, and for the fiscal
year ended December 31, 2005, 3% of our revenues were derived from sales of
these products.
In
addition to our own software products, we resell certain titles and title
versions that we purchase at a discount and that are published by others,
including SummitSoft, Divine Comedy Productions and Webroot®.
These
are non-exclusive, purchase-order only type arrangements in connection with
which we carry only limited inventory. Sales from these titles are derived
exclusively online through our Website and, apart from on our Website, we
do not
promote these products. Although prices are subject to change from time to
time,
these software products range in price from approximately $5.97 to $39.99
per
unit. In the aggregate, and for the fiscal year ended December 31, 2005,
less
than 1% of our revenues were derived from sales of these
products.
According
to a Gallup poll released in January 2006, 50% of Americans identified
themselves as Protestant, while 25% identified themselves as Catholic, and
13%
identified themselves as “Other Christian.” Another poll indicates that 41%
describe themselves as “born-again” or evangelical Christian. According to the
Gallup survey, 59% of Americans say that religion is “very” important to them in
their own lives, and another 25% say that religion is “fairly” important in
their lives.
According
to the most recent survey released in July 2003 by the Christian Bookseller’s
Association, Christian-product sales for the year 2002 were $4.2 billion.
The
survey also revealed that $2.4 billion of the $4.2 billion total was sold
through Christian retail, with $1.1 billion sold through general retail,
and
$725 million sold direct-to-consumer, and through ministry sales channels.
The
2,300-store CBA segment includes several different chains, Family Christian
Stores being the largest with 325 stores. As faith-based retailing increases,
secular stores are offering more faith-based products as evidenced by the
$1.1
billion sales figure in 2002 as reported by the CBA. It is this faith-based
demographic that we seek to target.
In
developing a marketing strategy for our consumer software products, we
seek
brands or titles and title versions that we believe will appeal to the
interests
of our target consumers. We strive to create marketing campaigns which
are
consistent with this strategy and generally market our software
through:
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our
Website (www.quickverse.com) and the Internet sites of
others;
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print
advertising;
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opt-in
e-mail campaigns;
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product
sampling through demonstration software;
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in-store
promotions, displays and retailer assisted co-operative advertising;
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publicity
activities; and
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trade
shows.
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Direct
Marketing / Online Sales
Direct
sales accounted for approximately 61% of our 2005 fiscal year revenue. Over
the
past three years, we have devoted significant and increasing resources to the
development of our direct-marketing program. Through this program, we market
our
products directly to consumers and Church and “para-church” organizations
through a combination of direct-mailings and opt-in e-mailings of our product
title catalogs and brochures. An important aspect of this initiative is our
online sales. In May of 2004, we launched a full-service online store with
many
of the kinds of features and capabilities that online shoppers have come to
expect from cutting-edge Internet retailers. We are currently marketing our
products online through multiple sources including our own www.quickverse.com
Internet Website, other Internet Websites such as www.amazon.com, as well as
several widely used search engines such as Google®
and
Yahoo®.
Furthermore, in October of 2005 we joined an affiliate network through
www.shareasale.com and have gained approximately 100 affiliate merchants that
market our products through their Websites. While we market our products through
these other Internet Websites, search engines and affiliate merchants, excluding
our own www.quickverse.com
Internet
Website, accounted for less than approximately 1% of our 2005 fiscal year
revenue.
We
anticipate online orders will continue to increase as we expand our software
product base and enhance our marketing efforts in this area.
Retail
Sales
Retail
sales accounted for approximately 39% of our 2005 fiscal year revenue. Our
domestic retail sales involve thousands of retail stores across the United
States through which our products are sold, many of which are members of the
Christian Bookseller’s Association. These stores vary from small, family-owned
Christian bookstores to large chain bookstores such as LifeWay Christian Stores,
Family Christian Stores®
and
Berean Christian Stores. We face the continuing challenge of reaching these
stores on a consistent basis to keep them informed of new releases, promotional
offers, etc. In addition to advertising in trade publications and maintaining
visibility at CBA trade shows and events, we believe that it is critical to
be
in direct personal contact with each customer routinely in order to maintain
or
increase our market position. Towards that end, our sales representatives are
expected to contact each of our customers as well as each of the independent
stores that are not yet our customers regularly and present them with the latest
in our products and promotions. We believe our personalized approach to
marketing provides us with an edge over our competition, which we believe rely
predominantly on advertising to maintain and develop their relations with CBA
customers.
In
the
secular retail market, which includes chains such as Best Buy™,
CompUSA®,
OfficeMax™ and Apple®
Stores
we believe that we continue to be a top seller of Bible study software
and we
are developing additional product offerings and promotions to grow our
market
share.
International
Sales
International
sales accounted for approximately 3% of our 2005 fiscal year revenue. We
currently sell to distributors and retailers in Canada, New Zealand, Australia,
Philippines, Faroe Island, Korea, Africa, the United Kingdom, and Singapore.
These distributors and retailers, in turn, sell our products into both Christian
and large, secular retail outlets that sell off-the-shelf consumer software
packages.
Returns
and Price Concessions
At
the
time we ship our products we establish reserves, including reserves that
estimate the potential for future product returns and price concessions.
Management makes these estimates and assumptions based on actual historical
experience regarding allowances for estimated price concessions and product
returns. In determining the percentage of sales for product return
reserves, management considers a number of different statistical factors.
First, it reviews the rate of actual product returns (in total) for the period.
Second, it reviews return rates for the same period(s) of prior years. Third,
it
reviews its sales by individual retail customers to assess any unusual return
exposure. Fourth, it reviews actual return rates of specific title and title
versions to determine if there are any unusual trends taking place. Fifth,
the
potential for an increase in actual returns resulting from upcoming new title
or
title version releases is reassessed. Sixth, and finally, management reviews
the
actual returns from the balance sheet date to the date of calculation to
determine if anything unexpected has taken place.
We
give
all of our distributors and retail customers a written product return policy
providing for returns, upon written request, within nine months of the
invoice
date for credit only. If a new title or title version release falls within
that
nine month time span, a distributor has 60 days from the announced release
date
to return the old title or title version in exchange for the new title
or title
version only. We provide our end-user consumers with a 45 day satisfaction
guarantee, allowing them to return a title or title version within that
time
frame if for any reason unsatisfied. Our
warranty policy for defective software is to provide replacement or repair
for a
period of 45 days from the invoice date. We
believe that these measurement dates provide a consistent period for assessment
and the opportunity to adequately estimate channel inventory levels for
appropriately estimating our return reserves.
We
generally grant price concessions to our wholesale retail customers when we
deem those concessions necessary to maintain our relationships with those
retailers and maintain continued access to their retail channel customers.
Further if consumer demand for a specific title falls below expectations or
significantly declines below previous rates of wholesale retail sell-through,
then a price concession or credit may be requested by our retail customers
to
spur further retail channel sell-through.
Trends
that our returns typically follow include (i) the seasonality of sales,
and (ii)
the fact that, generally, relatively higher return rates occur during periods
of
new title or title version releases. Historically, actual returns have
been
within management’s prior estimates, however, we cannot be certain that any
future write-offs exceeding reserves will not occur or that amounts written
off
will not have a material adverse effect on our business, our financial
condition, including liquidity and profitability, and our results of operations.
Management continually monitors and adjusts these allowances to take into
account actual developments and sales results in the marketplace. In the
past,
particularly during title and title version transitions, we have had to
increase
price concessions to our retail customers.
We
prepare a set of master program copies, documentation and packaging materials
for each platform on which a title or title version is available. All of
our
software products are manufactured through third-party subcontractors,
with
orders for PC-based titles and title versions generally taking seven to
ten days, and reorders taking three to five days. Packaging,
printing and assembly are also performed by third-party subcontractors. To
date, we have not experienced any material returns due to product
defects.
We
currently fulfill all of our direct-to-consumer sales out of our own warehouse
located in Omaha, Nebraska and a third-party fulfillment company, also
located
in Omaha, Nebraska, fulfills our bulk retail sales.
During
the fiscal years ended December 31, 2005 and 2004, we had no major customers
that individually accounted for 10% or more of annual sales. As we introduce
new
and enhanced software titles into the market, we anticipate our sales to a
single customer, as a percentage of gross consolidated revenue, will continue
to
remain below 10%.
Also
for
the fiscal years ended December 31, 2005 and 2004, product and material
purchases from IsoDisc accounted for 24% and 29%, respectively, Frogs Copy
and
Graphics accounted for 23% and 17%, respectively, Midlands Packaging Corporation
accounted for 19% and 18%, respectively, S.P.A., Inc. accounted for 6% and
0%,
respectively, and GP Direct, LLC accounted for 5% and 0%, respectively, of
the
total product and material purchases made by us. We currently have no long-term
written agreements with any of these suppliers. The payment terms are generally
net 30 days, and we are not substantially dependent upon any one or more of
them; all are easily replaceable with any locally available
supplier.
We
are
not currently subject to direct regulation by any government agency, other
than
regulations applicable to businesses generally.
The
market for our products is rapidly evolving and intensely competitive as
new
software products and platforms are regularly introduced. Competition in
the
software industry is based primarily upon:
|
•
|
brand
name recognition;
|
|
•
|
availability
of financial resources;
|
|
•
|
the
quality of titles;
|
|
•
|
reviews
received for a title from independent reviewers who publish reviews
in
magazines, Websites, newspapers and other industry publications;
|
|
•
|
publisher’s
access to retail shelf space;
|
|
•
|
the
price of each title; and
|
|
•
|
the
number of titles then available.
|
We
face
competition from other software publishers, all of which generally sell through
the same combination of channels that we do, including chain store, secular,
Christian Bookseller’s Association, direct and online sales.
Specifically,
and in relation to our QuickVerse®
family
of products, we believe that we are the market leader in our category. We
currently compete with the following companies and products, among others,
in
the PC category:
|
|
•
|
Logos
Research Systems, Inc. - Logos Series X®
|
|
|
•
|
Biblesoft,
Inc.- BibleSoft PC Bible Study®
Version 4
|
|
|
•
|
Thomas
Nelson, Inc. - Nelson eBible®
|
|
|
•
|
WordSearch
Bible Publishers - WordSearch®
7
|
|
•
|
Zondervan
- Zondervan Bible Study Library®
|
Although
each of these companies publishes software packages in several different
variations, generally in a range that includes a standard package, an expanded
package, and a deluxe package (the same way that we do), in each of these
respective categories we believe that we tend to be the least expensive but
the
most comprehensive in terms of the number of Bibles and reference titles
included. We believe QuickVerse’s® reputation to be among the most
well-respected in its category.
In
relation to our QuickVerse®
Mobile
products, we currently compete with the following companies and products,
among
others:
|
▪
|
Laridian
- My Bible®
|
|
|
▪
|
Thomas
Nelson, Inc. - Nelson eBible®
for PDA
|
|
|
▪
|
Zondervan
- NIV Bible Study Suite PDA®
|
|
|
▪
|
WordSearch
Bible Publishers - Life Application Bible Pocket Library®
|
|
|
▪
|
Olive
Tree Bible Publishers - Olive Tree Bible Software®
|
We
believe that QuickVerse®
Mobile
is the market leader in CBA retail and a top performer in overall sales
in the
PDA Bible Software market. We believe QuickVerse®
Mobile
offers a high quality product along with a substantial amount of content
at an
affordable price.
Furthermore,
we currently compete with the following companies and comparable products,
among
others, in relation to our QuickVerse®
Macintosh products:
|
▪
|
Zondervan
- Zondervan Bible Study Suite®
for Macintosh®
|
|
|
▪
|
Oak
Tree Software, Inc. - Accordance Bible Software®
|
QuickVerse®
Macintosh was released in June 2005, and we believe that it is the market
leader
in CBA retail. QuickVerse®
Macintosh was developed from the ground up to be a truly native OS-X
application. As with the other QuickVerse®
family
of products, we believe QuickVerse®
Macintosh tends to be the least expensive product in its category given
its
features and extensive collection of Bibles and Bible reference content.
In
relation to our Membership Plus® products, we currently compete with
the following companies and comparable products, among others:
|
|
•
|
ACS
Technologies®
|
|
|
•
|
CCIS
Church Software®
|
|
|
•
|
Church
Data Master Plus®
|
|
|
•
|
Church
Windows/Computer Helper®
|
|
|
•
|
Church
Office®
|
|
|
•
|
Logos
Management Software®
|
|
|
•
|
Power
Church Software®
|
|
|
•
|
Servant
PC®
|
|
|
•
|
Shelby
Systems®
|
|
|
•
|
Shepard’s
Staff®
(Concordia Publishing House)
|
|
|
•
|
Specialty
Software®
|
We
believe that Membership Plus® is the market leader by a margin of
over 100% in the church management software publishing category in terms
of
registered users. Membership Plus® packages are also among the least
expensive products in the category.
We
rely
upon our product quality, marketing and sales abilities, proprietary technology
and product development capability, the depth of our retail distribution
channels and management experience to compete in the software industry. Although
we believe that we are among the market leaders in each of our primary product
categories, some of our competitors have longer operating histories, larger
customer bases and greater financial, marketing, service, support, technical
and
other resources than we do. Due to these greater resources, certain of our
competitors have the ability to undertake more extensive marketing campaigns,
adopt more aggressive pricing policies, pay higher fees to licensors and
pay
more to third-party software developers than we can. Moreover, we believe
that
competition from new entrants will increase as the market for faith-based
products and services expands.
Overview
We
rely
for our business on a combination of copyrights, trademarks, and trade
secrets
to protect our intellectual property. Our copyrighted software content
and the
brand recognition associated with our related product trademarks are among
the
most important assets that we possess in our present ability to generate
revenues and profits, and we rely very significantly on these intellectual
property assets in being able to effectively compete in our market. Our
intellectual property rights derive from a combination of licenses from
third
parties, internal development and confidentiality and non-disclosure
agreements.
We
cannot
be certain that the precautions we have taken will provide meaningful protection
from unauthorized use by others. If we must pursue litigation in the future
to
enforce or otherwise protect our intellectual property rights, or to determine
the validity and scope of the proprietary rights of others, we may not
prevail
and will likely have to make substantial expenditures and divert valuable
resources in the process. Finally, we may not have adequate remedies if
our
proprietary content is appropriated, our proprietary rights are violated
or our
trade secrets are disclosed.
Copyrights
Our
copyrights, some of which have been registered and others of which remain
unregistered, derive from a combination of program and source code embodied
in
software titles that we license from third parties, as well as program
and
source code embodied in software titles that we have internally developed
on our
own.
We
entered into a license agreement in June 1999 with Parsons Technology,
Inc.
which forms the basis of our copyright protection for products that accounted
for approximately 99% of our revenues in 2005, including those generated
from
sales of QuickVerse®
and
Membership Plus®,
by far
our two largest selling software titles. A copy of the license that we
obtained
from Parsons Technology, which has since been assigned to Riverdeep, Inc.,
the
latest licensor-assignee in a succession of assignments by Parsons Technology
that have occurred since June 1999, is incorporated by reference into this
prospectus as Exhibit 10.3. At the time, it was acquired as part of a
combination of related transactions involving ourselves, Parsons Technology,
then a wholly-owned subsidiary of Mattel, Inc.®,
and TLC
Multimedia Inc., then also a wholly-owned subsidiary of Mattel, Inc.®.
Aside
from the license, the transactions involved an asset sale, a product
distribution agreement, and a related services agreement. Taken as a whole,
and
essentially, we had acquired from TLC Multimedia a software publishing
and sales
division (known and referred to by many then as the “Parsons Church Group”). In
accordance with its terms, we agreed to pay a one-time non-recurring fee
of $5
million to obtain the license, which fee was payable over a subsequent
approximate one year period. The related asset sale involved separate
consideration.
The
license that we acquired in 1999 provided us with the right, originally
for a
term of ten years, to publish, use, distribute, sublicense and sell, exclusively
worldwide in non-secular channels and non-exclusively (with the continuing
right
retained by Riverdeep, Inc., successor to Parsons Technology) on an unrestricted
basis in secular channels, a collection of 65 individual top-selling
Christian-related software titles owned by Parsons Technology, including
QuickVerse®
and
Membership Plus®,
among
others. The license covered a variety of other add-on content titles
(e.g.,
various
Bible translations, study guides and sermon preparation tools). The license
also
included the right for us to modify the programs (including the source
code) in
order to prepare derivative works and future versions of the programs,
and
stated that we would exclusively own all rights associated with any such
modifications.
Beginning
in 2000, we became involved in a series of mediations arising out of or
otherwise in connection with the 1999 license. The first of these involved
the
payment terms of the $5 million licensing fee. Rather than making payments
in
accordance with the fee schedule as originally set forth in the agreement,
we
entered into an arrangement with Parsons Technology’s direct sales group whereby
we provided resale products and in turn received an offset credit against
the
balance due under the fee provision in the license. The dispute centered
on the
amount of product actually resold, and, therefore, the amount of offset
credit
to which we were entitled. Prior to the resolution of this contest, a second
dispute arose, naming Parsons Technology and ourselves, among others, as
parties
thereto. The first mediation was set aside, and ultimately resolved in
conjunction with the latter proceeding described in the following
paragraph.
In
October 2001, due to being in arrears with respect to certain royalty
payments owed to The Zondervan Corporation, then a content provider
to
QuickVerse®,
we
became party to a second mediation ultimately resulting in a multi-party
settlement agreement, on October 20, 2003, the terms of which provided
for our
payment to Zondervan of $500,000 plus 5% simple interest in installments,
as
well as for our destruction of all inventory containing Zondervan-owned
content,
all of which we satisfied within months thereafter. As part of the
settlement
agreement, we received a covenant in perpetuity with respect to our
rights under
the 1999 license, effectively extending it indefinitely with no continuing
financial obligations owed by us. A copy of the settlement agreement
which
resulted in the effective extension is incorporated by reference as
Exhibit
10.14 to our Form 10-KSB for the year ended December 31, 2005.
Since
1999, the developments, including modifications and improvements, that
we have
made to the originally acquired copyrighted programs covered by the
license have
been extensive. We have used both in-house developers and third-party
contractors in these modifications and improvements over which we retain
the
exclusive ownership. Given these developments, which have been made
through five
subsequent versions, eight different editions and three new platforms
of
QuickVerse®
, five subsequent versions and one new edition of Membership
Plus®
,
and various subsequent versions of some of the other titles to which
we acquired rights under the license (including those in each of the
print and
graphics, pastoral, children’s, and language tutorial product categories), we
believe that the real value of the copyrights associated with these
titles lay
almost exclusively at this point in the improvements that we own rather
than the
base copyrights that we were originally granted and that continue to
be owned by
Riverdeep, Inc. Moreover, it is our belief that the original source
code covered
by the license has been effectively rendered valueless by virtue of
these
subsequent modifications and improvements. Although we do not believe
that any
third parties have been granted any rights to date in addition to our
own to
publish or sell these titles into secular channels, and do believe
that, even if
this has occurred or should occur in the future, the barriers to entry
created
by the extensive developments that we have made and now own to these
otherwise
licensed titles would make it practically infeasible for any third
party to
effectively compete with us in relation to these products in any market,
there
can be no assurance that one or more competitors will not emerge at
some point
or that they will not impact on our sales and revenues.
As
noted
above, our largest-selling title, QuickVerse®,
is one
from which we originally derived our rights under the 1999 license.
One of the
features that make QuickVerse®
such a
popular title is its breadth of content. A very significant percentage
of this
content is licensed by us from various third-party content providers
for
inclusion in QuickVerse®.
We are
therefore responsible for paying royalties on a regular basis to these
providers
in connection with our sales of QuickVerse®.
In
total, we currently have content licensing agreements with 45 different
publishers for approximately 765 individual Bible translations and
other
Biblical or related scholarly works which are incorporated in various
editions
of our QuickVerse®
products, or in some cases sold as stand-alone or add-on content. These
licensing agreements are typically non-exclusive and for a fixed duration
(e.g.,
a term
of 3 or 5 years). Royalties are generally paid within 30 days following
the end
of a quarter and are calculated as a percentage of net sales from a
work
(e.g.,
ranging
from 3% to 10% according to the licensing agreements), based upon factors
such
as value as a stand-alone product as compared to, for example, value
when
bundled with other titles within a collective work. These license agreements
typically cover content in the context of both stand-alone products
and as
bundled works. For example, consumers who purchase QuickVerse®
pay the
suggested retail price and are in part paying for the technology within
the
program along with the content. QuickVerse®
titles
sold to new consumers or new users are subject to royalties on all
content
within each specific QuickVerse®
title.
However, upgrade sales to existing users are only subject to royalties
on new
content additions of the upgraded version.
In
addition to the copyrights associated with the 1999 license described above,
copyright protection exists in relation to the software titles that we
resell
published by others. These copyrights, however, are held by the publishers
and/or their respective third-party content providers.
While
approximately 82%
of our
copyrighted software programs are registered with the U.S. Copyright
Office,
approximately 18%
remain
unregistered, including all of the works included in the enhancements
that we
have made to titles from which we originally derived our rights under
the 1999
license. In the U.S., works afforded the benefit of copyright protection
can
either be registered with the U.S. Copyright Office or remain unregistered,
and although registration offers certain advantages to the holder in being
able to assert its rights (including a rebuttable presumption of ownership
and
entitlement to statutory damages and attorneys fees), the fact remains
that an
original work in the U.S. becomes protected by the copyright laws from
the
moment it is “fixed in a tangible medium,” which, as it relates to software, has
long been interpreted to mean when it is stored on a hard drive or removable
disk.
Trademarks
As
part
of the 1999 license, we acquired the unlimited right to use the registered
trademarks associated with the various titles licensed thereunder exclusively
worldwide in non-secular channels and non-exclusively in secular channels.
Because of the fact that each of QuickVerse®
and
Membership Plus®
had been
on the market for approximately ten years by the time we acquired the license,
and each had a substantial existing user base, the trademarks for these
products
alone were deemed at the time to be of great importance and value. We believe
that our initiatives in introducing subsequent versions, editions and platforms
of these titles since then, as well as our having maintained extremely
high
publishing standards throughout the period that we have been publishing
these
titles, have served to sustain and enhance the importance and value of
these
trademarks.
Trade
Secrets
Whenever
we deem it important for purposes of maintaining competitive advantages,
our
policy requires parties with whom we share, or who otherwise are likely
to
become privy to, our trade secrets or other confidential information, including
source code, to execute and deliver to us confidentiality and/or non-disclosure
agreements prior to their exposure to any such information. Among others,
this
includes employees, consultants and other advisors, including our in-house
and
outsourced software developers and collaborators, each of whom we require
to
execute such an agreement upon commencement of their employment, consulting
or
advisory relationships. These agreements generally provide that all confidential
information developed or made known to the individual by us during the
course of
the individual's relationship with us is to be kept confidential and not
to be
disclosed to third parties except in specific circumstances. In the case
of
employees and consultants, the agreements provide that all inventions conceived
by the individual in the course of their employment or consulting relationship
shall be our exclusive property.
As
of March 30, 2007, we had twenty-three full-time employees. Of those
twenty-three, four were part of the senior-level executive and financial
management team, four were in the product development team, seven were
on the
sales team, and eight were in fulfillment, administration, and related
support positions. For the fiscal year ended December 31, 2005, our annual
payroll was approximately $1,603,000, equivalent to 25% of gross revenues.
In
addition, we have engaged the services of several consulting firms who
are
working full or part-time for us in the area of product development and
marketing.
We
rely
heavily on our current officers in operating the business. We are not subject
to
any collective bargaining agreements and believe that our relationships with
our
employees are good.
As
of the
date of this prospectus, there were no pending material legal proceedings to
which we were a party and we are not aware that any were contemplated.
There can be no assurance, however, that we will not be made a party to
litigation in the future. Moreover, there can be no assurance that our insurance
coverage will prove adequate to cover all liabilities arising out of any claims
that may be initiated against us in the future. Any finding of liability imposed
against us coupled with a lack of corresponding insurance coverage is likely
to
have an adverse effect on our business, our financial condition, including
liquidity and profitability, and our results of operations.
Our
principal executive offices are located at 11204 Davenport Street, Suite
100,
Omaha, Nebraska. We lease this 6,500 square foot premises under a five
year
lease agreement with 11204, LLC. Our monthly rent is $8,309.14 and, as
of March 30, 2007 there were approximately two months remaining under the
lease.
We
maintain additional leased office space in Naperville, Illinois for
certain
product development activity. We lease this 880 square foot premises
under a
three year lease agreement with Transwestern Commercial Services. Our
monthly
rent is $1,356.67 and there are twenty-four months remaining under the
lease.
Two
of
our full-time employees work in home offices located in Cedar Rapids,
Iowa. We
do not pay for any space associated with these operations.
Our
business is highly seasonal. More than 50% of our annual sales are expected
to
occur in the five months of September through January; the five months
of April
through August are generally our weakest, historically accounting for
less than
30% of annual sales.
Our
directors and executive officers and their ages as of March 30, 2007 were
as follows:
|
Name
|
|
Age
|
Position
|
||||||
|
Steven
Malone
|
|
40
|
|
Director,
Chairman of the Board and President
|
|||||
|
John
A. Kuehne, CA
|
|
49
|
|
Director
|
|||||
|
Kirk
R. Rowland, CPA
|
|
47
|
|
Director
and Chief Financial Officer
|
|||||
|
William
Terrill
|
|
50
|
|
Chief
Technology Officer
|
|||||
|
Brittian
Edwards
|
|
44
|
|
Vice
President, CBA Sales and
Licensing
|
|||||
-56-
Steven
Malone - Chairman of the Board of Directors, President and Chief Executive
Officer
Mr.
Malone has served as our President and Chief Executive Officer since March
2001
and as a director and Chairman of the Board since February 2002. Between July
2000 and March 2001, Mr. Malone was Senior Vice President and between June
1999
and July 2000 he was a Vice President. Mr. Malone possesses over eighteen years
of experience in the computer industry, with the last twelve focused on software
sales. As a National Account Manager from 1992 to 1996 for Grolier Interactive,
he was responsible for their largest retail and distribution accounts. As
Director of Corporate Sales from 1996 to 1998 for Software Publishing
Corporation, he was responsible for the on-going sales growth of premiere
corporate products, such as the award winning Harvard Graphics, as well as
the
introduction of several new products to the corporate marketplace. As Director
of Sales from 1998 to1999 for InfoUSA, he was responsible for sales and
marketing of InfoUSA’s products to retail, distribution, OEM and corporate
accounts.
John
A. Kuehne, CA - Director
Mr.
Kuehne has served as one of our directors since December 2000. He is also
currently a management consultant and the President of SmallCap Corporate
Partners Inc., (www.smallcap.ca),
a
corporate finance and investor communications advisory firm for microcap public
companies. He has held this position since August 2003. Prior to SmallCap,
Mr.
Kuehne served as a management consultant with Alliance Corporate Services Inc.
from July 2000 through to June 2003. Mr. Kuehne worked in finance and accounting
for Deloitte & Touche for eight years. He also has industry experience,
including over seven years with Doman Industries Limited (1990 to 1999), a
large
private Canadian forest products company, where he eventually became Chief
Financial Officer. As the CFO of Doman Industries, Mr. Kuehne gained practical
experience in corporate finance and mergers and acquisitions, completing a
$125
million senior note issue through Bear Stearns and the $140 million acquisition
of Pacific Forest Products. Mr. Kuehne holds a Bachelor of Commerce degree
from
the University of Alberta (1984) and a Masters of Management from the
J.L.Kellogg Graduate School of Management at Northwestern University (1990).
From June 2000 to May 2004 he served as a director of Prospector Consolidated
Resources Inc., a Canadian public company. From January 2003 to November 2004
he
served as a director of Beau Pre Explorations Ltd., also a Canadian public
company. Mr. Kuehne qualified as a Canadian Chartered Accountant in 1983 and
as
an American Certified Public Accountant in 1985.
Kirk
R. Rowland, CPA - Chief Financial Officer
Mr.
Rowland has served as our Chief Financial Officer and as one of
our directors since April 2002. He served as our Vice President of Finance
from March 2001 to April 2002, and as our Director of Finance from December
1999
through March 2001. Mr. Rowland has over seventeen years of experience in
public
accounting working in a multitude of industries, including insurance,
manufacturing, and agriculture. Most recently, and from 1992 to 1999 he was
a
partner in Manning & Associates, P.C. a local Nebraska accounting firm. From
1984 to 1988, Mr. Rowland was a Senior Staff Accountant with KMG Main Hurdman
(now KPMG), an international accounting firm,
and
from 1988 to 1992 he was an Audit Supervisor with Sommer, Magnuson, &
Dawson, P.C.
William
Terrill - Chief Technology Officer
Mr.
Terrill rejoined us in July 2002 as our Chief Technology Officer after
having
been involved with us from July 1999 to July 2000. He has over 26 years
of
experience managing software divisions and technology efforts for us, The
Learning Company, Mindscape, and The Software Toolworks. As Vice President
of
the Parsons Church Division for The Learning Company, from January 1999
to July
1999, Mr. Terrill managed a 30% annual revenue increase and shared
responsibilities in the transaction that resulted in our acquiring that
division. Mr. Terrill was the Senior Vice President Reference Products
Division
for Mindscape from 1989 to 1995 managing revenues exceeding $14 million.
He has
extensive experience managing international software development teams
in China,
Singapore, United Kingdom, India, and Russia. Mr. Terrill has experience
with
joint ventures, spin-offs, mergers, IPOs, and corporate acquisitions. In
addition, Mr. Terrill has lead software product marketing teams and
content/media acquisition efforts for over ten years. As a consultant from
1996
to 1998, Mr. Terrill has extensive experience leading large-scale product
development and information technology efforts for Navistar, Nalco Chemical,
American Express, Motorola, and IBM Global Services. From July 2000 to
July
2002, Mr. Terrill served as the IT Integration Program Manager for Blue
Diamond
Joint Venture between Ford Motor Company and International Truck and Engine
Corporation.
Mr.
Edwards has served as our Vice President of CBA Sales and Licensing since July
2004. Mr. Edwards served as our Vice President of Sales from April 2002 to
July
2004 and director of Christian Booksellers Association Sales from July 1999
to
April 2002. Mr. Edwards has been in the Christian Booksellers Association
marketplace for more than 18 years. He began his career in 1988 with LifeWay
Christian Resources as LifeWay Christian Stores retail manager. He then worked
successfully for Genesis Marketing Group from 1994 to 1995 as a Sales Manager
for Texas, Oklahoma, Louisiana and New Mexico. From there he served as a Product
Manager for the largest Christian distributor, Spring Arbor, which is now owned
by Ingram Book Group. He left Spring Arbor as National Sales Manager in 1988
to
become the National Sales Manager for Parsons Technology, then owned by
Broderbund.
Board
of Directors Committees
There
are
currently two standing committees comprised of members of our board of
directors. These include our audit committee and our compensation committee.
Since
December 2000, we have maintained an audit committee. We currently only have
one
member, John A. Kuehne, who is a “financial expert” (as defined in Regulation
228.401(e)(1)(i)(A) of Regulation S-B) serving on our audit committee. Mr.
Kuehne qualifies as an “independent” director under Item 7(d)(3)(iv) of Schedule
14A of the Securities Exchange Act of 1934.
Since
July 2003, we have maintained a compensation committee. We currently only
have
one member, John A. Kuehne, serving on our compensation committee.
On
March
31, 2006, Dr. Henry M. Washington resigned as a member of our board of
directors
as a result of other professional obligations, leaving us with only one
independent director and causing the entire board to temporarily function
as the
audit and compensation committee. As of the date of this filing, and
despite our
efforts to do so, we have not yet identified a suitable replacement.
Disclosure
Policy Committee
Since
September 2002, we have had a Disclosure Controls and Procedure Officer
Committee (the “Disclosure Policy Committee”). The current members of the
Disclosure Policy Committee include Steven Malone, John A. Kuehne, and
Kirk R.
Rowland. The Disclosure Policy Committee has implemented disclosure controls
and
procedures that meet the standards established by Rule 13a-15 of the Securities
Exchange Act.
The
following table sets forth the total compensation awarded to, earned or
paid,
for each of the last two fiscal years to our Chief Executive Officer and
each of
our executive officers earning a total compensation of $100,000 or more
during
any such fiscal year. Steven Malone has served as our President and Chief
Executive Officer since March 2001. William Terrill has served as our Chief
Technology Officer since July 2002. Kirk R. Rowland has served as our Chief
Financial Officer and director since April 2002. No other individuals employed
by us earned a total compensation in excess of $100,000 during the fiscal
year
ended December 31, 2006.
-58-
|
Summary
Compensation
|
||||||||||||||||||||||||||||
|
Name
and Principal Position
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards ($)
|
|
|
Option
Awards ($)
|
|
|
Non-equity
Incentive Plan Compensation ($)
|
|
|
Non-qualified
Deferred Compensation Earnings ($) (a)
|
|
|
All
Other Compensation ($) (b)
|
|
|
Total
($)
|
|
||
|
Steven
Malone,
|
2006
|
$
|
150,000
|
$
|
6,632
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
650
|
$
|
5,041
|
$
|
162,323
|
|||||||||||
|
President
and Chief Executive Officer
|
2005
|
$
|
150,000
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
14,136
|
$
|
164,136
|
|||||||||||
|
|
|
|
||||||||||||||||||||||||||
|
William
Terrill,
|
2006
|
$
|
150,000
|
$
|
6,632
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
4,680
|
$
|
10,872
|
$
|
172,184
|
|||||||||||
|
Chief
Technology Officer
|
2005
|
$
|
150,000
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
4,500
|
$
|
12,181
|
$
|
166,681
|
|||||||||||
|
|
|
|||||||||||||||||||||||||||
|
Kirk
R. Rowland,
|
2006
|
$
|
110,000
|
$
|
6,632
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
10,283
|
$
|
126,915
|
|||||||||||
|
Chief
Financial Officer
|
2005
|
$
|
110,000
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
10,314
|
$
|
120,314
|
|||||||||||
|
(a)
Represents accrued deferred compensation from our Simple
IRA retirement
plan, which allows for those employees who participate to
receive an
employer's match in contribution funds up to 3% of the employee's
annual
gross pay.
|
||||||||||||||||||||||||||||
|
(b)
Represents earnings accrued at the end of each fiscal year
for vacation
hours earned that would be required to be paid in connection
with any
termination, including without limitation through retirement,
resignation,
severance or constructive termination of any such executive
officer's
employment.
|
||||||||||||||||||||||||||||
The
following table sets forth the outstanding equity awards, specifically
unexercised options, stock that has not vested, and equity incentive
plan
awards, held by the executive officers named in the Summary Compensation
Table
as of fiscal year ended December 31, 2006.
|
Outstanding
Equity Awards at Fiscal Year-End
|
||||||||||||||||||||||||||||
|
|
Option
awards
|
Stock
awards
|
||||||||||||||||||||||||||
|
Name
|
Number
of Securities Underlying Unexercised options (#)
Exercisable
|
|
|
Number
of Securities Underlying Unexercised options (#)
Unexercisable
|
|
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options (#)
|
|
|
Option
Exercise Price ($)
|
|
|
Option
Expiration Date
|
|
|
Number
of Shares or Units of Stock that have not Vested
(#)
|
|
|
Market
Value of Shares or Units of Stock that have not Vested
($)
|
|
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or
Other Rights
that have not Vested (#)
|
|
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned
Shares, Units or
Other rights that have not Vested ($)
|
|
||
|
Steven
Malone
|
250,000
|
---
|
---
|
$
|
0.11
|
July
17, 2011
|
---
|
$
|
---
|
---
|
$
|
---
|
||||||||||||||||
|
William
Terrill
|
500,000
|
---
|
---
|
$
|
0.05
|
June
6, 2012
|
---
|
$
|
---
|
---
|
$
|
---
|
||||||||||||||||
|
William
Terrill
|
500,000
|
---
|
---
|
$
|
0.05
|
June
7, 2013
|
---
|
$
|
---
|
---
|
$
|
---
|
||||||||||||||||
|
Kirk
R. Rowland
|
150,000
|
---
|
---
|
$
|
0.11
|
July
17, 2011
|
---
|
$
|
---
|
---
|
$
|
---
|
||||||||||||||||
Information
Concerning Stock Options
Our
Stock
Incentive Plan, adopted in 1999, authorizes the issuance of various forms
of
stock-based awards including incentive and nonqualified stock options,
stock
appreciation rights attached to stock options, and restricted stock awards
to
our directors, officers and other key employees. In accordance with the
terms of
the Stock Incentive Plan, stock options are granted at an exercise price
as
determined by our board of directors at the time any such option is granted
but
which may not be less than the par value of our common shares ($.001).
We
did
not grant stock options to our executive officers during the fiscal year
ended
December 31, 2006. No executive exercised any stock options during the
fiscal
year 2006.
Mr.
Malone is employed by us pursuant to a two-year employment agreement extension,
which extension commenced on March 31, 2006, and which is a term extension
to
the previous employment agreement originally dated July 25, 2003. The original
agreement provided for a base annual salary equal to $150,000 and an annual
bonus equal to 1% of our net income. In the event Mr. Malone is terminated
by us
for reason other than cause, we are required to pay him his then base salary
until the later of (i) the expiration of the employment agreement or (ii) one
year. Mr. Malone has agreed to refrain from competing with us for a period
of
one year following the termination of his employment.
Mr.
Terrill is employed by us pursuant to a two-year employment agreement extension,
which extension commenced on March 31, 2006, and which is a term extension
to
the previous employment agreement originally dated June 7, 2002. The original
agreement provided for a base annual salary equal to $150,000, an annual
bonus
equal to 1% of our net income, 500,000 stock options upon his start date
at an
exercise price of $0.05 per share, and an additional 500,000 stock options
upon
the one year anniversary of his start date based on performance criteria
outlined in a separate agreement. The agreement also included a signing cash
bonus of $10,000, which was converted on July 25, 2003 into 250,000 common
shares at the market price of $0.04 per share, the quoted trading price on
the
date the agreement was reached. In the event Mr. Terrill is terminated by
us for
reason other than cause, we are required to pay him his then base salary
until
the later of (i) the expiration of the employment agreement or (ii) one year.
Mr. Terrill has agreed to refrain from competing with us for a period of
one
year following the termination of his employment.
Mr.
Rowland is employed by us pursuant to a two-year employment agreement extension,
which extension commenced on March 31, 2006, and which is a term extension
to
the previous employment agreement originally dated July 25, 2003. The original
agreement provided for a base annual salary equal to $110,000 and an annual
bonus equal to 1% of our net income. In the event Mr. Rowland is terminated
by
us for reason other than cause, we are required to pay him his then base salary
until the later of (i) the expiration of the employment agreement or (ii) one
year. Mr. Rowland has agreed to refrain from competing with us for a period
of
one year following the termination of his employment.
Pursuant
to authority granted under Article III, Section 13 of our bylaws, non-officer
directors are entitled to such compensation as our board of directors shall
from
time to time determine. On July 25, 2003, we resolved to issue each of
our
outside directors 300,000 shares of common stock valued at $0.045 per share
in
lieu of cash and meeting fees, for the period April 1, 2002 through June
30,
2003. On June 4, 2004, we resolved to issue our outside directors a total
of
324,074 shares of common stock valued at $0.081 per share in lieu of cash
and
meeting fees, for the period July 1, 2003 through August 31, 2004. These
shares
were issued on September 9, 2004. On March 31, 2006, we resolved to issue
our
outside directors a total of 438,462 shares of common stock valued at $0.13
per
share in lieu of cash and meeting fees, for the period September 1, 2004
through
March 31, 2006. On October 26, 2006, we resolved to issue our outside director
a
total of 480,000 shares of common stock valued at $0.025 per share in lieu
of
cash and meeting fees, for the period of April 1, 2006 through September
30,
2006. As of the date of this prospectus, we have accrued approximately
$12,000
in director’s fees for our outside director for the period of October 1, 2006
through March 31, 2007.
The
following table sets forth the compensation of our outside directors
for the
fiscal year ended December 31, 2006.
|
Director
Compensation
|
||||||||||||||||||||||
|
Name
|
Fees
Earned or Paid in Cash ($)
|
|
|
Stock
Awards ($)
|
|
|
Option
Awards ($)
|
|
|
Non-Equity
Incentive Plan Compensation ($)
|
|
|
Non-Qualified
Deferred Compensation Earnings ($)
|
|
|
All
Other Compensation ($)
|
|
|
Total
($)
|
|
||
|
John
Kuehne (a)
|
$
|
6,000
|
$
|
18,000
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
24,000
|
||||||||
|
Henry
Washington (b)
|
$
|
---
|
$
|
3,000
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
3,000
|
||||||||
|
(a)
Stock awards consists of 46,154 shares of common stock, all
of which are
presently exercisable, issued on March 31, 2006 at $0.13
per share in lieu
of cash and meeting fees and 480,000 shares of common stock,
all of which
are presently exercisable, issued on October 26, 2006 at
$0.025 per share
in lieu of cash and meeting fees.
|
||||||||||||||||||||||
|
(b)
Stock awards consists of 23,077 shares of common stock, all
of which are
presently exercisable, issued on March 31, 2006 at $0.13
per share in lieu
of cash and meeting fees.
|
||||||||||||||||||||||
-60-
Mr.
Kuehne has served as one of our directors since December 2000. Mr. Kuehne's
compensation agreement currently provides for a monthly fee of $1,000
for
committee services and a monthly fee of $1,000 for services as a “financial
expert” (as defined in Regulation 228.401(e)(1)(i)(A) of Regulation S-B). Dr.
Washington has also served as one of our directors since December 2000;
however,
on March 31, 2006, Dr. Washington resigned as a member of our board of
directors
as a result of other professional obligations. Dr.Washington's compensation
agreement had provided for a monthly fee of $1,000 for committee
services.
Nevada
law authorizes a Nevada corporation to indemnify its officers and directors
against claims or liabilities arising out of such person’s conduct as officers
or directors if they acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the company for which
they serve. Our articles of incorporation provide for indemnification of our
directors. In addition, our Bylaws provide for indemnification of our directors,
officers, employees or agents. In general, these provisions provide for
indemnification in instances when such persons acted in good faith and in a
manner they reasonably believed to be in or not opposed to our best interests.
The
tables below set forth information regarding the beneficial ownership of
our
common stock as of March 30, 2007. The information in these tables
provides the ownership information for:
|
|
•
|
each
person known by us to be the beneficial owner of more than 5% of
our
common stock;
|
|
|
•
|
each
of our directors and executive officers; and
|
|
|
•
|
all
of our directors and executive officers as a group.
|
Beneficial
ownership has been determined in accordance with the rules and regulations
of
the SEC and includes voting or investment power with respect to our common
stock
and those rights to acquire additional shares within sixty days. Unless
otherwise indicated, the persons named in the table below have sole voting
and
investment power with respect to the number of shares of common stock indicated
as beneficially owned by them, except to the extent such power may be shared
with a spouse. Common stock beneficially owned and percentage ownership are
based on 49,788,317 shares of common stock currently outstanding (reflects
a 1-for-50 reverse stock-split of our common stock that occurred in 1997 and
a
1-for-20 reverse stock-split of our common stock that occurred on March 18,
1998) and 23,000,000 additional shares potentially acquired within sixty days
for a total of 72,788,317 shares. The address of each person listed is in
care of Findex.com, Inc., 11204 Davenport Street, Suite 100, Omaha, Nebraska
68154.
|
Name
of Beneficial Owner
|
Amount
and Nature
of Beneficial
Owner
|
Percent
of Class
|
|||||
|
Barron
Partners, LP (1)
|
43,750,000
|
60.1
|
%
|
|
|
(1)
|
Consists
of warrants to acquire up to 21,875,000 shares of common stock, all
of
which are presently exercisable, and 21,875,000 common shares directly
owned.
|
|
Name
of Beneficial Owner
|
Amount
and Nature of Beneficial
Owner
|
Percent
of Class
|
|||||
|
Steven
Malone (1)
|
2,203,111
|
3
.0
|
%
|
||||
|
John
A. Kuehne (2)
|
2,464,157
|
3 .4
|
%
|
||||
|
Kirk
R. Rowland (3)
|
1,819,111
|
2
.5
|
%
|
||||
|
William
Terrill (4)
|
1,751,127
|
2
.4
|
%
|
||||
|
All
officers and directors as a group of (4 persons)
|
8,237,506
|
11.3
|
%
|
|
|
(1)
|
Consists
of stock options to acquire up to 250,000 shares of common stock,
all of
which are presently exercisable, 1,719,111 common shares directly
owned,
and stock options to acquire up to 110,000 shares of common stock
all of
which are presently exercisable and 124,000 common shares indirectly
owned
through spouse.
|
|
|
(2)
|
Consists
of stock options to acquire up to 175,000 shares of common stock,
all of
which are presently exercisable and 2,289,157 common shares directly
owned.
|
|
|
(3)
|
Consists
of stock options to acquire up to 150,000 shares of common stock,
all of
which are presently exercisable and 1,669,111 common shares directly
owned.
|
|
|
(4)
|
Consists
of stock options to acquire up to 1,000,000 shares of common stock,
all of
which are presently exercisable and 751,127 common shares directly
owned.
|
On
July
19, 2004, we entered into a certain Stock Purchase Agreement pursuant to which
we agreed to issue and sell 21,875,000 restricted shares of our common stock
to
Barron Partners, LP, a New York based institutional investor, at a price of
$0.08 per share. Under the terms of transaction, Barron Partners, LP received
two of our common stock purchase warrants. The first warrant entitles the
holder, for a period of up to five years, to purchase up to 10,937,500 common
shares at a price of $0.18 per share, subject to standard adjustment
provisions. The second warrant entitles the holder, also for a period of
up to five years, to purchase up to 10,937,500 additional common shares at
a
price of $0.60 per share, subject to standard adjustment provisions.
As
part
of the financing transaction, we also entered into a certain Registration Rights
Agreement with Barron Partners, LP pursuant to which we became committed to
registering all of the shares issued as part of such transaction, including
those issuable under the warrants.
Upon
receipt of the requisite stockholder approval to increase the number of
authorized common shares so as to allow us to deliver the warrants, effectively
obtained and effectuated as of November 10, 2004, we had 30 days within which
to
file a registration statement on Form SB-2 covering the
shares issued to Barron Partners, as well as the shares underlying the warrants
issued to Barron Partners. Accordingly, this registration statement was
filed
on
November 22, 2004. On
February 1, 2006, the SEC declared this registration statement effective.
Due to
continued delays in effectiveness of this registration statement (due
principally to ongoing efforts made necessary by our determination to restate
certain of our historical financial information), and in accordance with
the
Registration Rights Agreement, we accrued a total of approximately $490,000
(284
days at $1,726 per day) in penalties, of which we had paid $150,000 prior
to
April 7, 2006. On April 7, 2006, we issued a two-year promissory note for
$336,000 together with simple interest at the rate of 8% per annum to Barron
Partners for the unpaid registration rights penalties. The note agreement
calls
for monthly installments for the first twelve months of $10,000, beginning
May
1, 2006 and $20,000 per month thereafter. The accrual and payment on the
registration rights penalties has had a material adverse effect on our business,
our financial condition, including liquidity and profitability, and our results
of operations.
As
of the
date hereof, Barron Partners, LP owns 44.0% of our outstanding common stock
and,
subject to the restrictions contained in Article VII, subsection B of our
Articles of Incorporation, controls the vote associated with such
shares.
The
validity of the securities being registered by this registration statement
is
being passed upon for the registrant by the legal firm of M.M. Membrado,
PLLC,
corporate counsel to the Registrant. Membrado has, in the past, either directly
or through its affiliates, received warrants currently exercisable to purchase
150,000 shares of common stock at an exercise price of $0.022 per share and
300,000 shares of common stock at an exercise price of $0.13 per share. These
warrants expire between April 7, 2009 and March 30, 2009, respectively.
On
July
19, 2004, we entered into a certain Stock Purchase Agreement pursuant to which
we agreed to issue and sell 21,875,000 restricted shares of our common stock
to
Barron Partners, LP, a New York based institutional investor, at a price of
$0.08 per share. The Regulation D Rule 506 private placement transaction, which
closed on July 26, 2004, resulted in gross equity financing proceeds to us
in the amount of $1,750,000. As of the date hereof, Barron Partners, LP owns
44.0% of our outstanding common stock and, subject to the restrictions contained
in Article VII, subsection B of our articles of incorporation, controls the
vote
associated with such shares. Under the terms of transaction (as subsequently
amended), Barron Partners, LP received two of our common stock purchase
warrants. The first warrant entitles the holder, for a period of up to five
years from November 10, 2004, to purchase up to 10,937,500 common shares at
a
price of $0.18 per share, subject to adjustment based on the occurrence of
certain events. The second warrant entitles the holder, also for a period of
up
to five years from November 10, 2004, to purchase up to 10,937,500 additional
common shares at a price of $0.60 per share, also subject to adjustment based
on
the occurrence of certain events.
In
addition to the shares of our common stock issued to Barron Partners, LP and
the
common stock issuable upon exercise of the warrants issued to Barron Partners,
LP, we are also registering the following:
|
•
|
2,000,000
shares of our common stock issued as of November 16, 2004 upon conversion
of $240,000 of previously outstanding debt securities;
|
|
|
•
|
466,666
shares of our common stock issued as of December 31, 2004 upon
conversion of $23,333 of previously outstanding debt securities;
and
|
|
•
|
1,125,000
shares of our common stock issuable upon exercise of warrants previously
issued to a number of our consultants/service providers.
|
The
following table sets forth the following information as of the date of this
prospectus, with respect to Barron Partners, LP and the other selling
stockholders for whom we are registering shares for resale to the public:
(1)
the name of each selling stockholder, (2) the number of shares of our common
stock beneficially owned by each selling stockholder, including the number
of
shares purchasable upon exercise within 60 days of warrants, (3) the number
of
shares of common stock registered for sale pursuant to this prospectus, (4)
the
number of shares of common stock that the selling stockholders would own
if they
sold all of their shares registered by this prospectus, and (5) the percentage
of our outstanding common stock that would be beneficially owned by such
selling
stockholder if they sold all of their shares registered by this prospectus.
Except
as
set forth below, none of the selling stockholders currently is an affiliate
of
ours, and none of them has had a material relationship with us during the past
three years. An asterisk in the table indicates a corresponding common stock
ownership of less than one percent (1%).
|
Selling
Stockholder
|
Number
of Shares
Beneficially
Owned
Prior to
Offering
|
Number
of Shares
Being Registered
For Sale
in this Prospectus
|
Number
of Shares
to be Beneficially
Owned
After the
Offering
|
Percentage
of
Outstanding
Shares
to be
Owned
After the
Offering(1)
|
|
||||||||
|
Barron
Partners, LP (2)
|
43,750,000
|
43,750,000
|
---
|
*
|
|||||||||
|
|
|||||||||||||
|
C.
James Jensen (3)
|
1,000,000
|
1,000,000
|
---
|
*
|
|||||||||
|
|
|||||||||||||
|
2030
Investors, LLC (4)
|
1,000,000
|
1,000,000
|
---
|
*
|
|||||||||
|
|
|||||||||||||
|
Robert
Chamberlain (5)
|
62,500
|
62,500
|
---
|
*
|
|||||||||
| Kevin Reagan (6) | 62,500 | 62,500 | --- | * | |||||||||
|
|
|||||||||||||
|
Michael
M. Membrado (7)
|
150,000
|
150,000
|
---
|
*
|
|||||||||
|
|
|||||||||||||
|
Ronald
Ardt (8)
|
1,891,599
|
716,666
|
1,174,933
|
1.60
|
% | ||||||||
|
|
|||||||||||||
|
Joseph
Abrams (9)
|
600,000
|
600,000
|
---
|
*
|
|||||||||
|
|
|||||||||||||
|
Total
|
48,516,599
|
47,341,666
|
1,174,933
|
1.60
|
% |
*
Represents less than one percent.
|
|
(1)
|
Assumes
that the selling stockholders will resell all of the registered
shares.
Because the selling stockholders may sell all, some or none of
their
shares or may acquire or dispose of other shares of common stock,
no
reliable estimate can be made of the aggregate number of shares
that will
be sold pursuant to this offering or the number or percentage of
shares of
common stock that each stockholder will own upon completion of
this
offering.
|
|
|
(2)
|
Includes
21,875,000 unregistered common shares issued to an accredited
investor
pursuant to the private offering exemption of Section 4(2)
of the
Securities Act and/or the private offering safe harbor provision
of Rule
506 of Regulation D promulgated thereunder, for consideration
in the
amount of $1,750,000, as based on the value of our securities
on the date
of issuance. Further includes two unregistered common stock
warrants each
issued to an accredited investor pursuant to the private offering
exemption of Section 4(2) of the Securities Act and/or the
private
offering safe harbor provision of Rule 506 of Regulation D
promulgated
thereunder, each for consideration in the amount of $576,042,
as based on
the value of our securities on the date of issuance. The first
warrant
would entitle the holder to purchase up to 10,937,500 common
shares at a
price of $0.18 per share, subject
to standard adjustment provisions and the second warrant would
entitle the holder to purchase up to 10,937,500 additional
common shares
at a price of $0.60 per share, also subject
to standard adjustment provisions. By virtue of these holdings,
Barron Partners, LP is deemed to be an “affiliate” of ours and is
therefore subject to certain regulations not otherwise applicable.
Voting
and/or investment power over these common shares and warrants
is held by
Andrew Barron Worden, a principal in the general partnership
of Barron
Partners, LP. Barron
Partners, LP has represented to us that it was neither a broker-dealer
nor
an affiliate of any broker-dealer at the time of the acquisition
and had
no agreements, understandings or arrangements with any other
persons,
either directly or indirectly, to dispose of any of the securities
being
registered
hereunder.
|
|
|
(3)
|
Includes
1,000,000 unregistered common shares acquired as of November
16, 2004 upon
conversion of a promissory note, in accordance with Section 3(a)(9),
which
note was originally issued September 30, 2004 to an accredited
investor
pursuant to the private offering exemption of Section 4(2) of
the
Securities Act and/or the private offering safe harbor provision
of Rule
506 of Regulation D promulgated thereunder, for consideration
in the
amount of $120,000, as based on the value of our securities on
the date of
issuance, in connection with a loan to us in the same amount.
C. James
Jensen has represented to us that he was not affiliated with
any
broker-dealer at the time of the acquisition and had no agreements,
understandings or arrangements with any other persons, either
directly or
indirectly, to dispose of any of the securities being registered
hereunder.
|
|
|
(4)
|
Includes
1,000,000 unregistered common shares acquired as of November
16, 2004 upon
conversion of a promissory note, in accordance with Section 3(a)(9)
of the
Securities Act, which note was originally issued September 30,
2004
pursuant to the private offering exemption of Section 4(2) of
the
Securities Act and/or the private offering safe harbor provision
of Rule
506 of Regulation D promulgated thereunder, for consideration
in the
amount of $120,000, as based on the value of our securities on
the date of
issuance, in connection with a loan to us in the same amount.
Voting
and/or investment power over these common shares is held by Ellison
Morgan
of 2030 Investors, LLC. 2030
Investors, LLC has represented to us that it was neither a broker-dealer
nor an affiliate of any broker-dealer at the time of the acquisition
and
had no agreements, understandings or arrangements with any other
persons,
either directly or indirectly, to dispose of any of the securities
being
registered
hereunder.
|
|
|
(5)
|
Includes
a single unregistered warrant to purchase a total of 62,500
common shares
at a price of $0.148 per share issued as of February 19, 2001
under the
private offering exemption of Section 4(2) of the Securities
Act and/or
the private offering safe harbor provision of Rule 506 of Regulation
D
promulgated thereunder, in partial consideration of certain
business
consulting services. The value attributed to the warrant was
$19,750, as
based on the value of our securities on the date of issuance.
Mr.
Chamberlain has represented to us that he was not affiliated
with any
broker-dealer at the time of the acquisition and had no agreements,
understandings or arrangements with any other persons, either
directly or
indirectly, to dispose of any of the securities being registered
hereunder.
|
|
|
(6)
|
Includes
a single unregistered warrant to purchase a total of 62,500
common shares
at a price of $0.148 per share issued as of February 19, 2001
under the
private offering exemption of Section 4(2) of the Securities
Act and/or
the private offering safe harbor provision of Rule 506 of Regulation
D
promulgated thereunder, in partial consideration of certain
business
consulting services. The value attributed to the warrant was
$19,750, as
based on the value of our securities on the date of issuance.
Mr. Reagan
has represented to us that he was not affiliated with any broker-dealer
at
the time of the acquisition and had no agreements, understandings
or
arrangements with any other persons, either directly or indirectly,
to
dispose of any of the securities being registered
hereunder.
|
|
|
(7)
|
Includes
a single unregistered warrant to purchase up to 150,000 common
shares at a
price of $0.022 per share issued as of April 7, 2004 pursuant
to the
private offering exemption of Section 4(2) of the Securities
Act and/or
the private offering safe harbor provision of Rule 506 of Regulation
D
promulgated thereunder, in consideration of the granting of extension
of
payment terms on amounts previously owed. The value attributable
to the
warrant was $3,300, as based on the value of our securities on
the date of
issuance. Mr. Membrado is the sole principal of M.M. Membrado,
PLLC our
corporate legal counsel. Voting and/or investment power over
this warrant
is held by Michael M. Membrado of M.M. Membrado, PLLC. Mr.
Membrado has represented to us that he was not affiliated with
any
broker-dealer at the time of the acquisition and had no agreements,
understandings or arrangements with any other persons, either
directly or
indirectly, to dispose of any of the securities being registered
hereunder.
|
|
|
(8)
|
Includes
the following:
(a)
668,625 common shares beneficially owned directly, including
(i) 35,500
common shares acquired as of April 28, 2000 pursuant to the private
offering exemption of Section 4(2) of the Securities Act and/or
the
private offering safe harbor provision of Rule 506 of Regulation
D
promulgated thereunder, in consideration of a cash investment
of $71,000
($2.00 per share), (ii) an additional 22,875 common shares acquired
as of
April 28, 2000 pursuant to the private offering exemption of
Section 4(2)
of the Securities Act and/or the private offering safe harbor
provision of
Rule 506 of Regulation D promulgated thereunder, in consideration
of part
of a 15% placement agent commission payable in connection with
a previous
private offering by us (based on $2.00 per share), (iii) 10,000
common
shares acquired as of August 18, 2000 pursuant to the private
offering
exemption of Section 4(2) of the Securities Act and/or the private
offering safe harbor provision of Rule 506 of Regulation D promulgated
thereunder, in consideration of a certain corporate development
consulting
agreement, (iv) 204,000 common shares acquired as of March 7,
2002
pursuant to the private offering exemption of Section 4(2) of
the
Securities Act and/or the private offering safe harbor provision
of Rule
506 of Regulation D promulgated thereunder, in consideration
of a
settlement of a claim by Mr. Ardt for failure on our part to
have
fulfilled certain registration obligations associated with common
shares
previously sold to him, (v) a warrant to purchase up to 250,000
common
shares, acquired as of June 3, 2002 pursuant to the private offering
exemption of Section 4(2) of the Securities Act and/or the private
offering safe harbor provision of Rule 506 of Regulation D promulgated
thereunder, in consideration of the satisfaction of $ 27,917.68
in
consulting fees then due, (vi) 137,250 common shares acquired
as of
September 20, 2002 pursuant to the private offering exemption
of Section
4(2) of the Securities Act and/or the private offering safe harbor
provision of Rule 506 of Regulation D promulgated thereunder,
in further
consideration of the settlement for failure on our part to have
fulfilled
certain registration obligations associated with common shares
previously
sold to Mr. Ardt, and (vii) an additional 9,000 common shares
acquired as
of September 20, 2002 pursuant to the private offering exemption
of
Section 4(2) of the Securities Act and/or the private offering
safe harbor
provision of Rule 506 of Regulation D promulgated thereunder,
in
consideration of delays in issuing shares associated with the
settlement
for failure on our part to have fulfilled certain registration
obligations
associated with common shares previously sold to Mr. Ardt.
(b)
901,666 common shares beneficially owned through Business Investor
Services, Inc., including (i) 60,000 common shares acquired as
of April
28, 2000 pursuant to the private offering exemption of Section
4(2) of the
Securities Act and/or the private offering safe harbor provision
of Rule
506 of Regulation D promulgated thereunder, in consideration
of a cash
investment of $71,000 ($2.00 per share), (ii) 15,000 common shares
acquired as of August 18, 2000 pursuant to the private offering
exemption
of Section 4(2) of the Securities Act and/or the private offering
safe
harbor provision of Regulation D promulgated thereunder, in consideration
of a certain corporate development consulting agreement, (iii)
360,000
common shares acquired as of March 7, 2002 pursuant to the private
offering exemption of Section 4(2) of the Securities Act and/or
the
private offering safe harbor provision of Rule 506 of Regulation
D
promulgated thereunder, in consideration of a settlement of a
claim by
Business Investor Services, Inc. for failure on our part to have
fulfilled
certain registration obligations associated with common shares
previously
sold to it, and (iv) 466,666 common shares acquired pursuant
to Section
3(a)(9) under the Securities Act as of December 31, 2004 upon
partial
conversion (in the amount of $23,333.33) of a convertible promissory
note
in the original face amount of $33,333 originally issued on May
31, 2002
pursuant to the private offering exemption of Section 4(2) of
the
Securities Act and/or the private offering safe harbor provision
of Rule
506 of Regulation D promulgated thereunder.
(c)
321,308 common shares beneficially owned through Ardt Investment
Management, Inc., including (i) 25,000 common shares acquired
as of August
18, 2000 pursuant to the private offering exemption of Section
4(2) of the
Securities Act and/or the private offering safe harbor provision
of
Regulation D promulgated thereunder, in consideration of a certain
corporate development consulting agreement, and (ii) a warrant
to purchase
up to 296,308 common shares acquired as of November 8, 2002 pursuant
to
the private offering exemption of Section 4(2) of the Securities
Act
and/or the private offering safe harbor provision of Rule 506
of
Regulation D promulgated thereunder, in consideration of the
satisfaction
of $8,869 in consulting fees then due.
Voting
and/or investment power over all of these securities is held
by Ronald
Ardt. At the time of each of these acquisitions except for that
one
occurring in 2004, Mr. Ardt was the owner and securities principal
of
Travis Morgan Securities, Inc. then an NASD registered broker-dealer,
and was a securities principal in an OSJ (Office of Supervisory
Jurisdiction) with RichMark Capital Corporation, also then an
NASD
registered broker-dealer, up until July 16, 2000. Since 2003,
Mr. Ardt has
been a securities principal with Worth Securities Inc. (formerly
ProMark
Securities Inc.). Also at the time of these acquisitions, Mr.
Ardt had no
agreements, understandings or arrangements with any other persons,
either
directly or indirectly, to dispose of any of the securities being
registered hereunder.
|
|
|
(9)
|
Includes
a single unregistered warrant to purchase up to 600,000 common
shares at a
price of $0.15 per share issued as of May 21, 2004 under the
private
offering exemption of Section 4(2) of the Securities Act and/or
the
private offering safe harbor provision of Rule 506 of Regulation
D
promulgated thereunder, in consideration of certain business
consulting
services in an amount equal to $59,915, as based on the value
of our
securities on the date of issuance. Joseph Abrams has represented
to us
that he was not an affiliate of any broker-dealer at the time
of the
acquisition and had no agreements, understandings or arrangements
with any
other persons, either directly or indirectly, to dispose of any
of the
securities being registered
hereunder.
|
Each
selling stockholder is free to offer and sell his or her shares of our common
stock at such times, in such manner and at such prices as he or she may
determine. The types of transactions in which the shares of our common stock
are
sold may include transactions in the over-the-counter market (including block
transactions), negotiated transactions, the settlement of short sales of our
common stock, or a combination of such methods of sale. The sales will be at
market prices prevailing at the time of sale or at negotiated prices. Such
transactions may or may not involve brokers or dealers. The selling stockholders
have advised us that they have not entered into agreements, understandings
or
arrangements with any underwriters or broker-dealers regarding the sale of
their
shares. The selling stockholders do not have an underwriter or coordinating
broker acting in connection with the proposed sale of our common stock.
The
selling stockholders may sell their shares directly to purchasers or to or
through broker-dealers, which may act as agents or principals. These
broker-dealers may receive compensation in the form of discounts, concessions
or
commissions from the selling stockholders. They may also receive compensation
from the purchasers of our common stock for whom such broker-dealers may act
as
agents or to whom they sell as principal, or both (which compensation as to
a
particular broker-dealer might be in excess of customary commissions).
Barron
Partners, LP is, and each of the other selling stockholders and any
broker-dealer that assists in the sale of our common stock may be deemed to
be,
an “underwriter” within the meaning of Section 2(a)(11) of the Securities Act.
Any commissions received by such broker-dealers and any profit on the resale
of
the shares of our common stock sold by them while acting as principals might
be
deemed to be underwriting discounts or commissions. The selling stockholders
may
agree to indemnify broker-dealers for transactions involving sales of our common
stock against certain liabilities, including liabilities arising under the
Securities Act.
Because
Barron Partners, LP is, and each of the other selling stockholders may be deemed
to be, an underwriter within the meaning of Section 2(a)(11) of the Securities
Act, Barron Partners, LP, and the other selling stockholders will be subject
to
prospectus delivery requirements.
Prior
to
any sales of the shares being registered hereunder, we will have informed Barron
Partners, LP that the anti-manipulation rules of the SEC, including Regulation
M
promulgated under the Securities Exchange Act, will apply to its sales in the
market, and we will have informed the other selling stockholders that these
anti-manipulation rules may apply to their sales in the market. Also prior
to
any sales of the shares being registered hereunder, we will have provided all
of
the selling stockholders with a copy of such rules and regulations.
Regulation
M may limit the timing of purchases and sales of any of the shares of our common
stock by the selling stockholders and any other person distributing our common
stock. The anti-manipulation rules under the Securities Exchange Act may apply
to sales of shares of our common stock in the market and to the activities
of
the selling stockholders and their affiliates. Furthermore, Regulation M of
the
Securities Exchange Act may restrict the ability of any person engaged in the
distribution of shares of our common stock to engage in market-making activities
with respect to the particular shares of common stock being distributed for
a
period of up to five business days prior to the commencement of such
distribution. All of the foregoing may affect the marketability of our common
stock and the ability of any person or entity to engage in market-making
activities with respect to our common stock.
Rules
101
and 102 of Regulation M under the Securities Exchange Act, among other things,
generally prohibit certain participants in a distribution from bidding for
or
purchasing for an account in which the participant has a beneficial interest,
any of the securities that are the subject of the distribution. Rule 104 of
Regulation M governs bids and purchases made to stabilize the price of a
security in connection with a distribution of the security.
Barron
Partners, LP and the other selling stockholders will pay all commissions,
transfer taxes and other expenses associated with their sales. The shares
offered hereby are being registered pursuant to our contractual obligations,
and
we have agreed to pay the expenses of the preparation of this prospectus.
The
following summary description of our capital stock is a summary and is qualified
in its entirety by reference to our articles of incorporation, as amended to
date, and our bylaws. All material terms of these referenced documents are
disclosed in this document.
We have
an authorized capitalization of 120,000,000 shares of common stock, $.001 par
value per share and 5,000,000 authorized shares of preferred stock, $.001 par
value per share. Our articles of incorporation authorize our board of directors
to direct the issuance of shares of preferred stock in one or more series from
time to time and to fix the designations, powers, preferences, rights,
qualifications, limitations and restrictions of each series of preferred stock.
These may include voting rights, dividend rates and whether dividends are
cumulative, terms and conditions of redemption or conversion, and rights upon
liquidation.
We
have
an authorized capitalization of 120,000,000 shares of common stock, $.001
par
value per share. As of March 30, 2007, there were 49,788,317 shares of
our common stock issued and outstanding. The holders of our common stock
are
entitled to one non-cumulative vote for each share held of record on all
matters
submitted to a vote of stockholders. Subject to preferences that may be
applicable to outstanding shares of preferred stock, if any, the holders
of
common stock are entitled to receive ratably any dividends that are declared
by
our board of directors out of funds legally available therefore and are entitled
to share ratably in all of our assets available for distribution to holders
of
our common stock upon liquidation, dissolution or winding up of our affairs.
Holders of our common stock have no preemptive, subscription or conversion
rights and there are no redemption or sinking fund provisions or rights
applicable thereto.
We
have an authorized capitalization of 5,000,000 authorized shares of
preferred stock, $.001 par value per share. Our board of directors, without
stockholder approval, may designate and issue from time to time various series
of preferred stock with rights, preferences and privileges as they deem
appropriate, including without limitation liquidation preferences, redemption
rights, consent rights, voting rights and conversion rights (including those
containing anti-dilution protections) that could materially and adversely impact
of the interests of holders of our common stock. The issuance of preferred
stock
could also decrease the amount of earnings and assets available for distribution
to holders of our common stock. In addition, the issuance of preferred stock
may
have the effect of delaying or preventing a change of our control.
Although
we have previously designated and had issued and outstanding two series
of
convertible preferred stock, all shares of such serial preferred stocks
have
since been converted to common stock and, as of March 30, 2007, there were
no outstanding shares of our preferred stock. We have no present intention
or
plans to designate any series, or to issue any additional shares, of preferred
stock. There can be no assurance, however, that we will not designate and
issue
additional series of preferred stock in the future.
Payment
of dividends is solely at the discretion of our board of directors. We have
never declared cash dividends on our capital stock. We currently intend to
retain all available funds and any future earnings for use in the operation
and
expansion of our business and do not anticipate paying any cash dividends in
the
foreseeable future.
Our
common stock is traded on the OTC Bulletin Board, a service provided by the
Nasdaq Stock Market Inc., under the symbol, “FIND”.
The
following table sets forth for the periods indicated the high and low bid prices
for our common stock as reported each quarterly period within the
last three fiscal years on the OTC Bulletin Board, and as obtained from
BigCharts.com. The prices are inter-dealer prices, do not include retail
mark-up, markdown or commission and may not necessarily represent actual
transactions.
Common
Stock
|
2004
|
High
|
Low
|
|||||
|
First
Quarter
|
$
|
0.055
|
$
|
0.020
|
|||
|
Second
Quarter
|
$
|
0.400
|
$
|
0.018
|
|||
|
Third
Quarter
|
$
|
0.250
|
$
|
0.090
|
|||
|
Fourth
Quarter
|
$
|
0.190
|
$
|
0.060
|
|||
|
2005
|
High
|
Low
|
|||||
|
First
Quarter
|
$
|
0.150
|
$
|
0.070
|
|||
|
Second
Quarter
|
$
|
0.150
|
$
|
0.090
|
|||
|
Third
Quarter
|
$
|
0.140
|
$
|
0.070
|
|||
|
Fourth
Quarter
|
$
|
0.170
|
$
|
0.070
|
|||
|
2006
|
High
|
|
Low
|
|
|||
|
First
Quarter
|
$
|
0.150
|
$
|
0.090
|
|||
|
Second
Quarter
|
$
|
0.150
|
$
|
0.040
|
|||
|
Third
Quarter
|
$
|
0.080
|
$
|
0.030
|
|||
|
Fourth
Quarter
|
$
|
0.060
|
$
|
0.030
|
On March
29, 2007, the closing bid price of our common stock was $0.037 and there
were
approximately 800 stockholders of record, excluding stock held in street
name.
The
SEC
has adopted Rule 15g-9 under the Securities Exchange Act of 1934 which
establishes the definition of a “penny stock” for the purposes relevant to us,
as any equity security having a market price of less than $5.00 per share or
carrying an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
|
•
|
that
a broker or dealer approve a person’s
account for transactions in penny stocks; and
|
|
•
|
the
broker or dealer receive from the investor a written agreement to
the
transaction, setting forth the identity and quantity of the penny
stock to
be purchased.
|
In
order
to approve a person’s account for transactions in penny stocks, the broker or
dealer must:
|
•
|
obtain
financial information and investment experience objectives of the
person;
and
|
|
•
|
make
a reasonable determination that the transactions in penny stocks
are
suitable for that person and the person has sufficient knowledge
and
experience in financial matters to be capable of evaluating the
risks of
transactions in penny stocks.
|
The
broker or dealer must also deliver, prior to any transaction in a penny stock,
a
disclosure schedule prescribed by the SEC relating to the penny stock market,
which, in highlight form:
|
•
|
sets
forth the basis on which the broker or dealer made the suitability
determination; and
|
|
•
|
that
the broker or dealer received a signed, written agreement from
the
investor prior to the transaction.
|
Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both
the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account
and
information on the limited market in penny stocks.
For
these
reasons, and generally, brokers may be less willing to execute transactions
in
securities subject to the penny stock rules. This may make it more difficult
for
investors to dispose of our common stock and cause a decline in the market
value
of our stock.
The
transfer agent for our common stock is Continental Stock Transfer and Trust
Company, 2 Broadway, New York, New York 10004.
M.M.
Membrado, PLLC, 115 East 57th
Street,
Suite 1006, New York, New York, 10022 has passed on the validity of the shares
of common stock and underlying the shares of common stock previously unexercised
warrants offered hereby.
The
audited consolidated financial statements included in this prospectus have
been
audited by Brimmer, Burek & Keelan LLP and Chisholm, Bierwolf & Nilson,
LLC, independent certified public accountants, and are included herein in
reliance upon the report of said firms given upon their authority as experts
in
accounting and auditing.
We
have
filed with the SEC a registration statement on Form SB-2 under the Securities
Act with respect to the common stock offered hereby. This prospectus does
not
contain all of the information set forth in the rules and regulations of
the
SEC. For further information with respect to our company and this offering,
we
refer you to the registration statement and exhibits filed as part of it.
You
may inspect the registration statement, including the exhibits thereto, without
charge at the Public Reference Room of the SEC at 100 F Street, N.E., Room
1580,
Washington, D.C. 20549. You may also obtain copies of all or any portion
of the
registration statement from the Public Reference Room, upon payment of the
prescribed fees. You may obtain information on the operation of the Public
Reference Room by calling the SEC at (202) 942-8090. You may also access
such
material electronically by means of the SEC’s home page on the Internet located
at www.sec.gov.
Descriptions contained in this prospectus as to the contents of any contract
or
other document filed as an exhibit to the registration statement are not
necessarily complete and each such description is qualified by reference
to such
contract or document.
-70-
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|||||||
|
|
|||||||
|
|
(Unaudited)
|
||||||
|
|
September
30, 2006
|
December
31, 2005
|
|||||
|
Assets
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
992
|
$
|
119,560
|
|||
|
Accounts
receivable, trade, net
|
270,209
|
405,380
|
|||||
|
Inventory
|
151,013
|
214,604
|
|||||
|
Other
current assets
|
235,887
|
128,206
|
|||||
|
Total
current assets
|
658,101
|
867,750
|
|||||
|
Property
and equipment, net
|
79,985
|
114,191
|
|||||
|
Software
license, net
|
1,384,645
|
1,762,276
|
|||||
|
Capitalized
software development costs, net
|
518,216
|
707,067
|
|||||
|
Other
assets
|
276,568
|
253,001
|
|||||
|
Total
assets
|
$
|
2,917,515
|
$
|
3,704,285
|
|||
|
|
|||||||
|
Liabilities
and stockholders’ equity
|
|||||||
|
Current
liabilities:
|
|||||||
|
Note
payable
|
$
|
75,000
|
$
|
---
|
|||
|
Accounts
payable, trade
|
712,411
|
556,042
|
|||||
|
Accrued
royalties
|
574,129
|
472,548
|
|||||
|
Derivative
liabilities
|
952,914
|
2,062,462
|
|||||
|
Other
current liabilities
|
551,991
|
802,395
|
|||||
|
Total
current liabilities
|
2,866,445
|
3,893,447
|
|||||
|
Long-term
obligations
|
156,961
|
52,891
|
|||||
|
Commitments
and contingencies (Note 8)
|
|||||||
|
Stockholders’
equity:
|
|||||||
|
Common
stock
|
49,558
|
48,620
|
|||||
|
Paid-in
capital
|
7,595,437
|
7,461,424
|
|||||
|
Retained
(deficit)
|
(7,750,886
|
)
|
(7,752,097
|
)
|
|||
|
Total
stockholders’ equity
|
(105,891
|
)
|
(242,053
|
)
|
|||
|
Total
liabilities and stockholders’ equity
|
$
|
2,917,515
|
$
|
3,704,285
|
|||
|
|
|||||||
|
See
accompanying notes.
|
|||||||
|
Findex.com,
Inc.
|
|||||||||||||
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|||||||||||||
|
(Unaudited)
|
|||||||||||||
|
|
|||||||||||||
|
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||
|
|
September
30,
|
September
30,
|
|||||||||||
|
|
2006
|
2005
|
2006
|
2005
|
|||||||||
|
Revenues,
net of reserves and allowances
|
$
|
826,127
|
$
|
1,023,609
|
$
|
2,586,197
|
$
|
3,978,019
|
|||||
|
Cost
of sales
|
391,771
|
450,413
|
1,361,157
|
1,410,191
|
|||||||||
|
Gross
profit
|
434,356
|
573,196
|
1,225,040
|
2,567,828
|
|||||||||
|
Operating
expenses:
|
|||||||||||||
|
Sales
and marketing
|
193,223
|
562,868
|
580,684
|
1,297,836
|
|||||||||
|
General
and administrative
|
385,658
|
212,261
|
1,310,340
|
1,419,057
|
|||||||||
|
Other
operating expenses
|
133,146
|
152,336
|
424,567
|
466,553
|
|||||||||
|
Total
operating expenses
|
712,027
|
927,465
|
2,315,591
|
3,183,446
|
|||||||||
|
Loss
from operations
|
(277,671
|
)
|
(354,269
|
)
|
(1,090,551
|
)
|
(615,618
|
)
|
|||||
|
Other
expenses, net
|
(47,898
|
)
|
(5,234
|
)
|
(57,929
|
)
|
(12,009
|
)
|
|||||
|
Registration
rights penalties
|
---
|
(158,792
|
)
|
(49,314
|
)
|
(277,792
|
)
|
||||||
|
Gain
(loss) on valuation adjustment of derivatives
|
237,009
|
(328,121
|
)
|
1,109,548
|
(874,992
|
)
|
|||||||
|
Loss
before income taxes
|
(88,560
|
)
|
(846,416
|
)
|
(88,246
|
)
|
(1,780,411
|
)
|
|||||
|
Income
tax (provision) benefit
|
114,909
|
(111,976
|
)
|
89,457
|
187,182
|
||||||||
|
Net
income (loss)
|
$
|
26,349
|
$
|
(958,392
|
)
|
1,211
|
(1,593,229
|
)
|
|||||
|
Retained
deficit at beginning of year
|
(7,752,097
|
)
|
(6,170,830
|
)
|
|||||||||
|
Retained
deficit at end of period
|
$
|
(7,750,886
|
)
|
$
|
(7,764,059
|
)
|
|||||||
|
Net
income (loss) per share:
|
|||||||||||||
|
Basic
|
$
|
0.00
|
$
|
(0.02
|
)
|
$
|
0.00
|
$
|
(0.03
|
)
|
|||
|
Diluted
|
$
|
0.00
|
$
|
(0.02
|
)
|
$
|
0.00
|
$
|
(0.03
|
)
|
|||
|
|
|||||||||||||
|
Weighted
average shares outstanding:
|
|||||||||||||
|
Basic
|
49,558,317
|
48,619,855
|
49,294,214
|
48,619,855
|
|||||||||
|
Diluted
|
51,167,410
|
48,619,855
|
51,660,240
|
48,619,855
|
|||||||||
|
|
|||||||||||||
|
See
accompanying notes.
|
|||||||||||||
|
Findex.com,
Inc.
|
|||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|||||||
|
(Unaudited)
|
|||||||
|
|
|||||||
|
Nine
Months Ended September 30
|
2006
|
2005
|
|||||
|
Cash
flows from operating activities:
|
|||||||
|
Cash
received from customers
|
$
|
2,683,215
|
$
|
4,049,153
|
|||
|
Cash
paid to suppliers and employees
|
(2,375,960
|
)
|
(3,565,309
|
)
|
|||
|
Other
operating activities, net
|
(16,204
|
)
|
(3,910
|
)
|
|||
|
Net
cash provided by operating activities
|
291,051
|
479,934
|
|||||
|
Cash
flows from investing activities:
|
|||||||
|
Software
development costs
|
(412,108
|
)
|
(766,151
|
)
|
|||
|
Other
investing activities, net
|
(12,955
|
)
|
15,300
|
||||
|
Net
cash (used) by investing activities
|
(425,063
|
)
|
(750,851
|
)
|
|||
|
Cash
flows from financing activities:
|
|||||||
|
Proceeds
from note payable, net
|
75,000
|
---
|
|||||
|
Payments
made on long-term notes payable
|
(59,556
|
)
|
(30,604
|
)
|
|||
|
Net
cash provided (used) by financing activities
|
15,444
|
(30,604
|
)
|
||||
|
Net
(decrease) in cash and cash equivalents
|
(118,568
|
)
|
(301,521
|
)
|
|||
|
Cash
and cash equivalents, beginning of year
|
119,560
|
341,359
|
|||||
|
Cash
and cash equivalents, end of period
|
$
|
992
|
$
|
39,838
|
|||
|
|
|||||||
|
Reconciliation
of net income (loss) to cash flows from operating
activities:
|
|||||||
|
Net
income (loss)
|
$
|
1,211
|
$
|
(1,593,229
|
)
|
||
|
Adjustments
to reconcile net income (loss) to net cash
|
|||||||
|
provided
by operating activities:
|
|||||||
|
Software
development costs amortized
|
600,959
|
524,989
|
|||||
|
(Gain)
loss on fair value adjustment of derivatives
|
(1,109,548
|
)
|
874,992
|
||||
|
Bad
debts (benefit) provision
|
(11,216
|
)
|
29,650
|
||||
|
Depreciation
& amortization
|
435,783
|
436,903
|
|||||
|
Noncash
operating expenses
|
69,997
|
---
|
|||||
|
Loss
on disposal of property and equipment
|
1,746
|
1,869
|
|||||
|
Change
in assets and liabilities:
|
|||||||
|
Decrease
in accounts receivable
|
146,387
|
71,786
|
|||||
|
Decrease
in inventories
|
63,591
|
22,231
|
|||||
|
Decrease
in refundable taxes
|
5,764
|
7,164
|
|||||
|
(Increase)
decrease in prepaid expenses
|
(7,603
|
)
|
55,509
|
||||
|
Increase
in accrued royalties
|
101,581
|
40,831
|
|||||
|
Increase
in accounts payable
|
164,327
|
65,858
|
|||||
|
Increase
in income taxes payable
|
---
|
180
|
|||||
|
(Decrease)
in deferred taxes
|
(89,457
|
)
|
(187,362
|
)
|
|||
|
(Decrease)
increase in other liabilities
|
(82,471
|
)
|
128,563
|
||||
|
Net
cash provided by operating activities
|
$
|
291,051
|
$
|
479,934
|
|||
|
|
|||||||
|
See
accompanying notes.
|
|||||||
F-3
Findex.com,
Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2006
(Unaudited)
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS
OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements
have been
prepared in accordance with Generally Accepted Accounting Principles
for interim
financial information and with the instructions to Form 10-QSB and
Item 310 of
Regulation S-B. Accordingly, they do not include all of the information
and
footnotes required by Generally Accepted Accounting Principles for
complete
financial statements. The accompanying unaudited condensed consolidated
financial statements reflect all adjustments that, in the opinion of
management,
are considered necessary for a fair presentation of the financial position,
results of operations, and cash flows for the periods presented. The
results of
operations for such periods are not necessarily indicative of the results
expected for the full fiscal year or for any future period. The accompanying
financial statements should be read in conjunction with the audited
consolidated
financial statements of Findex.com, Inc. included in our Form 10-KSB
for the
fiscal year ended December 31, 2005.
USE
OF ESTIMATES
The
preparation of consolidated financial statements in conformity with
Generally
Accepted Accounting Principles requires management to make estimates
and
assumptions that affect the amounts reported in the financial statements
and the
accompanying notes. Significant estimates used in the consolidated
financial
statements include the estimates of (i) doubtful accounts, sales
returns, price
protection and rebates, (ii) provision for income taxes and realizability
of the
deferred tax assets, and (iii) the life and realization of identifiable
intangible assets. The amounts we will ultimately incur or recover
could differ
materially from current estimates.
INVENTORY
Inventory,
including out on consignment, consists primarily of software media,
manuals and
related packaging materials and is recorded at the lower of cost or
market
value, determined on a first-in, first-out, and adjusted on a per-item,
basis.
ACCOUNTING
FOR LONG-LIVED ASSETS
We
review
property and equipment and intangible assets for impairment whenever
events or
changes in circumstances indicate that the carrying amount of an asset
may not
be recoverable. Recoverability is measured by comparison of our carrying
amount
to future net cash flows the assets are expected to generate. If such
assets are
considered to be impaired, the impairment to be recognized is measured
by the
amount by which the carrying amount of the asset exceeds its fair market
value.
Property and equipment to be disposed of are reported at the lower
of the
carrying amount or fair value less costs to sell.
INTANGIBLE
ASSETS
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142,
Goodwill
and Other Intangible Assets,
intangible assets with an indefinite useful life are not amortized.
Intangible
assets with a finite useful life are amortized on the straight-line
method over
the estimated useful lives. Our software license is amortized over
a ten year
useful life.
F-4
SOFTWARE
DEVELOPMENT COSTS
In
accordance with SFAS No. 86, Accounting
for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed,
software development costs are expensed as incurred until technological
feasibility and marketability has been established, generally with release
of a
beta version for customer testing. Once the point of technological feasibility
and marketability is reached, direct production costs (including labor
directly
associated with the development projects), indirect costs (including allocated
fringe benefits, payroll taxes, facilities costs, and management supervision),
and other direct costs (including costs of outside consultants, purchased
software to be included in the software product being developed, travel
expenses, material and supplies, and other direct costs) are capitalized
until
the product is available for general release to customers. We amortize
capitalized costs on a product-by-product basis. Amortization for each
period is
the greater of the amount computed using (i) the straight-line basis over
the
estimated product life (generally from 12 to 18 months), or (ii) the ratio
of
current revenues to total projected product revenues. Total cumulative
capitalized software development costs were $2,973,151, less accumulated
amortization of $2,454,935 at September 30, 2006.
Capitalized
software development costs are stated at the lower of amortized costs
or net
realizable value. Recoverability of these capitalized costs is determined
at
each balance sheet date by comparing the forecasted future revenues from
the
related products, based on management’s best estimates using appropriate
assumptions and projections at the time, to the carrying amount of the
capitalized software development costs. If the carrying value is determined
not
to be recoverable from future revenues, an impairment loss is recognized
equal
to the amount by which the carrying amount exceeds the future revenues.
To date,
no capitalized costs have been written down to net realizable
value.
SFAS
No.
2, Accounting
for Research and Development Costs,
established accounting and reporting standards for research and development.
In
accordance with SFAS No. 2, costs we incur to enhance our existing products
after general release to the public (bug fixes) are expensed in the period
they
are incurred and included in research and development costs. Research
and
development costs incurred prior to determination of technological feasibility
and marketability and after general release to the public and charged
to expense
were $131,013 and $130,407 for the nine months ended September 30, 2006
and 2005
respectively, included in general and administrative
expenses.
We
capitalize costs related to the development of computer software developed
or
obtained for internal use in accordance with the American Institute of
Certified
Public Accountants Statement of Position (“SOP”) 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal
Use.
Software obtained for internal use has generally been enterprise level
business
and finance software that we customize to meet our specific operational
needs.
We have not sold, leased, or licensed software developed for internal
use to our
customers and have no intention of doing so in the future.
We
capitalize costs related to the development and maintenance of our Website
in
accordance with Financial Accounting Standard Board’s (“FASB’s”) Emerging Issues
Task Force (“EITF”) Issue No. 00-2, Accounting
for Website Development Costs.
Under
EITF Issue No. 00-2, costs expensed as incurred are as follows:
|
•
|
planning
the Website,
|
|
•
|
developing
the applications and infrastructure until technological feasibility
is
established,
|
|
|
•
|
developing
graphics such as borders, background and text colors, fonts,
frames, and
buttons, and
|
|
|
•
|
operating
the site such as training, administration and
maintenance.
|
Capitalized
costs include those incurred to:
|
•
|
obtain
and register an Internet domain
name,
|
|
•
|
develop
or acquire software tools necessary for the development
work,
|
|
|
•
|
develop
or acquire software necessary for general Website
operations,
|
|
•
|
develop
or acquire code for web
applications,
|
|
•
|
develop
or acquire (and customize) database software and software
to integrate
applications such as corporate databases and accounting
systems into web
applications,
|
|
|
•
|
develop
HTML web pages or templates,
|
|
|
•
|
install
developed applications on the web server,
|
|
|
•
|
create
initial hypertext links to other Websites or other locations
within the
Website, and
|
|
|
•
|
test
the Website applications.
|
We
amortize Website development costs on a straight-line basis over the estimated
life of the site, generally 36 months. Total cumulative Website development
costs, included in other assets on our condensed consolidated balance sheets,
were $111,034, less accumulated amortization of $67,921 at September 30,
2006.
NET
REVENUE
We
derive
revenues from the sale of packaged software products, product support and
multiple element arrangements that may include any combination of these items.
We recognize software revenue for software products and related services
in
accordance with SOP 97-2, Software
Revenue Recognition,
as
modified by SOP 98-9,
Modification of SOP 97-2, With Respect to Certain Transactions.
We
recognize revenue when persuasive evidence of an arrangement exists (generally
a
purchase order), we have delivered the product, the fee is fixed or determinable
and collectibility is probable.
In
some
situations, we receive advance payments from our customers. We defer revenue
associated with these advance payments until we ship the products or offer
the
support.
In
accordance with EITF Issue No. 01-9, Accounting
for Consideration Given by a Vendor to a Customer or a Reseller of the
Vendor’s
Product,
we
generally account for cash considerations (such as sales incentives - rebates
and coupons) that we give to our customers as a reduction of revenue rather
than
as an operating expense.
Product
Revenue
We
typically recognize revenue from the sale of our packaged software products
when
we ship the product. We sell some of our products on consignment to a limited
number of resellers. We recognize revenue for these consignment transactions
only when the end-user sale has occurred. Revenue for software distributed
electronically via the Internet is recognized when the customer has been
provided with the access codes that allow the customer to take immediate
possession of the software on its hardware and evidence of the arrangement
exists (web order).
Some
of
our software arrangements involve multiple copies or licenses of the
same
program. These arrangements generally specify the number of simultaneous
users
the customer may have (multi-user license), or may allow the customer
to use as
many copies on as many computers as it chooses (a site license). Multi-user
arrangements, generally sold in networked environments, contain fees
that vary
based on the number of users that may utilize the software simultaneously.
We
recognize revenue when evidence of an order exists and upon delivery
of the
authorization code to the consumer that will allow them the limited simultaneous
access. Site licenses, generally sold in non-networked environments,
contain a
fixed fee that is not dependent on the number of simultaneous users.
Revenue is
recognized when evidence of an order exists and the first copy is delivered
to
the consumer.
Many
of
our software products contain additional content that is “locked” to prevent
access until a permanent access code, or “key,” is purchased. We recognize
revenue when evidence of an order exists and the customer has been provided
with
the access code that allows the customer immediate access to the additional
content. All of the programs containing additional locked content are
fully
functional and the keys are necessary only to access the additional content.
The
customer’s obligation to pay for the software is not contingent on delivery of
the “key” to access the additional content.
We
reduce
product revenue for estimated returns and price protections that are
based on
historical experience and other factors such as the volume and price
mix of
products in the retail channel, trends in retailer inventory and economic
trends
that might impact customer demand for our products. We also reduce product
revenue for the estimated redemption of end-user rebates on certain current
product sales. Our rebate reserves are estimated based on the terms and
conditions of the specific promotional rebate program, actual sales during
the
promotion, the amount of redemptions received and historical redemption
trends
by product and by type of promotional program. We did not offer any rebate
programs to our customers during the three and nine months ended September
30,
2006 and 2005 and maintain a reserve for rebate claims remaining unpaid
from
2000 and 2001.
F-6
Service
Revenue
We
offer
several technical support plans and recognize support revenue over the
life of
the plans, generally one year.
Multiple
Element Arrangements
We
also
enter into certain revenue arrangements for which we are obligated to deliver
multiple products or products and services (multiple elements). For these
arrangements, which include software products, we allocate and defer revenue
for
the undelivered elements based on their vendor-specific objective evidence
(“VSOE”) of fair value. VSOE is generally the price charged when that element
is
sold separately.
In
situations where VSOE exists for all elements (delivered and undelivered),
we
allocate the total revenue to be earned under the arrangement among the
various
elements, based on their relative fair value. For transactions where
VSOE exists
only for the undelivered elements, we defer the full fair value of the
undelivered elements and recognize the difference between the total arrangement
fee and the amount deferred for the undelivered items as revenue (residual
method). If VSOE does not exist for undelivered items that are services,
we
recognize the entire arrangement fee ratably over the remaining service
period.
If VSOE does not exist for undelivered elements that are specified products,
we
defer revenue until the earlier of the delivery of all elements or the
point at
which we determine VSOE for these undelivered elements.
We
recognize revenue related to the delivered products or services only
if (i) the
above revenue recognition criteria are met, (ii) any undelivered products
or
services are not essential to the functionality of the delivered products
and
services, (iii) payment for the delivered products or services is not
contingent
upon delivery of the remaining products or services, and (iv) we have
an
enforceable claim to receive the amount due in the event that we do not
deliver
the undelivered products or services.
Shipping
and Handling Costs
We
record
the amounts we charge our customers for the shipping and handling of
our
software products as product revenue and we record the related costs
as cost of
sales on our condensed consolidated statements of operations.
Customer
Service and Technical Support
Customer
service and technical support costs include the costs associated with
performing
order processing, answering customer inquiries by telephone and through
Websites, e-mail and other electronic means, and providing technical
support
assistance to our customers. In connection with the sale of certain products,
we
provide a limited amount of free technical support assistance to customers.
We
do not defer the recognition of any revenue associated with sales of
these
products, since the cost of providing this free technical support is
insignificant. The technical support is provided within one year after
the
associated revenue is recognized and free product enhancements (bug fixes)
are
minimal and infrequent. We accrue the estimated cost of providing this
free
support upon product shipment and include it in cost of
sales.
INCOME
TAXES
We
utilize SFAS No. 109, Accounting
for Income Taxes.
SFAS
No. 109 requires the use of the asset and liability method of accounting
for
income taxes. Under this method, deferred income taxes are provided for
the
temporary differences between the financial reporting basis and the tax
basis of
our assets and liabilities. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years
in
which those temporary differences are expected to be recovered or
settled.
EARNINGS
PER SHARE
We
follow
SFAS No. 128, Earnings
Per Share,
to
calculate and report basic and diluted earnings per share (“EPS”). Basic EPS is
computed by dividing income available to common shareholders by the weighted
average number of shares of common stock outstanding for the period.
Diluted EPS
is computed by giving effect to all dilutive potential shares of common
stock
that were outstanding during the period. For us, dilutive potential shares
of
common stock consist of the incremental shares of common stock issuable
upon the
exercise of stock options and warrants for all periods, convertible notes
payable and the incremental shares of common stock issuable upon the
conversion
of convertible preferred stock.
When
discontinued operations, extraordinary items, and/or the cumulative effect
of an
accounting change are present, income before any of such items on a per
share
basis represents the “control number” in determining whether potential shares of
common stock are dilutive or anti-dilutive. Thus, the same number of potential
shares of common stock used in computing diluted EPS for income from continuing
operations is used in calculating all other reported diluted EPS amounts.
In the
case of a net loss, it is assumed that no incremental shares would be issued
because they would be anti-dilutive. In addition, certain options and warrants
are considered anti-dilutive because the exercise prices were above the
average
market price during the period. Anti-dilutive shares are not included in
the
computation of diluted EPS, in accordance with SFAS No. 128.
DERIVATIVES
We
account for warrants issued with shares of common stock in a private
placement
according to EITF Issue 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled
in, a
Company’s Own Stock.
In
accordance with the accounting mandate, the derivative liability associated
with
the warrants has been and shall continue until our registration statement
on
Form SB-2 originally filed on November 22, 2004 is declared effective
to be
adjusted to fair value (calculated using the Black-Scholes method) at
each
balance sheet date and is accordingly reassessed at each such time to
determine
whether the warrants should be classified (or reclassified, as appropriate)
as a
liability or as equity. The
corresponding fair value adjustment is included in the consolidated statements
of operations as other expenses as the value of the warrants increases
from an
increase in our stock price at the balance sheet date and as other income
as the
value of the warrants decreases from a decrease in our stock price.
RECLASSIFICATIONS
Certain
accounts in the 2005 financial statements have been reclassified for comparative
purposes to conform with the presentation in the 2006 financial
statements.
NOTE
2 - INVENTORIES
At
September 30, 2006, inventories consisted of the following:
|
Raw
materials
|
$
|
95,366
|
||
|
Finished
goods
|
55,647
|
|||
|
Inventories
|
$
|
151,013
|
NOTE
3 - NOTE PAYABLE
In
July
2006, we entered into a loan agreement with an individual for $150,000.
The
agreement bears interest at a rate of 10% per thirty-day period and carried
an
original due date of September 18, 2006. On September 19, 2006, for additional
consideration of $750, we entered into a modification and extension agreement
which extended the repayment term of the balance of the outstanding principal
under the loan, as well as the interest payable thereon, until October
20, 2006.
The loan agreement is secured by a first priority security interest in
all of
our assets, including the intellectual property comprising the software
products
upon which we are dependent for revenue, and is convertible, together
with any
accrued interest thereon, into restricted shares of our common stock
at a
conversion price per share equal to $0.07 per share. In further consideration,
we issued the lender a three-year common stock purchase warrant to acquire
up to
an aggregate of 100,000 restricted shares of common stock at an exercise
price
of $0.07 per share. See Note 6, Common Stock and Note 11, Subsequent
Events.
NOTE 4
- DERIVATIVES
At
September 30, 2006, our derivative liability consisted of the
following:
|
Warrant
A
|
$
|
12,544
|
||
|
Warrant
B
|
488,717
|
|||
|
Warrant
C
|
451,653
|
|||
|
Derivatives
|
$
|
952,914
|
In
May
2004, we issued a three-year warrant (Warrant A) to purchase up to 600,000
shares of our common stock to a consultant. This warrant may be exercised
on a
cashless basis at the option of the warrant holder at a price per share
of
$0.15. We will receive up to $90,000 from the warrant holder upon the
exercise
of this warrant. This warrant has been accounted for as a liability according
to
the guidance of EITF 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled
in, a
Company’s Own Stock,
and the
fair value of the warrant has been determined using the Black-Scholes
valuation
method with the assumptions listed in the table below.
In
November 2004, we issued two five-year warrants to purchase up to an
aggregate
of 21,875,000 shares of our common stock in connection with a certain
Stock
Purchase Agreement completed with a New York-based private investment
partnership on July 19, 2004. The first warrant (Warrant B) entitles
the holder
to purchase up to 10,937,500 shares of our common stock at a price
of $0.18 per
share, and the second warrant (Warrant C) entitles the holder to purchase
up to
10,937,500 additional shares of our common stock at a price of $0.60
per share.
Each warrant is subject to standard adjustment provisions and each
provides for
settlement in registered shares of our common stock and may, at the
option of
the holder, be settled in a cashless, net-share settlement. The warrant
holder
is prevented from electing a cashless exercise so long as there is
in effect a
registration statement covering the shares underlying these warrants.
The
maximum number of shares of our common stock to be received for each
warrant in
a net-share settlement would be 10,937,500 but the actual number of
shares
settled would likely be significantly less and would vary based on
the last
reported sale price (as reported by Bloomberg) of our common stock
on the date
immediately preceding the date of the exercise notice. These warrants
are
accounted for as a liability according to the guidance of EITF 00-19
and the
fair value of each warrant has been determined using the Black-Scholes
valuation
method with the assumptions listed in the table below.
|
|
Warrant
A
|
Warrant
B
|
Warrant
C
|
|||||||||
|
Expected
term - years
|
.58
|
3.11
|
3.11
|
|||||||||
|
Stock
price at September 30, 2006
|
$
|
0.05
|
$
|
0.05
|
$
|
0.05
|
||||||
|
Expected
dividend yield
|
0
|
%
|
0
|
%
|
0
|
%
|
||||||
|
Expected
stock price volatility
|
235
|
%
|
212
|
%
|
212
|
%
|
||||||
|
Risk-free
interest rate
|
4.83
|
%
|
4.50
|
%
|
4.50
|
%
|
The
warrants are revalued at each balance sheet date by using the parameters
above,
reducing the expected term to reflect the passing of time, and using
the stock
price at the balance sheet date. Net fair value adjustments included
in other
income and expenses on the consolidated statements of operations were
income
adjustments of $237,009 and $1,109,548 for the three and nine months
ended
September 30, 2006, and expense adjustments of ($328,121) and ($874,992)
for the
three and nine months ended September 30, 2005,
respectively.
NOTE 5
- INCOME TAXES
The
provision (benefit) for taxes on net income for the three and nine months ended
September 30, 2006 and 2005 consisted of the following:
|
|
Three
months ended September 30
|
Nine
months ended September 30
|
|||||||||||
|
2006
|
2005
|
2006
|
2005
|
||||||||||
|
Current:
|
|||||||||||||
|
Federal
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
---
|
|||||
|
State
|
---
|
---
|
---
|
180
|
|||||||||
|
|
--- |
---
|
---
|
180
|
|||||||||
|
Deferred:
|
|||||||||||||
|
Federal
|
(112,543
|
)
|
116,472
|
(84,655
|
)
|
(165,714
|
)
|
||||||
|
State
|
(2,366
|
)
|
(4,496
|
)
|
(4,802
|
)
|
(21,648
|
)
|
|||||
|
(114,909
|
)
|
111,976
|
(89,457
|
)
|
(187,362
|
)
|
|||||||
|
Total
tax provision (benefit)
|
$ |
(114,909
|
)
|
$
|
111,976
|
$ |
(89,457
|
)
|
$ |
(187,182
|
)
|
||
NOTE
6 - STOCKHOLDERS’ EQUITY
COMMON
STOCK
In
March
2006, we committed to issue a total of 146,154 restricted shares of common
stock
to each of our then outside directors (a total of 438,462 shares), at the
closing price as of March 30, 2006 ($0.13), in lieu of cash payments of amounts
accrued for their services as members of our board from the period of September
1, 2004 through March 31, 2006. This issuance was valued at
$57,000.
In
April
2006, we committed to issue a total of 500,000 restricted shares of common
stock
to a company for investor relations services, at the closing price as of
April
2, 2006 ($0.13), in accordance with the terms of a twelve-month agreement.
This
issuance was valued at $65,000.
COMMON
STOCK WARRANTS
In
March
2006, we committed to issue a three-year warrant to purchase up to 300,000
restricted shares of our common stock, at a price per share of $0.13, to
our
legal counsel, in lieu of cash as payment for certain accrued legal fees.
This
warrant was valued at $7,958 based on the negotiated fair value of the services
provided as prescribed by SFAS No. 123(R), Share-Based
Payments,
for
share-based transactions with non-employees.
In
July
2006, we issued a three-year warrant to purchase up to 100,000 restricted
shares
of our common stock, at a price of $0.07, to an individual, in connection
with
the issuance of a convertible note payable. This warrant was valued at $4,997
based on the Black-Scholes method using a stock price of $0.05 per share,
volatility of 196%, an annual dividend rate of 0% and a risk-free interest
rate
of 4.91%. The value was treated as a discount on debt issued with detachable
stock purchase warrants, per APB No. 14, and amortized to interest expense
over
the original life of the note. See Note 3, Note Payable.
NOTE 7
- EARNINGS PER COMMON SHARE
Earnings
per common share are computed by dividing net income by the weighted
average
number of shares of common stock and common stock equivalents outstanding
during
the year. Common stock equivalents are the net additional number of
shares that
would be issuable upon the exercise of our outstanding common stock
options and
warrants, assuming that we reinvested the proceeds to purchase additional
shares
at market value.
The
following table shows the amounts used in computing earnings per
common share
and the effect on income and the average number of shares of dilutive
potential
common stock:
|
For
the Three Months Ended September 30
|
2006
|
2005
|
|||||
|
Net
income (loss)
|
$
|
26,349
|
$ |
(958,392
|
)
|
||
|
Preferred
stock dividends
|
---
|
---
|
|||||
|
Net
income (loss) available to common shareholders
|
$
|
26,349
|
$ |
(958,392
|
)
|
||
|
Basic
weighted average shares outstanding
|
49,558,317
|
48,619,855
|
|||||
|
Dilutive
effect of:
|
|||||||
|
Convertible
debt
|
1,535,714
|
---
|
|||||
|
Stock
options
|
---
|
---
|
|||||
|
Warrants
|
73,379
|
---
|
|||||
|
Diluted
weighted average shares outstanding
|
51,167,410
|
48,619,855
|
|||||
|
For
the Nine Months Ended September 30
|
2006
|
2005
|
|||||
|
Net
loss
|
$
|
1,211
|
$ |
(1,593,229
|
)
|
||
|
Preferred
stock dividends
|
---
|
---
|
|||||
|
Net
loss available to common shareholders
|
$
|
1,211
|
$ |
(1,593,229
|
)
|
||
|
Basic
weighted average shares outstanding
|
49,294,214
|
48,619,855
|
|||||
|
Dilutive
effect of:
|
|||||||
|
Convertible
debt
|
1,535,714
|
---
|
|||||
|
Stock
options
|
676,043
|
---
|
|||||
|
Warrants
|
154,269
|
---
|
|||||
|
Diluted
weighted average shares outstanding
|
51,660,240
|
48,619,855
|
|||||
NOTE 8
- COMMITMENTS AND CONTINGENCIES
We
are
subject to legal proceedings and claims that arise in the ordinary course
of our
business. In the opinion of management, the amount of ultimate liability
with
respect to these actions will not materially affect our financial statements
taken as a whole.
Our
employment agreements with our management team each contain a provision
for an
annual bonus equal to 1% of our net income (3% total). We accrue this
bonus on a
quarterly basis. Our management team consists of our Chief Executive
Officer
(with a base annual salary of $150,000), our Chief Financial Officer
(with a
base annual salary of $110,000), and our Chief Technology Officer (with
a base
annual salary of $150,000). In addition to the bonus provisions and annual
base
salary, each employment agreement provides for payment of all accrued
base
salaries ($8,703 included in Other current liabilities at September 30,
2006),
bonuses ($37,033 included in other current liabilities at September 30,
2006),
and any vested deferred vacation compensation ($30,443 included in other
current
liabilities at September 30, 2006) for termination by reason of disability.
The
agreements also provide for severance compensation equal to the then
base salary
until the later of (i) the expiration of the term of the agreement as
set forth
therein or (ii) one year, when the termination is other than for cause
(including termination by reason of disability). There is no severance
compensation in the event of voluntary termination or termination for
cause.
In
2003
and 2004, we reduced our reserve for rebates payable based, in part,
on our
ability to meet the financial obligation of claims carried forward from
our last
rebate program in 2001. As such, we may have a legal obligation to pay
rebates
in excess of the liability recorded.
Our
royalty agreements for new content generally provide for advance payments
to be
made upon contract signing. In addition, several new agreements provide
for
additional advance payments to be made upon delivery of usable content
and
publication. We accrue and pay these advances when the respective milestone
is
met.
NOTE 9
- RISKS AND UNCERTAINTIES
Our
future operating results may be affected by a number of factors. We
depend upon
a number of major inventory and intellectual property suppliers. If
a critical
supplier had operational problems or ceased making material available
to us,
operations could be adversely affected.
NOTE
10 - GOING CONCERN
The
accompanying unaudited condensed consolidated financial statements
have been
prepared in accordance with Generally Accepted Accounting Principles
in the
United States applicable to a going concern. As of September 30,
2006, we had a
year-to-date net income of $1,211, and negative working capital of
$2,208,344
and $3,025,697, and an accumulated deficit of $7,750,886 and $7,752,097
as of
September 30, 2006 and December 31, 2005, respectively. Although
these factors
raise substantial doubt as to our ability to continue as a going
concern through
December 31, 2006, we have taken several measures to mitigate against
this risk,
including expanding our in-house telemarketing efforts to increase
our
direct-to-consumer revenue while at the same time reducing commissions
paid to
third-party telemarketing firms. In addition, we are focused on distilling
both
our sales and marketing, and general and administrative expenses
to include only
those providing the most return on investment.
NOTE 11
- SUBSEQUENT EVENTS
On
October 19, 2006, we repaid the note payable in
full.
On
October 26, 2006, we granted 850,000 nonqualified stock options to
non-executive
employees. These options carry an exercise price of $0.10 per share,
vest
immediately, and have a three-year term.
On
October 26, 2006, we committed to issue 480,000 restricted shares
of common
stock to our outside director, at the closing price as of October
26, 2006
($0.025), in lieu of cash payments of amounts accrued for his service
as a
member of our board from the period of April 1, 2006 through September
30, 2006.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors
FindEx.com
Inc.
We
have
audited the accompanying consolidated balance sheets of FindEx.com Inc. and
subsidiaries as of December 31, 2005 and the related consolidated statements
of
operations, changes in 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 audit. The restated consolidated financial statements
of
FindEx.com, Inc. as of December 31, 2004, were audited by other auditors
whose
report dated February 18, 2005 except for Notes 1, 5, 8, 9, 10, 11, 12, 13,
15,
16 and 19 dated December 13, 2005, expressed an unqualified opinion on those
statements.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the
accounting principles used and significant estimates made by management,
as well
as evaluating the overall consolidated financial statement presentation.
We
believe that our audit provides a reasonable basis for our opinion.
The
Company is not required to have, nor were we engaged to perform, an audit
of its
internal control over financial reporting. Our audit 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.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of FindEx.com Inc. and subsidiaries
as
of December 31, 2005 and the results of operations and cash flows for the
year
ended December 31, 2005 in conformity with accounting principles generally
accepted in the United States of America.
/s/
BRIMMER, BUREK & KEELAN LLP
Brimmer,
Burek & Keelan LLP
Tampa,
Florida
April
12,
2006
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of Findex.com, Inc.:
We
have
audited the accompanying consolidated balance sheets of Findex.com, Inc.
as of
December 31, 2004 and 2003 and the related consolidated statements of
operations, stockholders’ 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 consolidated 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
consolidated financial statements are free of material misstatement. The
Company
has determined that it is not required to have, nor were we engaged to
perform,
an audit of its internal control over financial reporting. Our audit 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 includes examining, on a test basis, evidence supporting
the
amounts and disclosures in the consolidated financial statements. An audit
also
includes assessing the accounting principles used and significant estimates
made
by management, as well as evaluating the overall consolidated 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 consolidated financial position of Findex.com,
Inc. as of December 31, 2004 and 2003 and the results of its operations
and cash
flows for the years then ended in conformity with U.S. Generally Accepted
Accounting Principles.
As
discussed in Note 19 to the consolidated financial statements, there were
errors
in reporting the Company’s settlement agreement for the software license, errors
in reporting some of the classifications, errors in reporting the rebate
reserve
adjustment, and errors in reporting the warrants issued in connection with
a
private placement in the balance sheets and the statements of operations
that
were discovered by management as a result of a regulatory review. Accordingly,
the consolidated financial statements have been restated to correct the
errors.
Chisholm,
Bierwolf & Nilson, LLC
Bountiful,
UT
February
18, 2005 except for Notes 1, 5, 8, 9, 10, 11, 12, 13, 15, 16, and 19 dated
December 13, 2005
|
Findex.com,
Inc.
|
|||||||
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|||||||
|
December
31, 2005 and 2004
|
|||||||
|
|
|||||||
|
|
2005
|
2004
|
|||||
|
Assets
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
119,560
|
$
|
341,359
|
|||
|
Accounts
receivable, trade
|
405,380
|
566,819
|
|||||
|
Inventories
|
214,604
|
234,000
|
|||||
|
Deferred
income taxes, net
|
85,392
|
300,191
|
|||||
|
Other
current assets
|
42,814
|
109,078
|
|||||
|
Total
current assets
|
867,750
|
1,551,447
|
|||||
|
Property
and equipment, net
|
114,191
|
131,019
|
|||||
|
Software
license, net
|
1,762,276
|
2,265,783
|
|||||
|
Capitalized
software development costs, net
|
707,067
|
701,289
|
|||||
|
Deferred
income taxes, net
|
183,195
|
157,840
|
|||||
|
Restricted
cash
|
---
|
50,354
|
|||||
|
Other
assets
|
69,806
|
94,101
|
|||||
|
Total
assets
|
$
|
3,704,285
|
$
|
4,951,833
|
|||
|
|
|||||||
|
Liabilities
and stockholders’ equity
|
|||||||
|
Current
liabilities:
|
|||||||
|
Current
maturities of long-term debt
|
$
|
11,955
|
$
|
35,495
|
|||
|
Accrued
royalties
|
472,548
|
287,514
|
|||||
|
Accounts
payable, trade
|
556,042
|
621,804
|
|||||
|
Accrued
registration rights penalties
|
336,686
|
---
|
|||||
|
Accrued
payroll
|
206,988
|
209,984
|
|||||
|
Reserve
for sales returns
|
125,492
|
100,180
|
|||||
|
Derivatives
|
2,062,462
|
1,968,750
|
|||||
|
Other
current liabilities
|
121,274
|
128,166
|
|||||
|
Total
current liabilities
|
3,893,447
|
3,351,893
|
|||||
|
Long-term
debt
|
33,786
|
42,972
|
|||||
|
Deferred
income taxes, net
|
19,105
|
157,840
|
|||||
|
Commitments
and contingencies (Note 17)
|
|||||||
|
Stockholders’
equity:
|
|||||||
|
Common
stock, $.001 par value
|
|||||||
|
120,000,000
shares authorized,
|
|||||||
|
48,619,855
shares issued and outstanding
|
48,620
|
48,620
|
|||||
|
Paid-in
capital
|
7,461,424
|
7,521,339
|
|||||
|
Retained
(deficit)
|
(7,752,097
|
)
|
(6,170,831
|
)
|
|||
|
Total
stockholders’ equity
|
(242,053
|
)
|
1,399,128
|
||||
|
Total
liabilities and stockholders’ equity
|
$
|
3,704,285
|
$
|
4,951,833
|
|||
|
|
|||||||
|
See
accompanying notes.
|
|||||||
|
Findex.com,
Inc.
|
|||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|||||||
|
|
|||||||
|
Year
Ended December 31
|
2005
|
2004
|
|||||
|
Revenues,
net of reserves and allowances
|
$
|
5,337,342
|
$
|
5,322,842
|
|||
|
Cost
of sales
|
1,973,944
|
1,721,298
|
|||||
|
Gross
profit
|
3,363,398
|
3,601,544
|
|||||
|
Operating
expenses:
|
|||||||
|
Sales
and marketing
|
1,273,231
|
1,280,761
|
|||||
|
General
and administrative
|
2,432,667
|
2,309,838
|
|||||
|
Bad
debt expense
|
137,303
|
22,778
|
|||||
|
Amortization
expense
|
531,524
|
519,850
|
|||||
|
Depreciation
expense
|
50,704
|
44,478
|
|||||
|
Total
operating expenses
|
4,425,429
|
4,177,705
|
|||||
|
Loss
from operations
|
(1,062,031
|
)
|
(576,161
|
)
|
|||
|
Interest
income
|
1,059
|
1,378
|
|||||
|
Other
income
|
13,796
|
1,011,366
|
|||||
|
Other
adjustments
|
(436,686
|
)
|
(154,569
|
)
|
|||
|
Loss
on fair value adjustment of derivatives
|
(33,797
|
)
|
(291,672
|
)
|
|||
|
Loss
on disposition of assets
|
(1,869
|
)
|
(141
|
)
|
|||
|
Interest
expense
|
(11,029
|
)
|
(42,007
|
)
|
|||
|
Loss
before income taxes
|
(1,530,557
|
)
|
(51,806
|
)
|
|||
|
Provision
for income taxes
|
(50,709
|
)
|
1,015,859
|
||||
|
Net
income (loss)
|
$
|
(1,581,266
|
)
|
$
|
964,053
|
||
|
|
|||||||
|
Earnings
(loss) per share:
|
|||||||
|
Basic
|
$
|
(0.03
|
)
|
$
|
0.03
|
||
|
Diluted
|
$
|
(0.03
|
)
|
$
|
0.03
|
||
|
|
|||||||
|
Weighted
average shares outstanding:
|
|||||||
|
Basic
|
48,619,855
|
34,520,754
|
|||||
|
Diluted
|
48,619,855
|
35,195,840
|
|||||
|
|
|||||||
|
See
accompanying notes.
|
|||||||
|
Findex.com,
Inc.
|
||||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
||||||||||||||||||||||
|
|
||||||||||||||||||||||
|
|
Retained
|
|||||||||||||||||||||
|
|
Preferred
Stock
|
Common
Stock
|
Paid-In
|
Earnings
|
||||||||||||||||||
|
|
Series
A
|
Series
B
|
Shares
|
Amount
|
Capital
|
(Deficit)
|
|
Total
|
||||||||||||||
|
|
||||||||||||||||||||||
|
Balance,
December 31, 2003
|
$
|
11
|
$
|
40
|
21,011,438
|
$
|
21,011
|
$
|
7,080,629
|
$
|
(7,130,759
|
)
|
$
|
(29,068
|
)
|
|||||||
|
Common
stock issued for services
|
---
|
---
|
2,774,105
|
2,774
|
100,445
|
---
|
103,219
|
|||||||||||||||
|
Common
stock warrants issued for services
|
---
|
---
|
---
|
---
|
75,715
|
---
|
75,715
|
|||||||||||||||
|
Common
stock cancelled
|
---
|
---
|
(48,387
|
)
|
(48
|
)
|
48
|
---
|
---
|
|||||||||||||
|
Preferred
Series A common stock dividend
|
---
|
---
|
56,356
|
56
|
4,069
|
(4,125
|
)
|
---
|
||||||||||||||
|
Conversion
of preferred stock
|
(11
|
)
|
(40
|
)
|
484,677
|
485
|
(434
|
)
|
---
|
---
|
||||||||||||
|
Common
stock issued in connection with
|
||||||||||||||||||||||
|
private
placement, net of $51,047 of issuance costs
|
---
|
---
|
21,875,000
|
21,875
|
---
|
---
|
21,875
|
|||||||||||||||
|
Conversion
of notes payable
|
---
|
---
|
2,466,666
|
2,467
|
260,867
|
---
|
263,334
|
|||||||||||||||
|
Net
income, December 31, 2004
|
---
|
---
|
---
|
---
|
---
|
964,053
|
964,053
|
|||||||||||||||
|
Balance,
December 31, 2004
|
$
|
---
|
$
|
---
|
48,619,855
|
$
|
48,620
|
$
|
7,521,339
|
$
|
(6,170,831
|
)
|
$
|
1,399,128
|
||||||||
|
Common
stock warrant reclassified as derivative
|
---
|
---
|
---
|
---
|
(59,915
|
)
|
---
|
(59,915
|
)
|
|||||||||||||
|
Net
loss, December 31, 2005
|
---
|
---
|
---
|
---
|
---
|
(1,581,266
|
)
|
(1,581,266
|
)
|
|||||||||||||
|
Balance,
December 31, 2005
|
$
|
---
|
$
|
---
|
48,619,855
|
$
|
48,620
|
$
|
7,461,424
|
$
|
(7,752,097
|
)
|
$
|
(242,053
|
)
|
|||||||
|
|
||||||||||||||||||||||
|
See
accompanying notes.
|
||||||||||||||||||||||
|
Findex.com,
Inc.
|
|||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|||||||
|
|
|||||||
|
Year
Ended December 31
|
2005
|
2004
|
|||||
|
Cash
flows from operating activities:
|
|||||||
|
Cash
received from customers
|
$
|
5,369,139
|
$
|
5,062,396
|
|||
|
Cash
paid to suppliers and employees
|
(4,761,153
|
)
|
(5,673,088
|
)
|
|||
|
Other
operating receipts
|
13,796
|
9,276
|
|||||
|
Interest
paid
|
(11,896
|
)
|
(37,928
|
)
|
|||
|
Interest
received
|
1,059
|
1,378
|
|||||
|
Income
taxes (paid) refunded
|
1,400
|
(5,702
|
)
|
||||
|
Net
cash provided (used) by operating activities
|
612,345
|
(643,668
|
)
|
||||
|
Cash
flows from investing activities:
|
|||||||
|
Acquisition
of property, plant and equipment
|
(35,746
|
)
|
(58,247
|
)
|
|||
|
Software
development costs
|
(812,309
|
)
|
(692,063
|
)
|
|||
|
Website
development costs
|
(16,163
|
)
|
(31,838
|
)
|
|||
|
Deposits
refunded (paid)
|
62,796
|
35,216
|
|||||
|
Net
cash (used) by investing activities
|
(801,422
|
)
|
(746,932
|
)
|
|||
|
Cash
flows from financing activities:
|
|||||||
|
Proceeds
from (payments on) line of credit, net
|
---
|
(20,935
|
)
|
||||
|
Payments
made on long-term notes payable
|
(32,722
|
)
|
(227,727
|
)
|
|||
|
Proceeds
from convertible notes payable
|
---
|
240,000
|
|||||
|
Proceeds
from issuance of stock
|
---
|
1,750,000
|
|||||
|
Stock
offering costs paid
|
---
|
(51,047
|
)
|
||||
|
Net
cash provided (used) by financing activities
|
(32,722
|
)
|
1,690,291
|
||||
|
Net
increase (decrease) in cash and cash equivalents
|
(221,799
|
)
|
299,691
|
||||
|
Cash
and cash equivalents, beginning of year
|
341,359
|
41,668
|
|||||
|
Cash
and cash equivalents, end of year
|
$
|
119,560
|
$
|
341,359
|
|||
|
|
|||||||
|
Reconciliation
of net income to cash flows from operating activities:
|
|||||||
|
Net
income (loss)
|
$
|
(1,581,266
|
)
|
$
|
964,053
|
||
|
Adjustments
to reconcile net income (loss) to net cash
|
|||||||
|
provided
(used) by operating activities:
|
|||||||
|
Software
development costs amortized
|
806,531
|
575,481
|
|||||
|
Stock
and warrants issued for services
|
---
|
178,929
|
|||||
|
Rebate
reserve adjustment
|
---
|
(142,039
|
)
|
||||
|
Provision
for bad debts
|
137,303
|
22,778
|
|||||
|
Depreciation
& amortization
|
582,228
|
564,328
|
|||||
|
Debt
forgiveness
|
---
|
(1,002,090
|
)
|
||||
|
Loss
on disposal of property and equipment
|
1,869
|
141
|
|||||
|
Loss
on fair value adjustment of derivatives
|
33,797
|
291,672
|
|||||
|
Change
in assets and liabilities:
|
|||||||
|
(Increase)
decrease in accounts receivable
|
24,136
|
(223,794
|
)
|
||||
|
Decrease
in inventories
|
19,396
|
38,600
|
|||||
|
(Increase)
decrease in refundable taxes
|
1,400
|
(2,948
|
)
|
||||
|
(Increase)
decrease in prepaid expenses
|
64,865
|
(84,211
|
)
|
||||
|
Increase
(decrease) in accrued royalties
|
185,034
|
(324,360
|
)
|
||||
|
(Decrease)
in accounts payable
|
(65,762
|
)
|
(271,198
|
)
|
|||
|
(Decrease)
in income taxes payable
|
---
|
(1,270
|
)
|
||||
|
Increase
(decrease) in deferred taxes
|
50,709
|
(1,017,343
|
)
|
||||
|
Increase
(decrease) in other liabilities
|
352,105
|
(210,397
|
)
|
||||
|
Net
cash provided (used) by operating activities
|
$
|
612,345
|
$
|
(643,668
|
)
|
||
|
|
|||||||
|
See
accompanying notes.
|
|||||||
Findex.com,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2005 and 2004
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Findex.com,
Inc. was incorporated under the laws of the State of Nevada on November 7,
1997, as EJH Entertainment, Inc. On December 4, 1997, we acquired EJH
Entertainment, Inc., an Idaho corporation, in a stock-for-stock transaction.
EJH
Idaho was incorporated on June 21, 1968, as Alpine Silver, Inc. Alpine
changed its name to The Linked Companies, Inc. on December 4, 1992. On
September 9, 1996, The Linked Companies acquired Worldwide Entertainment,
Inc., a Delaware corporation, in a stock-for-stock transaction and changed
its
name to Worldwide Entertainment, Inc. On June 27, 1997, Worldwide Entertainment
changed its name to EJH Entertainment, Inc.
On
April
30, 1999, we acquired Findex Acquisition Corporation, a Delaware corporation
in
a stock-for-stock transaction and our name of was changed to Findex.com,
Inc.
Findex Acquisition Corporation is a wholly-owned subsidiary without current
business operations. It was incorporated on February 19, 1999 and acquired
FinSource Ltd., a Delaware corporation in April 1999, in a stock-for-stock
transaction. The mergers with Findex Acquisition Corporation and FinSource
were
treated as reorganization mergers with the accounting survivor being
FinSource.
On
March
7, 2000, we acquired Reagan Holdings, Inc., a Delaware corporation
in a
stock-for-stock transaction. Reagan was incorporated on July 27, 1999
and is a
wholly-owned subsidiary without current business operations.
We
are a
retail, wholesale and Internet supplier of personal computer software
products
to business and religious organizations and individuals around the
world. In
July 1999, we completed a license agreement with Parsons Technology,
Inc., a
subsidiary of TLC Multimedia, LLC, formerly Mattel Corporation, for
the Parsons
Church Division of Mattel. In so doing, we obtained the right to market,
sell
and continue to develop several Bible study software products. We develop
and
publish church and Bible study software products designed to simplify
biblical
research and streamline church office tasks.
ACCOUNTING
METHOD
We
recognize income and expenses on the accrual basis of accounting.
PRINCIPLES
OF CONSOLIDATION
The
consolidated financial statements include the accounts of the company
and our wholly-owned subsidiaries after eliminations.
USE
OF ESTIMATES
The
preparation of consolidated financial statements in conformity with Generally
Accepted Accounting Principles requires management to make estimates
and
assumptions that affect the amounts reported in the financial statements
and the
accompanying notes. Significant estimates used in the consolidated financial
statements include the estimates of (i) doubtful accounts, sales returns,
price
protection and rebates, (ii) provision for income taxes and realizability
of the
deferred tax assets, (iii) the life and realization of identifiable intangible
assets, and (iv) provisions for obsolete inventory. The amounts we will
ultimately incur or recover could differ materially from current estimates.
Financial
instruments that potentially subject us to concentrations of credit risk
consist
of cash and cash equivalents and accounts receivable. We place our cash
and cash
equivalents at well-known, quality financial institutions. We currently
maintain
our cash balances in one financial institution located in Omaha, Nebraska.
The
balances are insured by the Federal Deposit Insurance Corporation up
to
$100,000. At December 31, 2005 and 2004, our uninsured cash balance totaled
$-0-
and $336,175, respectively.
We
sell a
majority of our products to consumers through distributors, Christian
bookstores, Internet and direct marketing efforts. Although we attempt
to
prudently manage and control accounts receivable and perform ongoing
credit
evaluations in the normal course of business, we generally require
no collateral
on our product sales. Our top five customers in aggregate accounted
for 16% of
gross sales for the year ended December 31, 2005. No single customer
accounted
for more than 10% of revenue in the years ended December 31, 2005
and
2004.
During
the years ended December 31, 2005 and 2004, we derived 66% and 63%,
respectively, of our total revenue from sales of QuickVerse®,
26% and
28%, respectively, from sales of Membership Plus®,
and 8%
and 9%, respectively, from sales of other software titles.
During
the years ended December 31, 2005 and 2004, four vendors provided
purchases
individually of 10% or more of the total product and material purchases
as
follows: Vendor A (cd replicator) accounted for 24% and 29%, respectively,
Vendor B (printer) accounted for 23% and 18%, respectively, Vendor
C (retail
boxes) accounted for 19% and 17%, respectively, and Vendor D (cd
replicator)
accounted for -0-% and 12%, respectively. Accounts payable relating
to Vendors
A, B, C, and D were $8,886 and $40,234, $8,820 and $18,426, $17,031
and $34,931,
and $-0- and $-0-, as of December 31, 2005 and 2004, respectively.
ROYALTY
AGREEMENTS
We
have
entered into certain agreements whereby we are obligated to pay
royalties for content of software published. We generally pay royalties
based on a percentage of sales on respective products or on a fee per
unit sold
basis. We expense
software royalties as product costs during the period in which the related
revenues are recorded.
CASH
AND CASH EQUIVALENTS
We
consider all highly liquid investments purchased with an original maturity
of
three months or less to be cash equivalents.
RESTRICTED
CASH
Restricted
cash represents cash held in reserve by our merchant banker to allow
for a
potential increase in credit card chargebacks from increased consumer
purchases.
ACCOUNTS
RECEIVABLE
We
sell
our products to resellers and distributors generally under terms appropriate
for
the creditworthiness of the customer. Our terms generally range from
net 30 days
for domestic resellers, net 60 days for domestic distributors, to net
90 days
for international resellers and distributors. Receivables from customers
are
unsecured. We continuously monitor our customer account balances and
actively
pursue collections on past due balances.
We
maintain an allowance for doubtful accounts comprised of two components,
one of
which is based on historical collections performance and a second component
based on specific collection issues. If actual bad debts differ from
the
reserves calculated based on historical trends and known customer issues,
we
record an adjustment to bad debt expense in the period in which the
difference
occurs. Such adjustment could result in additional expense or a reduction
of
expense.
Our
accounts receivable go through a collection process that is based on
the age of
the invoice and requires attempted contacts with the customer at specified
intervals and the assistance from other personnel within the company
who have a
relationship with the customer. If after a number of days, we have
been
unsuccessful in our collections efforts, we may turn the account over
to a
collection agency. We write-off accounts to our allowance when we have
determined that collection is not likely. The factors considered in
reaching
this determination are (i) the apparent financial condition of the
customer,
(ii) the success we’ve had in contacting and negotiating with the customer and
(iii) the number of days the account has been outstanding. To the extent
that
our collections do not correspond with historical experience, we may
be required
to incur additional charges.
INVENTORY
Inventory,
including out on consignment, consists primarily of software media, manuals
and
related packaging materials and is recorded at the lower of cost or market
value, determined on a first-in, first-out, and adjusted on a per-item,
basis.
PROPERTY
AND EQUIPMENT
Property
and equipment are recorded at cost. Furniture, fixtures and computer
equipment
are depreciated over five years using the straight-line method. Software
is
depreciated over three years using the straight-line method. Expenditures
for
maintenance, repairs and other renewals of items are charged to expense
when
incurred.
ACCOUNTING
FOR LONG-LIVED ASSETS
We
review
property and equipment and intangible assets for impairment whenever
events or
changes in circumstances indicate that the carrying amount of an asset
may not
be recoverable. Recoverability is measured by comparison of our carrying
amount to future net cash flows the assets are expected to generate.
If such
assets are considered to be impaired, the impairment to be recognized
is
measured by the amount by which the carrying amount of the asset exceeds
its
fair market value. Property and equipment to be disposed of are reported
at the
lower of the carrying amount or fair value less costs to sell.
INTANGIBLE
ASSETS
In
accordance with SFAS No. 142, Goodwill
and Other Intangible Assets,
intangible assets with an indefinite useful life are not amortized. Intangible
assets with a finite useful life are amortized on the straight-line method
over
the estimated useful lives. All intangible assets are tested for impairment
annually during the fourth quarter.
SOFTWARE
DEVELOPMENT COSTS
In
accordance with SFAS No. 86, Accounting
for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed,
software development costs are expensed as incurred until technological
feasibility and marketability has been established, generally with release
of a
beta version for customer testing. Once the point of technological feasibility
and marketability is reached, direct production costs (including labor
directly
associated with the development projects), indirect costs (including
allocated
fringe benefits, payroll taxes, facilities costs, and management supervision),
and other direct costs (including costs of outside consultants, purchased
software to be included in the software product being developed, travel
expenses, material and supplies, and other direct costs) are capitalized
until
the product is available for general release to customers. We amortize
capitalized costs on a product-by-product basis. Amortization for each
period is
the greater of the amount computed using (i) the straight-line basis
over the
estimated product life (generally from 12 to 18 months), or (ii) the
ratio of
current revenues to total projected product revenues. Total cumulative
capitalized software development costs were $2,561,043 and $1,748,735,
less
accumulated amortization of $1,853,976 and $1,047,446 at December 31,
2005 and
2004, respectively.
Capitalized
software development costs are stated at the lower of amortized costs
or net
realizable value. Recoverability of these capitalized costs is determined
at
each balance sheet date by comparing the forecasted future revenues from
the
related products, based on management’s best estimates using appropriate
assumptions and projections at the time, to the carrying amount of the
capitalized software development costs. If the carrying value is determined
not
to be recoverable from future revenues, an impairment loss is recognized
equal
to the amount by which the carrying amount exceeds the future revenues.
To date,
no capitalized costs have been written down to net realizable
value.
SFAS
No.
2, Accounting
for Research and Development Costs,
established accounting and reporting standards for research and development.
In
accordance with SFAS No. 2, costs we incur to enhance our existing products
after general release to the public (bug fixes) are expensed in the period
they
are incurred and included in research and development costs. Research
and
development costs incurred prior to determination of technological feasibility
and marketability and after general release to the public and charged
to expense
were $216,397 and $64,653 for the years ended December 31, 2005 and 2004,
respectively.
We
capitalize costs related to the development of computer software developed
or
obtained for internal use in accordance with the American Institute of
Certified
Public Accountants Statement of Position (“SOP”) 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use. Software
obtained for internal use has generally been enterprise level business
and
finance software that we customize to meet our specific operational needs.
We
have not sold, leased, or licensed software developed for internal use
to our
customers and have no intention of doing so in the future.
We
capitalize costs related to the development and maintenance of our
Website in
accordance FASB’s EITF Issue No. 00-2, Accounting
for Website Development Costs.
Under
EITF Issue No. 00-2, costs expensed as incurred are as follows:
|
•
|
planning
the Website,
|
|
•
|
developing
the applications and infrastructure until technological
feasibility is
established,
|
|
|
•
|
developing
graphics such as borders, background and text colors,
fonts, frames, and
buttons, and
|
|
|
•
|
operating
the site such as training, administration and
maintenance.
|
Capitalized
costs include those incurred to:
|
•
|
obtain
and register an Internet domain
name,
|
|
•
|
develop
or acquire software tools necessary for the development
work,
|
|
|
•
|
develop
or acquire software necessary for general Website
operations,
|
|
•
|
develop
or acquire code for web
applications,
|
|
•
|
develop
or acquire (and customize) database software and
software to integrate
applications such as corporate databases and accounting
systems into web
applications,
|
|
|
•
|
develop
HTML web pages or templates,
|
|
|
•
|
install
developed applications on the web server,
|
|
|
•
|
create
initial hypertext links to other Websites or other
locations within the
Website, and
|
|
|
•
|
test
the Website applications.
|
We
amortize Website development costs on a straight-line basis over
the estimated
life of the site, generally 36 months. Total cumulative Website
development
costs, included in other assets on our consolidated balance sheets,
were
$102,663 and $86,500, less accumulated amortization of $46,811
and $18,795 at
December
31, 2005
and
2004,
respectively.
NET
REVENUE
We
derive
revenues from the sale of packaged software products, product support
and
multiple element arrangements that may include any combination of these
items.
We recognize software revenue for software products and related services
in
accordance with SOP 97-2, Software Revenue Recognition, as modified by
SOP 98-9, Modification of SOP 97-2, With Respect to Certain
Transactions. We recognize revenue when persuasive evidence of an
arrangement exists (generally a purchase order), we have delivered the
product,
the fee is fixed or determinable and collectibility is probable.
In
some
situations, we receive advance payments from our customers. We defer
revenue
associated with these advance payments until we ship the products or
offer the
support.
In
accordance with EITF Issue No. 01-9, Accounting for Consideration Given by a
Vendor to a Customer or a Reseller of the Vendor’s Product, we generally
account for cash considerations (such as sales incentives - rebates and
coupons)
that we give to our customers as a reduction of revenue rather than as
an
operating expense.
Product
Revenue
We
typically recognize revenue from the sale of our packaged software products
when
we ship the product. We sell some of our products on consignment to a
limited
number of resellers. We recognize revenue for these consignment transactions
only when the end-user sale has occurred. Revenue for software distributed
electronically via the Internet is recognized when the customer has been
provided with the access codes that allow the customer to take immediate
possession of the software on its hardware and evidence of the arrangement
exists (web order).
We
reduce
product revenue for estimated returns and price protections that are
based on
historical experience and other factors such as the volume and price
mix of
products in the retail channel, trends in retailer inventory and economic
trends
that might impact customer demand for our products. We also reduce product
revenue for the estimated redemption of end-user rebates on certain current
product sales. Our rebate reserves are estimated based on the terms and
conditions of the specific promotional rebate program, actual sales during
the
promotion, the amount of redemptions received and historical redemption
trends
by product and by type of promotional program. We did not offer any rebate
programs to our customers during 2004 or 2003 and maintain a reserve
for rebate
claims remaining unpaid from 2000.
Service
Revenue
We
offer
several technical support plans and recognize support revenue over the
life of
the plans, generally one year.
Multiple
Element Arrangements
We
also
enter into certain revenue arrangements for which we are obligated to
deliver
multiple products or products and services (multiple elements). For these
arrangements, which include software products, we allocate and defer
revenue for
the undelivered elements based on their vendor-specific objective evidence
(“VSOE”) of fair value. VSOE is generally the price charged when that element
is
sold separately.
In
situations where VSOE exists for all elements (delivered and undelivered),
we
allocate the total revenue to be earned under the arrangement among the
various
elements, based on their relative fair value. For transactions where
VSOE exists
only for the undelivered elements, we defer the full fair value of the
undelivered elements and recognize the difference between the total arrangement
fee and the amount deferred for the undelivered items as revenue (residual
method). If VSOE does not exist for undelivered items that are services,
we
recognize the entire arrangement fee ratably over the remaining service
period.
If VSOE does not exist for undelivered elements that are specified products,
we
defer revenue until the earlier of the delivery of all elements or the
point at
which we determine VSOE for these undelivered elements.
We
recognize revenue related to the delivered products or services only
if: (i) the
above revenue recognition criteria are met; (ii any undelivered products
or
services are not essential to the functionality of the delivered products
and
services; (iii) payment for the delivered products or services is not
contingent
upon delivery of the remaining products or service; and (iv) we have
an
enforceable claim to receive the amount due in the event that we do not
deliver
the undelivered products or services.
Shipping
and Handling Costs
We
record
the amounts we charge our customers for the shipping and handling of
our
software products as product revenue and we record the related costs
as cost of
sales on our consolidated statements of operations.
Customer
Service and Technical Support
Customer
service and technical support costs include the costs associated with
performing
order processing, answering customer inquiries by telephone and through
Websites, e-mail and other electronic means, and providing technical
support
assistance to our customers. In connection with the sale of certain products,
we
provide a limited amount of free technical support assistance to customers.
We
do not defer the recognition of any revenue associated with sales of
these
products, since the cost of providing this free technical support is
insignificant. The technical support is provided within one year after
the
associated revenue is recognized and free product enhancements (bug fixes)
are
minimal and infrequent. We accrue the estimated cost of providing this
free
support upon product shipment and are recorded as cost of sales.
ADVERTISING
Advertising
costs, including direct response advertising costs, are charged to operations
as
incurred. We have determined that direct response advertising costs are
insignificant. Total advertising costs for the years ended December 31,
2005 and
2004 were approximately, $512,000 and $448,000,
respectively.
STOCK-BASED
COMPENSATION
As
permitted under SFAS No. 123, Accounting
for Stock-based Compensation,
and
amended under SFAS No. 148, Accounting
for Stock-based Compensation-Transition and Disclosure,
we have
elected to follow the intrinsic value based method of accounting prescribed
by
APB No. 25, Accounting for Stock Issued to Employees, in accounting for
stock-based awards to employees (see Note 14) and, accordingly, does
not
recognize compensation cost when employee stock-option grants are made
at
fair-market value. In December 2004, the FASB issued SFAS No. 123(R),
Share-Based
Payment,
which
replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123(R)
requires compensation costs related to share-based payment transactions
to be
recognized in the financial statements. With limited exceptions, the
amount of
compensation cost will be measured based on the fair value on the grant
date of
the equity or liability instruments issued. Compensation cost will be
recognized
over the period that the service is provided for that award. This new
standard
will be effective for us the first quarter of fiscal
2006.
LEGAL
COSTS RELATED TO LOSS CONTINGENCIES
We
accrue
legal costs expected to be incurred in connection with a loss contingency
as
they occur.
INCOME
TAXES
We
utilize SFAS No. 109, Accounting for Income Taxes, which requires the
use of the asset and liability method of accounting for income taxes.
Under this
method, deferred income taxes are provided for the temporary differences
between
the financial reporting basis and the tax basis of our assets and
liabilities. Deferred tax assets and liabilities are measured using enacted
tax
rates expected to apply to taxable income in the years in which those
temporary
differences are expected to be recovered or settled.
EARNINGS
PER SHARE
We
follow
SFAS No. 128, Earnings Per Share, to calculate and report basic and
diluted earnings per share (EPS). Basic EPS is computed by dividing income
available to common stockholders by the weighted average number of shares
of
common stock outstanding for the period. Diluted EPS is computed by giving
effect to all dilutive potential shares of common stock that were outstanding
during the period. For us, dilutive potential shares of common stock
consist of
the incremental shares of common stock issuable upon the exercise of
stock
options and warrants for all periods, convertible notes payable and the
incremental shares of common stock issuable upon the conversion of convertible
preferred stock.
When
discontinued operations, extraordinary items, and/or the cumulative effect
of an
accounting change are present, income before any of such items on a per
share
basis represents the “control number” in determining whether potential shares of
common stock are dilutive or anti-dilutive. Thus, the same number of
potential
shares of common stock used in computing diluted EPS for income from
continuing
operations is used in calculating all other reported diluted EPS amounts.
In the
case of a net loss, it is assumed that no incremental shares would be
issued
because they would be anti-dilutive. In addition, certain options and
warrants
are considered anti-dilutive because the exercise prices were above the
average
market price during the period. Anti-dilutive shares are not included
in the
computation of diluted EPS, in accordance with SFAS No. 128.
COMPREHENSIVE
INCOME (LOSS)
We
have
adopted SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130
establishes standards of reporting and displaying comprehensive income
and its
components of net income and “other comprehensive income” in a full set of
general-purpose financial statements. “Other comprehensive income” refers to
revenues, expenses, gains and losses that are not included in net income,
but
rather are recorded directly in stockholders’ equity. The adoption of this
Statement had no impact on our net income or loss or stockholders’ equity.
TRANSFER
OF FINANCIAL ASSETS
We
have
adopted SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. SFAS No. 140 provides accounting
and reporting standards for transfers and servicing of financial assets
and
extinguishments of liabilities and provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers
that
are secured borrowings. The adoption of this standard did not have a
material
effect on our results of operations or financial position.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
Unless
otherwise indicated, the fair values of all reported assets and liabilities
that
represent financial instruments (none of which are held for trading purposes)
approximate the carrying values of such instruments because of the short
maturity of those instruments.
DERIVATIVES
We
account for warrants issued with shares of common stock in a private
placement
according to EITF Issue 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a
Company’s Own Stock.
In
accordance with the accounting mandate, the derivative liability
associated with
the warrants has been and shall continue to be adjusted to fair value
(calculated using the Black-Scholes method) at each balance sheet
date and is
accordingly reassessed at each such time to determine whether the
warrants
should be classified (or reclassified, as appropriate) as a liability
or as
equity. The corresponding fair value adjustment is included in the
consolidated
statements of operations as other expenses as the value of the warrants
increases from an increase in our stock price at the balance sheet
date and as
other income as the value of the warrants decreases from a decrease
in our stock
price.
RECLASSIFICATIONS
Certain
accounts in the 2004 financial statements have been reclassified for
comparative
purposes to conform with the presentation in the 2005 financial statements.
NOTE
2 - ACCOUNTS RECEIVABLE
At
December 31, 2005 and 2004, accounts receivable consisted of the following
(see
Note 1 - Concentrations):
|
2005
|
2004
|
||||||
|
Trade
receivables
|
$
|
483,380
|
$
|
584,819
|
|||
|
Less:
Allowance for doubtful accounts
|
78,000
|
18,000
|
|||||
|
Accounts
receivable, trade
|
$
|
405,380
|
$
|
566,819
|
During
the year ended December 31, 2004, we transferred accounts receivable
totaling
$300,966 to a factor for cash advances of $180,580. As accounts were
paid, the
collected funds (less the amount advanced and appropriate fees) were
disbursed
to us. The transfer agreement included a repurchase requirement and,
accordingly, the proceeds were accounted for as a secured borrowing.
The
agreement was terminated in July 2004.
NOTE
3 - INVENTORIES
At
December 31, 2005 and 2004, inventories consisted of the following:
|
2005
|
2004
|
||||||
|
Raw
materials
|
$
|
118,158
|
$
|
111,300
|
|||
|
Finished
goods
|
96,446
|
122,700
|
|||||
|
Inventories
|
$
|
214,604
|
$
|
234,000
|
During
the year ended December 31, 2004, we wrote-off obsolete inventory with
a carried
cost totaling $32,396. This has been recognized in cost of sales.
NOTE
4 - PROPERTY AND EQUIPMENT, NET
At
December 31, 2005 and 2004, property and equipment consisted of the
following:
|
2005
|
2004
|
||||||
|
Computer
equipment
|
$
|
93,992
|
$
|
84,009
|
|||
|
Computer
software
|
65,442
|
62,861
|
|||||
|
Office
equipment
|
85,431
|
77,947
|
|||||
|
Office
furniture and fixtures
|
68,171
|
62,594
|
|||||
|
Warehouse
equipment
|
12,159
|
23,150
|
|||||
|
325,195
|
310,561
|
||||||
|
Less:
Accumulated depreciation
|
211,004
|
179,542
|
|||||
|
Property
and equipment, net
|
$
|
114,191
|
$
|
131,019
|
At
December 31, 2005 and 2004, Office equipment contained telephone equipment
under
a capital lease obligation with a cost basis of $51,788. See Notes
8 and 15.
NOTE
5 - SOFTWARE LICENSE AGREEMENT, NET
In
July
1999, we completed an exclusive license agreement with Parsons Technology,
Inc.,
a subsidiary of The Learning Company, Inc. (“TLC”), for the perpetual and
fully-paid up right and license to publish, use, distribute and sublicense
the
programs incorporating the trademarks (i.e. QuickVerse, Membership Plus)
throughout the world and also in the licensed media, for sale, resale
and/or
license to churches or other places of worship, religious schools and
companies
or individuals for which the majority of sales revenue is derived from
sales of
religious, Christian or Bible products (the “Church Channel”). In addition, the
license agreement provided us the non-exclusive, perpetual and fully-paid
up
right and license to publish, use, distribute and sublicense the programs
incorporating the trademarks throughout the world and also in the licensed
media, for sale, resale and/or license into all channels other than the
Church
Channel. This original license agreement carried a 10 year economic
life.
During
the year ended December 31, 2002 we reached tentative settlement in
a dispute
with TLC which called for the extension of the term of the license
from 10 years
to 50 years.
On
October 20, 2003, we reached settlement in a dispute with The Zondervan
Corporation and TLC which extended indefinitely the term of the software
license
agreement.
As
required by SFAS No. 142, management periodically evaluates the remaining
useful
life of the license agreement and revises the amortization period if
it is
determined that the useful life is longer or shorter than originally
estimated.
Amortization expense, determined using the straight-line method, has
been
calculated using the original 10 year economic life. The software license
is
tested for impairment annually during the fourth quarter.
At
December 31, 2005 and 2004, the software license consisted of the
following:
|
2005
|
2004
|
||||||
|
Software
license cost
|
$
|
5,135,574
|
$
|
5,135,574
|
|||
|
Less:
Accumulated amortization
|
3,373,298
|
2,869,791
|
|||||
|
Software
license, net
|
$
|
1,762,276
|
$
|
2,265,783
|
Amortization
expense related to this intangible asset was $503,508 for both years.
Amortization expense for the next five years is expected to be $503,508
each
year through 2008 and $251,751 for 2009.
NOTE
6 - NOTES PAYABLE
In
September 2004, we borrowed a total of $240,000 from two individuals.
Both notes
were unsecured, carried an annual interest rate of 7.5%, were due August
2005,
and were convertible at the option of the holder into a total of 2,000,000
restricted shares of common stock. Both notes were converted in November
2004 at
the election of the respective holder. See Notes 10 and 16.
NOTE
7 - DERIVATIVES
At
December 31, 2005 and 2004, the derivative liability consisted of the
following:
|
2005
|
2004
|
||||||
|
Warrant
A
|
$
|
47,389
|
$
|
---
|
|||
|
Warrant
B
|
1,030,348
|
984,375
|
|||||
|
Warrant
C
|
984,725
|
984,375
|
|||||
|
Derivatives
|
$
|
2,062,462
|
$
|
1,968,750
|
In
May
2004, we issued a 3-year warrant (Warrant A) to purchase up to 600,000
shares of
our common stock to a consultant. This warrant may be exercised on
a cashless
basis at the option of the warrant holder at a price per share of $0.15.
We will
receive up to $90,000 from the warrant holder upon the exercise of
this warrant.
This warrant has been accounted for as a liability according to the
guidance of
EITF 00-19 and the fair value of the warrant has been determined using
the
Black-Scholes valuation method with the assumptions listed in the table
below.
In
November 2004, we issued two 5-year warrants to purchase up to an aggregate
of
21,875,000 shares of our common stock in connection with a certain
Stock
Purchase Agreement completed with a New York based private investment
partnership on July 19, 2004. The first warrant (Warrant B) entitles
the holder
to purchase up to 10,937,500 shares of our common stock at a price
of $0.18 per
share, and the second warrant (Warrant C) entitles the holder to purchase
up to
10,937,500 additional shares of our common stock at a price of $0.60
per share.
Each warrant is subject to standard adjustment provisions and each
provides for
settlement in registered shares of our common stock and may, at the
option of
the holder, be settled in a cashless, net-share settlement. The warrant
holder
is prevented from electing a cashless exercise so long as there is
an effective
registration statement for the shares underlying these warrants. The
maximum
number of shares of our common stock to be received for each warrant
in a
net-share settlement would be 10,937,500 but the actual number of shares
settled
would likely be significantly less and would vary based on the last
reported
sale price (as reported by Bloomberg) of our common stock on the date
immediately preceding the date of the exercise notice. These warrants
are
accounted for as a liability according to the guidance of EITF 00-19
and the
fair value of each warrant has been determined using the Black-Scholes
valuation
method with the assumptions listed in the table below.
|
|
Warrant
A
|
Warrant
B
|
Warrant
C
|
|||||||
|
Expected
term - years
|
1.33
|
3.55
|
3.55
|
|||||||
|
Stock
price at December 31, 2005
|
$
|
0.10
|
$
|
0.10
|
$
|
0.10
|
||||
|
Expected
dividend yield
|
0
|
%
|
0
|
%
|
0
|
%
|
||||
|
Expected
stock price volatility
|
235
|
%
|
212
|
%
|
212
|
%
|
||||
|
Risk-free
interest rate
|
2.94
|
%
|
3.62
|
%
|
3.62
|
%
|
The
warrants are revalued at each balance sheet date by using the parameters
above,
reducing the expected term to reflect the passing of time, and using
the stock
price at the balance sheet date. Net fair value adjustments of $33,797
and
$291,672 have been included in other expenses on the consolidated statements
of
operations for the years ended December 31, 2005 and 2004,
respectively.
NOTE 8
- LONG-TERM DEBT
At
December 31, 2005 and 2004, long-term debt consisted of the
following:
|
2005
|
2004
|
||||||
|
Unsecured
term note payable to a corporation due October 2004 in monthly
installments of $5,285, including interest at 8%.
|
$
|
2,769
|
$
|
26,679
|
|||
|
Capital
lease obligation payable to a corporation due November 2009
in monthly
installments of $1,144, including interest at 11.7%. Secured
by telephone
equipment. See Notes 4 and 14.
|
42,972
|
51,788
|
|||||
|
45,741
|
78,467
|
||||||
|
Less:
Current maturities
|
11,955
|
35,495
|
|||||
|
Long-term
debt
|
$
|
33,786
|
$
|
42,972
|
|||
Principal
maturities at December 31, 2005 are as follows:
|
2006
|
$
|
11,955
|
||
|
2007
|
10,318
|
|||
|
2008
|
11,591
|
|||
|
2009
|
11,877
|
|||
|
Total
|
$
|
45,741
|
NOTE 9
- INCOME TAXES
The
provision (benefit) for taxes on income from continuing operations for
the years
ended December 31, 2005 and 2004 consisted of the following:
|
2005
|
2004
|
||||||
|
Current:
|
|||||||
|
Federal
|
$
|
---
|
$
|
---
|
|||
|
State
|
---
|
1,484
|
|||||
|
|
---
|
1,484
|
|||||
|
Deferred:
|
|||||||
|
Federal
|
161,169
|
(1,009,939
|
)
|
||||
|
State
|
(110,460
|
)
|
(7,404
|
)
|
|||
|
50,709
|
(1,017,343
|
)
|
|||||
|
Total
tax provision (benefit)
|
$
|
50,709
|
$
|
(1,015,859
|
)
|
||
The
reconciliation of income tax computed at statutory rates of income tax
benefits
is as follows:
|
2005
|
2004
|
||||||
|
Expense
(benefit) at Federal statutory rate - 34%
|
$
|
(520,389
|
)
|
$ |
(12,952
|
)
|
|
|
State
tax effects, net of Federal taxes
|
(110,460
|
)
|
(4,069
|
)
|
|||
|
Nondeductible
expenses
|
14,814
|
236,009
|
|||||
|
Taxable
temporary differences
|
187,051
|
(73,533
|
)
|
||||
|
Deductible
temporary differences
|
(11,157
|
)
|
356,278
|
||||
|
Net
operating loss
|
505,575
|
---
|
|||||
|
Deferred
tax asset valuation allowance
|
(14,725
|
)
|
(1,517,592
|
)
|
|||
|
Income
tax expense (benefit)
|
$
|
50,709
|
$ |
(1,015,859
|
)
|
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. Our total and net deferred
tax assets,
deferred tax asset valuation allowances and deferred tax liabilities
at December
31, 2005 and 2004 are as follows:
|
For
the year ended December 31, 2005
|
Federal
|
State
|
Total
|
|||||||
|
Current
Deferred Income Taxes
|
||||||||||
|
Reserve
for sales returns
|
$
|
42,667
|
$
|
1,054
|
$
|
43,721
|
||||
|
Reserve
for technical support costs
|
13,022
|
322
|
13,344
|
|||||||
|
Accrued
compensation costs
|
50,622
|
1,251
|
51,873
|
|||||||
|
Deferred
revenue
|
8,806
|
218
|
9,024
|
|||||||
|
Reserve
for bad debts
|
26,520
|
655
|
27,175
|
|||||||
|
Operating
loss carryforwards
|
85,091
|
531
|
85,622
|
|||||||
|
226,728
|
4,031
|
230,759
|
||||||||
|
Less:
Valuation allowance
|
141,705
|
3,662
|
145,367
|
|||||||
|
Deferred
income tax asset, net
|
$
|
85,023
|
$
|
369
|
$
|
85,392
|
||||
|
Non-current
Deferred Income Taxes
|
||||||||||
|
State
deferred tax liabilities
|
$
|
7,185
|
$
|
---
|
$
|
7,185
|
||||
|
Operating
loss carryforwards
|
2,794,956
|
25,101
|
2,820,057
|
|||||||
|
2,802,141
|
25,101
|
2,827,242
|
||||||||
|
Less:
Valuation allowance
|
1,751,338
|
22,804
|
1,774,142
|
|||||||
|
Deferred
income tax asset, net
|
1,050,803
|
2,297
|
$
|
1,053,100
|
||||||
|
Software
development costs
|
(240,403
|
)
|
(5,939
|
)
|
|
(246,342
|
)
|
|||
|
Website
costs
|
(18,990
|
)
|
(469
|
)
|
(19,459
|
)
|
||||
|
Inventory
|
(10,915
|
)
|
(270
|
)
|
(11,185
|
)
|
||||
|
Property
and equipment
|
(188
|
)
|
(5
|
)
|
(193
|
)
|
||||
|
Software
license fees
|
(595,774
|
)
|
(14,719
|
)
|
(610,493
|
)
|
||||
|
State
deferred tax assets
|
(1,338
|
)
|
---
|
(1,338
|
)
|
|||||
|
Deferred
income tax liability
|
(867,608
|
)
|
(21,402
|
)
|
$
|
(889,010
|
)
|
|||
|
Deferred
income tax asset, net
|
$
|
183,195
|
||||||||
|
Deferred
income tax liability, net
|
$
|
(19,105
|
)
|
|||||||
|
For
the year ended December 31, 2004
|
Federal
|
State
|
Total
|
|||||||
|
Current
Deferred Income Taxes
|
||||||||||
|
Reserve
for sales returns
|
$
|
34,061
|
$
|
8,014
|
$
|
42,075
|
||||
|
Reserve
for technical support costs
|
13,362
|
3,144
|
16,506
|
|||||||
|
Accrued
compensation costs
|
50,734
|
11,937
|
62,671
|
|||||||
|
Deferred
revenue
|
14,807
|
3,484
|
18,291
|
|||||||
|
Reserve
for bad debts
|
6,120
|
1,440
|
7,560
|
|||||||
|
Operating
loss carryforwards
|
285,600
|
1,054
|
286,654
|
|||||||
|
404,684
|
29,073
|
433,757
|
||||||||
|
Less:
Valuation allowance
|
129,005
|
4,561
|
133,566
|
|||||||
|
Deferred
income tax asset, net
|
$
|
275,679
|
$
|
24,512
|
$
|
300,191
|
||||
|
Non-current
Deferred Income Taxes
|
||||||||||
|
Property
and equipment, net
|
$
|
2,312
|
$
|
544
|
$
|
2,856
|
||||
|
Reorganization
costs
|
1,700
|
400
|
2,100
|
|||||||
|
State
deferred tax liabilities
|
53,665
|
---
|
53,665
|
|||||||
|
Operating
loss carryforwards
|
2,555,351
|
3,957
|
2,559,308
|
|||||||
|
|
2,613,028
|
4,901
|
2,617,929
|
|||||||
|
Less:
Valuation allowance
|
1,774,631
|
4,901
|
1,779,532
|
|||||||
|
Deferred
income tax asset, net
|
|
838,397
|
|
---
|
|
838,397
|
||||
|
Software
development costs
|
(238,438
|
)
|
(56,103
|
)
|
|
(294,541
|
)
|
|||
|
Website
costs
|
(23,020
|
)
|
(5,416
|
)
|
(28,436
|
)
|
||||
|
Software
license fees
|
(409,360
|
)
|
(96,321
|
)
|
(505,681
|
)
|
||||
|
State
deferred tax assets
|
(9,739
|
)
|
---
|
(9,739
|
)
|
|||||
|
Deferred
income tax liability
|
|
(680,557
|
)
|
|
(157,840
|
)
|
$
|
(838,397
|
)
|
|
|
Deferred
income tax asset, net
|
$
|
157,840
|
||||||||
|
Deferred
income tax liability, net
|
$
|
(157,840
|
)
|
|||||||
A
valuation allowance has been recorded primarily related to tax benefits
associated with income tax operating loss carryforwards. Adjustments
to the
valuation allowance will be made if there is a change in management’s assessment
of the amount of the deferred tax asset that is realizable. At December
31,
2001, in accordance with SFAS No. 109, Accounting
for Income Taxes,
management established the valuation allowance equal to the total deferred
tax
assets due to the uncertainty about our ability to continue as a going
concern.
At December 31, 2004, management adjusted the amount of valuation allowance
based on the assessment that we will continue as a going concern and
will
produce sufficient income in the future to realize our net deferred tax
asset.
The valuation allowance for deferred tax assets was increased by $6,411
and
decreased by $1,602,090 during the years ended December 31, 2005 and
2004,
respectively.
At
December 31, 2005, we had available net operating loss carryforwards
of
approximately $8,470,000 for federal income tax purposes that expire
in 2022.
The federal carryforwards resulted from losses generated in 1996 through
2002
and 2005. We also had net operating loss carryforwards available from
various
state jurisdictions ranging from approximately $39,000 to approximately
$841,000
that expire in 2022.
NOTE 10
- STOCKHOLDERS’ EQUITY
COMMON
STOCK
In
April
2004, we issued a total of 1,519,349 restricted shares of common stock
to the
executive management team as payment of the 2003 accrued performance
bonus.
These shares were valued at $0.022 per share.
In
April
2004, we resolved to issue 637,500 restricted shares of common stock
to the
non-executive employees as additional compensation pursuant to an
incentive and
retention bonus program. In July, 2004, we removed 2,500 restricted
shares of
common stock from the resolution due to voluntary separation from
service by a
part-time employee. These shares were valued at $0.022 per share.
In
June
2004, we issued 324,074 restricted shares of common stock to the
outside board
of directors in lieu of cash and meeting fees for the period from
July 2003
through August 2004. These shares were valued at $0.081 per share.
In
July
2004, the holders of 11,400 shares of Series A Preferred Stock
and the holders
of 40,000 shares of Series B Preferred Stock elected to convert
such shares into
218,000 shares of common stock and 266,667 shares of common stock,
respectively.
In addition, the holders converted $4,125 unpaid accumulated Series
A Preferred
Stock dividends into 56,353 shares of common stock.
In
July
2004, we issued 295,692 non-restricted shares of common stock in
settlement of
an agreement with an institutional private equity investor. These
shares were
valued at $0.10 per share. A warrant dated March 26, 2001 to purchase
510,000
shares of common stock exercisable at $0.23 per share was cancelled
in the
settlement. See Note 11.
In
July
2004, we issued 21,875,000 restricted shares of common stock for
proceeds of
$1,750,000 through a private placement with a New York based private
investment
partnership. In connection with this issuance, we incurred $51,047
in legal and
other direct costs. These costs have been recorded as a reduction
to additional
paid-in capital.
In
July
2004, we removed 48,387 previously resolved but un-issued shares
of common stock
associated with an unexecuted 2001 stock subscription agreement.
In
October 2004, we increased the number of our authorized shares of
common stock
from 50,000,000 to 120,000,000.
In
November 2004, we issued 2,000,000 restricted shares of common stock
to holders
of convertible promissory notes who exercised their options to convert.
See Note
6.
COMMON
STOCK OPTIONS
In
July
2004, we cancelled 190,200 vested stock options with an exercise price
of $1.00
per share and 525,000 vested stock options with an exercise price of
$1.03 per
share. In addition, 100,000 vested stock options with an exercise price
of $0.11
were voluntarily forfeited by management and 1,333 vested stock options
with an
exercise price of $1.00 and 38,750 vested stock options with an exercise
price
of $0.11 expired after termination. We apply APB Opinion No. 25 and
related
interpretations in accounting for our stock options. Accordingly, no
compensation cost has been recognized for these stock options and therefore,
there was no effect on the financial statements resulting from these
cancellations. See Note 14. We did not grant any options or other stock-based
awards to any of the individuals for which the options were canceled,
during the
six months prior to and after the option cancellation.
During
2005, 55,000 vested stock options related to terminated employees expired
unexercised. We did not grant any options or other stock-based awards
to any of
the individuals for which the options expired, during the six months
prior to
and after the option expirations.
COMMON
STOCK WARRANTS
In
April
2004, we issued a warrant for 150,000 shares of common stock with an
exercise
price of $0.022 per share to our corporate counsel as payment for $3,300
of
accrued legal services.
In
May
2004, we issued a warrant for 600,000 shares of common stock with an
exercise
price of $0.15 per share to a consultant for corporate business planning,
financing, and merger and acquisition assistance. This warrant was
valued at
$59,915 using the Black-Scholes method and recorded as an expense.
In
July
2004, we cancelled a warrant for 510,000 shares of common stock with
an exercise
price of $0.23 per share with an institutional private equity investor
in
connection with a settlement in which 295,692 non-restricted shares
of common
stock were issued. See Note 11.
In
November 2004, we issued two warrants to purchase an aggregate of 21,875,000
shares of our common stock in connection with a certain Stock Purchase
Agreement
completed with a New York based private investment partnership, on
July 19,
2004. The first warrant entitles the holder to purchase up to 10,937,500
shares
of our common stock at a price of $0.18 per share, and the second warrant
entitles the holder to purchase up to 10,937,500 additional shares
of our common
stock at a price of $0.60 per share. Each warrant is subject to standard
adjustment provisions.
SERIES
A CONVERTIBLE PREFERRED STOCK
The
rights, preferences and privileges of our Series A Preferred Stock,
none of
which currently remain outstanding, were as follows:
Dividends
Holders
of Series A Preferred Stock were entitled to receive common stock dividends
of
$0.50 per share per annum, in preference to any payment of cash dividends
declared or paid on shares of common stock. Dividends on Series A Preferred
Stock were fully cumulative and were payable as determined by our board
of
directors. As of December 31, 2005 and 2004, no dividends had been declared.
Series A Preferred Stock dividends, however, were paid to a
stockholder as a conversion incentive during 2004.
Liquidation
Holders
of Series A Preferred Stock were entitled to liquidation preferences
over common
stockholders to the extent of $10.00 per Series A Preferred share,
plus all
declared but unpaid dividends. If funds were sufficient to make a complete
distribution to the preferred stockholders, such stockholders would
have shared
in the distribution of our assets on a pro rata basis in proportion
to the
aggregate preferential amounts owed each stockholder. After payment
would have
been made to the preferred stockholders, any remaining assets and funds
would
have been distributed equally among the holders of our common stock
based upon
the number of shares of common stock held by each.
Conversion
Each
share of Series A Preferred Stock would have been convertible into
shares of
common stock at the rate of 10 shares of common stock for each share
of Series A
Preferred Stock, subject to adjustment.
During
the year ended December 31, 2004, all shares of Series A Preferred
Stock were
converted into shares of common stock.
Redemption
At
the
election of our board of directors, we were able to redeem all or part
of the
shares of the Series A Preferred Stock at any time (pro rata based
upon the
total number of shares of the Preferred Stock held by each holder)
by paying in
cash a sum per share equal to $10.00 plus accrued and unpaid dividends
per
annum.
Voting
Rights
The
holder of each share of Series A Preferred Stock was not entitled to
vote except
as required by law.
SERIES
B CONVERTIBLE PREFERRED STOCK
The
rights, preferences and privileges of our Series B Preferred Stock,
none of
which currently remain outstanding, were as follows:
Dividends
The
holders of Series B Preferred Stock were entitled to receive cumulative
cash
dividends at the rate of $1.60 per annum per share. As of December 31,
2005 and
2004, no dividends had been declared.
Liquidation
The
Series B Preferred stockholders were entitled to a liquidation preference
in an
amount equal to the dividends accrued and unpaid, whether or not declared,
without interest, and a sum equal to $20.00 per share before any payment
was to
be made or any assets distributed to the holders of our common stock
or any
other class or series of our capital stock ranking junior as to liquidation
rights to the Series B Preferred Stock.
Conversion
Each
share of Series B Preferred Stock had been convertible into shares
of common
stock at the rate of 1 share of common stock for each share of Series
B
Preferred Stock, subject to adjustment.
During
the year ended December 31, 2004, all shares of Series B Preferred
Stock were
converted into shares of common stock.
Redemption
Subject
to restrictions, shares of the Series B Preferred Stock were redeemable
at our
option at any time at the redemption price of $20.00 per share plus,
in each
case, an amount equal to the dividends accrued and unpaid thereon to
the
redemption date. We did not have the right to redeem any shares of
Series B
Preferred Stock unless the current market value of our common stock
immediately
prior to the redemption date was not less than $18.00 per share.
Voting
Rights
The
holder of each share of Series B Preferred Stock was not entitled to
vote,
except as required by law and as a class. Voting as a class, the holders
were
entitled to elect one director to fill one directorship.
NOTE
11 - OTHER INCOME AND ADJUSTMENTS
During
the year ended December 31, 2004, we settled with various vendors and
content
providers for lump-sum payments ranging from approximately 17% to approximately
60% of balances owed. The difference between the balance owed and the
settlement
amount, totaling $1,002,090, has been treated as gain from extinguishment
of
debt and included in other income.
During
the year ended December 31, 2004, we settled an agreement with an institutional
private equity investor, for early termination of the agreement. We
issued
295,692 shares of common stock valued at $0.10 per share and paid a
cash lump
sum of $125,000. A total of $154,569 has been treated as expenses incurred
in a
withdrawn public offering. See Note 10. This has been included in other
adjustments.
As
part
of the July 19, 2004 financing transaction, see Note 10, we also entered
into a
Registration Rights Agreement pursuant to which we became committed
to
registering all of the shares issued as part of such transaction, including
those issuable under each of two warrants. On November 22, 2004 we filed a
registration statement on Form SB-2 covering the shares issued, as
well as the
shares underlying the warrants. In accordance with the terms of the
Registration
Rights Agreement, as amended, we had another 150 days, until April
22, 2005, to
cause such registration statement to be declared effective by the SEC,
with any
delays in meeting this obligation resulting in our being liable to
the New York
based private investment firm in an amount equal to $630,000 per year,
pro-rated
for the duration of any such delay, which amounts to $1,726 per day.
As
of
December 31, 2005, we have accrued a total of $436,686 (253 days at
$1,726 per
day) in penalties under the terms of the Registration Rights Agreement.
This has
been included in other adjustments.
NOTE
12 - REBATE RESERVE ADJUSTMENT
During
the year ended December 31, 2004, we recorded an adjustment to our
rebates
reserve in the amount of $142,039. Our reserve balance properly reflects
open
rebate programs and the estimated balance of each that management expects
to
pay. These adjustments are the result of, among other things, an internal
review
of the amount owed and of our ability to reach intended rebate recipients,
as
properly reflected by historical response rates. These adjustments
to our rebate
reserves have been recognized as an adjustment to revenue in accordance
with
EITF Issue No. 01-09.
NOTE
13 - EARNINGS PER COMMON SHARE
Earnings
per common share are computed by dividing net income by the weighted
average
number of shares of common stock and common stock equivalents outstanding
during
the year. Common stock equivalents are the net additional number of shares
that
would be issuable upon the exercise of the outstanding common stock options
(see
Note 14), assuming that we reinvested the proceeds to purchase additional
shares
at market value.
The
following table shows the amounts used in computing earnings per common
share
and the effect on income and the average number of shares of dilutive
potential
common stock:
|
For
the Year Ended December 31
|
2005
|
2004
|
|||||
|
Net
Income (loss)
|
$ |
(1,581,266
|
)
|
$
|
964,053
|
||
|
Common
stock dividend on Preferred Series A
|
---
|
(4,125
|
)
|
||||
|
Net
income (loss) available to common shareholders
|
$ |
(1,581,266
|
)
|
$
|
959,928
|
||
|
Basic
weighted average shares outstanding
|
48,619,855
|
34,520,754
|
|||||
|
Dilutive
effect of:
|
|||||||
|
Stock
options
|
---
|
429,824
|
|||||
|
Warrants
|
---
|
245,262
|
|||||
|
Diluted
weighted average shares outstanding
|
48,619,855
|
35,195,840
|
|||||
A
total
of 25,530,000 and 24,315,000 dilutive potential securities for the
years ended
December
31, 2005
and
2004,
respectively, have been excluded from the computation of diluted
earnings per
common share, as their inclusion would be anti-dilutive.
NOTE
14 - STOCK-BASED COMPENSATION
Our
1999 Stock Incentive Plan authorizes the issuance of various forms of
stock-based awards including incentive and nonqualified stock options,
stock
appreciation rights attached to stock options, and restricted stock awards
to
our directors, officers and other key employees. The plan has been approved
by our stockholders and as such, provides certain income tax advantages
to
employees as provided under Sections 421, 422, and 424 of the Internal
Revenue
Code. Stock options are granted at an exercise price as determined by our
board at the time the option is granted and may not be less than the par
value of such shares of common stock. None of the options granted under
the plan
have been granted with an exercise price less than fair value of the
common
stock on the date of grant. Stock options vest quarterly over three years
and
have a term of up to ten years. The plan authorizes an aggregate of 1,500,000
shares of common stock may be issued. We did not grant any options under
the
plan during 2005 or 2004.
In
addition, we issue various forms of stock-based awards including nonqualified
stock options and restricted stock awards to directors, officers, other
key
employees and third-party consultants, outside of the plan. Awards granted
outside of the plan have been granted pursuant to equity compensation
arrangements that have not been approved by our stockholders. These awards
are granted at an exercise price as determined by our board at the time of
grant and are not less than the par value of such shares of common stock.
None
of the options granted outside of the plan have been granted with an
exercise
price less than fair value of the common stock on the date of grant.
Stock
options granted outside of the plan vest as determined by our board at the
time of grant and have a term of up to ten years. Non-employee directors,
though
treated as employees for financial reporting purposes under FASB Interpretation
No. 44, are excluded from the income tax advantages afforded employees
by the
Internal Revenue Code. We did not grant any options outside of the plan
during
2005 or 2004.
We
apply
APB Opinion No. 25 and related interpretations in accounting for our
stock
options. Accordingly, no compensation cost has been recognized for outstanding
stock options. Had compensation cost for our outstanding stock options
been
determined based on the fair value at the grant date (calculated using
the
Black-Scholes Option-Pricing Model) for those options consistent with
SFAS No.
123, our net income (loss) and primary and diluted earnings per share
would not
have differed from those as reported:
Activity
under our stock option plans is summarized as follows:
|
|
Outstanding
Options
|
||||||
|
|
Number
of Shares
|
Weighted-Average
Exercise Price
|
|||||
|
Balance
at December 31, 2003
|
3,290,283
|
$
|
0.29
|
||||
|
Granted
|
---
|
---
|
|||||
|
Exercised
|
---
|
---
|
|||||
|
Expired
or forfeited
|
(140,083
|
)
|
$
|
0.12
|
|||
|
Canceled
|
(715,200
|
)
|
$
|
1.02
|
|||
|
Balance
at December 31, 2004
|
2,435,000
|
$
|
0.09
|
||||
|
Granted
|
---
|
---
|
|||||
|
Exercised
|
---
|
---
|
|||||
|
Expired
or forfeited
|
(55,000
|
)
|
$
|
0.11
|
|||
|
Canceled
|
---
|
---
|
|||||
|
Balance
at December 31, 2005
|
2,380,000
|
$
|
0.08
|
||||
No
stock
options, or any other form of stock-based awards, were granted to the
individuals for whom the options were cancelled, during the six months
prior to
and after the cancellation.
The
following table summarizes information about stock options outstanding
at
December 31, 2005:
|
Outstanding
Options
|
Exercisable
Options
|
|||||||||||||||
|
Range
of Exercise Prices
|
Outstanding
at December 31, 2005
|
Weighted-Average
Remaining Contractual Life (Years)
|
|
Weighted-Average
Exercise Price
|
Exercisable
at December 31, 2005
|
Weighted-Average
Exercise Price
|
||||||||||
|
$0.00
to $0.11
|
2,380,000
|
6.15
|
$
|
0.0848
|
2,380,000
|
$
|
0.0848
|
|||||||||
A
summary
of warrants to purchase shares of our common stock as of December 31,
2005 and
2004, and changes during the years then ended is as follows:
|
|
Outstanding
Warrants
|
||||||
|
|
Number
of Shares
|
Weighted-Average
Exercise Price
|
|||||
|
Balance
at December 31, 2003
|
525,000
|
$
|
0.09
|
||||
|
Granted
|
22,625,000
|
$
|
0.38
|
||||
|
Exercised
|
---
|
---
|
|||||
|
Expired
or forfeited
|
---
|
---
|
|||||
|
Canceled
|
---
|
---
|
|||||
|
Balance
at December 31, 2004
|
23,150,000
|
$
|
0.37
|
||||
|
Granted
|
---
|
---
|
|||||
|
Exercised
|
---
|
---
|
|||||
|
Expired
or forfeited
|
---
|
---
|
|||||
|
Canceled
|
---
|
---
|
|||||
|
Balance
at December 31, 2005
|
23,150,000
|
$
|
0.37
|
||||
No
other
equity instruments were issued during 2005 to acquire goods and services
(see
Note 10).
NOTE
15 - RENTAL AND LEASE INFORMATION
OPERATING
LEASES
We
lease
office space/warehouse facilities in Omaha, Nebraska under an operating
lease
with a third-party with terms extending through 2007. We are responsible
for all
taxes, insurance and utility expenses associated with this lease. There
is no
lease renewal option contained in the lease.
We
lease
office space in Naperville, Illinois under an operating lease with a
third-party
with terms extending through March 2006. We are responsible for all insurance
expenses associated with this lease. See Note 21.
Rental
expense for the years ended December 31, 2005 and 2004 amounted to $82,172
and
$75,555, respectively. Rental expenses are included in capitalized software
development costs. See Note 1.
At
December 31, 2005, the future minimum rental payments required under
these
leases are as follows:
|
2006
|
$
|
81,331
|
||
|
2007
|
31,248
|
|||
|
Total
future minimum rental payments
|
$
|
112,579
|
CAPITAL
LEASES
We
lease
telephone equipment under a capital lease expiring in November 2009.
The asset
and liability under the capital lease are recorded at the present value
of the
minimum lease payments. The asset is depreciated over a 5 year life.
Depreciation of the asset under the capital lease is included in depreciation
expense for 2005 and 2004.
The
following table summarizes property held under capital leases at December
31,
2005:
|
Office
equipment
|
$
|
51,788
|
||
|
Less:
Accumulated depreciation
|
12,084
|
|||
|
Net
property and equipment under capital lease
|
$
|
39,704
|
Future
minimum lease payments under capital leases as of December 31, 2005
for each of
the next five years and in the aggregate are:
|
2006
|
$
|
13,726
|
||
|
2007
|
13,726
|
|||
|
2008
|
13,726
|
|||
|
2009
|
12,582
|
|||
|
2010
|
---
|
|||
|
Total
minimum lease payments
|
53,760
|
|||
|
Less:
Amount representing interest
|
10,788
|
|||
|
Total
obligations under capital lease
|
42,972
|
|||
|
Less:
Current installments of obligations under capital lease
|
9,186
|
|||
|
Long-term
obligation under capital lease
|
$
|
33,786
|
NOTE
16 - SUPPLEMENTAL CASH FLOW INFORMATION
We
incurred the following non-cash investing and financing activities during
the
years ended December 31, 2005 and 2004, respectively:
|
2005
|
2004
|
||||||
|
Property
and equipment acquired under capital lease
|
$
|
---
|
$
|
51,788
|
|||
|
Conversion
of notes payable into common stock. See Note 6.
|
$
|
---
|
$
|
263,334
|
|||
|
Common
stock dividend on Preferred Series A
|
$
|
---
|
$
|
4,125
|
|||
|
Preferred
stock converted into common stock
|
$
|
---
|
$
|
470
|
|||
|
Common
stock and warrants issued for services
|
$
|
---
|
$
|
178,929
|
NOTE
17 - COMMITMENTS AND CONTINGENCIES
We
are
subject to legal proceedings and claims that arise in the ordinary
course of our
business. In the opinion of management, the amount of ultimate liability
with
respect to these actions will not materially affect our financial statements
taken as a whole.
We
entered into a license agreement in June 1999 with Parsons Technology,
Inc., a
copy of which has since been assigned to Riverdeep, Inc., the latest
licensor-assignee in a succession of assignments that have occurred
since the
original agreement. The license, as we acquired it in 1999, provided
us with the
right, for a term of ten years, to publish, use, distribute, sublicense
and
sell, exclusively worldwide in non-secular channels and non-exclusively
in
secular channels, a collection of top-selling Christian-related software
titles
and content owned by Parsons Technology, including certain intellectual
properties owned by The Zondervan Corporation.
In
October 2001, due to a shortage in working capital, we fell in arrears
with
certain royalty payments due under the Parsons Agreements. Thereafter
we became
party with, among others, Zondervan, Parsons and Riverdeep, to a court
supervised mediation arising out of a content royalty claim. A multi-party
settlement was reached on October 20, 2003, providing for our payment
to
Zondervan of $500,000 plus 5% simple interest in installments over
a period of
nine months from November 2003 to July 2004, as well as for the destruction
of
all inventory containing Zondervan-owned content. We have fully complied
with
the terms of the agreement and, upon satisfaction, received a covenant
in
perpetuity with respect to our rights under the Parsons Agreement,
effectively
extending the agreement indefinitely.
We
were
in arrears with the Internal Revenue Service for back payroll taxes
and had been
paying the payroll taxes in monthly installments previously approved
by the
Internal Revenue Service. In July of 2004, we paid all back payroll
taxes that
were due to the Internal Revenue Service and remain current with all
payroll tax
deposits and filings.
Our
employment agreements with our management team each contain a provision
for an
annual bonus equal to 1% of our net income (3% total). We accrue this
bonus on a
quarterly basis. Our management team consists of our Chief Executive
Officer
(with a base annual salary of $150,000), our Chief Financial Officer
(with a
base annual salary of $110,000), and our Chief Technology Officer (with
a base
annual salary of $150,000). In addition to the bonus provisions and
annual base
salary, each employment agreement provides for payment of all accrued
base
salaries ($17,191 included in Accrued payroll at December 31, 2005),
bonuses
($44,384 from fiscal 2004 and $-0- from fiscal 2005 included in Other
current
liabilities at December 31, 2005), and any vested deferred compensation
($36,631
included in Other current liabilities at December 31, 2005) for termination
by
reason of disability. The agreements also provide for severance compensation
equal to the then base salary until the later of (i) the expiration
of the term
of the agreement as set forth therein or (ii) one year, when the termination
is
other than for cause (including termination by reason of disability).
There is
no severance compensation in the event of voluntary termination or
termination
for cause.
In
2004,
we reduced our reserve for rebates payable based, in part, on our
ability to
meet the financial obligation of claims carried forward from our
last rebate
program in 2001. As such, we may have a legal obligation to pay rebates
in
excess of the liability recorded.
On
July
19, 2004, we entered into a certain Stock Purchase Agreement pursuant
to which
we agreed to issue and sell 21,875,000 restricted shares of our common
stock to
a New York based institutional investor, at a price of $0.08 per
share. Under
the terms of transaction, the investor received two of our common
stock purchase
warrants. The first warrant entitles the holder, for a period of
up to five
years, to purchase up to 10,937,500 common shares at a price of $0.18
per share,
subject to standard adjustment provisions. The second warrant entitles the
holder, also for a period of up to five years, to purchase up to
10,937,500
additional common shares at a price of $0.60 per share, subject to
standard
adjustment provisions.
As
part
of the financing transaction, we also entered into a certain Registration
Rights
Agreement with the investor pursuant to which we became committed
to registering
all of the shares issued as part of such transaction, including
those issuable
under the warrants. On November 22, 2004, we filed a registration
statement on
Form SB-2 covering the shares issued to the investor, as well as
the shares
underlying the warrants issued to the investor. Under the terms
of the
Registration Rights Agreement, as amended, we had until April 22,
2005 to cause
such registration statement to be declared effective by the SEC.
In accordance
with the terms of the Registration Rights Agreement, any delays
in meeting this
obligation subjected us to liability to the investor in an amount equal to
$1,726 per day for the duration of any such delay. As of December
31, 2005, we
have accrued a total of $436,686 (253 days at $1,726 per day) in
penalties under
the terms of the Registration Rights Agreement. See Note 21.
NOTE
18 - RELATED PARTY TRANSACTIONS
Our
executive officers and employees, from time to time, make purchases
of materials
and various expense items via their personal credit cards in
lieu of a corporate
check for COD orders and/or prior to establishment of a line
of credit with a
vendor. We do not provide our employees or executive officers
with corporate
credit cards and reimburse these purchases promptly. We had no
other
transactions with related parties during the years ended December
31, 2005 and
2004.
NOTE
19 - RISKS AND UNCERTAINTIES
Our
future operating results may be affected by a number of factors. We are
dependent upon a number of major inventory and intellectual property
suppliers.
If a critical supplier had operational problems or ceased making material
available to us, operations could be adversely affected.
NOTE
20 - GOING CONCERN
The
accompanying financial statements have been prepared in conformity
with
accounting principles generally accepted in the United States of America,
which
contemplates our continuation as a going concern. However, as of December
31,
2005, we had a net loss of $1,581,266. In addition, we had negative
working
capital of $3,025,697 and $1,800,446, and had an accumulated deficit
of
$7,752,097 and $6,170,831 as of December 31, 2005 and 2004, respectively.
Although these factors raise substantial doubt about our ability to
continue as
a going concern, we have taken several actions to mitigate the risk
that we will
be unable to continue as a going concern through December 31, 2006.
These
actions include expanding our in-house telemarketing efforts to increase
our
direct-to-consumer revenue while at the same time reducing commissions
paid to
third-party telemarketing firms. In addition, we have focused on reducing
both
our sales and marketing and general and administrative expenses to
those
providing the most return on investment. Finally, as indicated in Note
21, we
have stopped the accrual of penalties associated with our registration
statement
and have negotiated extended payment terms for the penalties
accrued.
NOTE 21
- SUBSEQUENT EVENTS
On
February 1, 2006, the registration statement filed on November 22, 2004
was
declared effective by the SEC. We accrued penalties at $1,726 per day
from
January 1, 2006 through January 31, 2006 ($53,506).
On
March
10, 2006, we secured a twelve-month extension to our Naperville, Illinois
office
lease. The extension expires March 31, 2007 and continues at a base
rent of
$1,320 per month.
On
March
31, 2006, we committed to issue a total of 438,462 restricted shares
of common
stock at the closing market trading price as of March 30, 2006 ($0.13)
to our
outside directors in lieu of cash as payment of amounts accrued for
their
services from the period from September 1, 2004 through March 31,
2006.
On
March
31, 2006, we committed to issue a three year warrant for up to 300,000
restricted shares of common stock with an exercise price at the closing
market
trading price as of March 30, 2006 ($.13) to our legal counsel in lieu
of cash
as payment for accrued legal fees.
On
April
3, 2006, we entered into a consulting agreement with a company for
investor
relations services. The agreement carries a twelve-month term with
either party
having the option of terminating the agreement at the six-month anniversary.
The
agreement provides for a monthly cash payment of $7,500 and 500,000
restricted
shares of common stock to be delivered during the first thirty days
of the
agreement term. In the event that the consultant does not complete
the full
twelve-month term, a pro-rata portion of 360,000 restricted shares
of common
stock will be returned to us.
On
April
7, 2006, we signed a two-year, $336,000, 8% promissory note with the
New York
based institutional investor for payment of the unpaid registration
rights
penalties. The note agreement calls for monthly installments of $10,000,
beginning May 1, 2006, for the first twelve months and $20,000 per
month
thereafter. Any overdue principal bears interest at 15% and is due
on
demand.
TABLE
OF CONTENTS
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61
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70
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70
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F-1
|
|
|
47,341,666
Shares
FINDEX.COM,
INC.
Common
Stock
_________________
PROSPECTUS
_________________
March
30,
2007
_________________
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Indemnification
of Officers And Directors
Nevada
law authorizes a Nevada corporation to indemnify its officers and directors
against claims or liabilities arising out of such person’s conduct as officers
or directors if they acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the company for which
they serve. Our srticles of incorporation provide for indemnification of our
directors. In addition, our Bylaws provide for indemnification of our directors,
officers, employees or agents. In general, these provisions provide for
indemnification in instances when such persons acted in good faith and in a
manner they reasonably believed to be in or not opposed to our best interests.
Other
Expenses of Issuance and Distribution
Expenses
payable in connection with the registration and distribution of the securities
being registered hereunder, all of which will be borne by the registrant, are
as
follows:
|
Registration
Fee - Securities and Exchange Commission
|
$
|
1,370
|
||
|
Printing
and Engraving
|
$
|
3,630
|
*
|
|
|
Legal
Fees and Expenses
|
$
|
150,000
|
*
|
|
|
Accounting
Fees
|
$
|
20,000
|
*
|
|
|
Blue
Sky Fees and Expenses
|
$
|
5,000
|
*
|
|
| Penalty Fees under Registration Rights Agreement with Barron Partners, LP |
$
|
469,472 | ||
|
Total
|
$
|
649,472
|
*
|
*
Estimated
Recent
Sales of Unregistered Securities
The
following is a comprehensive list of securities that we issued and sold within
the past three years without registration under the Securities Act:
|
Date
Securities Issued
|
Securities
Title
|
Issued
to
|
Number
of Securities Issued
|
Consideration
*
|
Footnotes
|
|||||||||||
|
Common
Stock Issuances
|
||||||||||||||||
|
Sold
for Cash
|
||||||||||||||||
|
7/19/2004
|
Common
Stock
|
Barron
Partners, LP
|
21,875,000
|
$
|
597,916
|
(A)(1)
|
|
|||||||||
|
3/7/2002
|
Common
Stock
|
Ahmad
Al Khiyami
|
75,000
|
$
|
21,429
|
(A)(2)
|
|
|||||||||
|
3/7/2002
|
Common
Stock
|
Betty
Wolfe
|
36,000
|
$
|
10,286
|
(A)(2)
|
|
|||||||||
|
3/7/2002
|
Common
Stock
|
Billy
W. Spain
|
30,000
|
$
|
8,571
|
(A)(2)
|
|
|||||||||
|
3/7/2002
|
Common
Stock
|
Bing
Bingham
|
30,000
|
$
|
8,571
|
(A)(2)
|
|
|||||||||
|
3/7/2002
|
Common
Stock
|
Bob
Heusinkveld
|
60,000
|
$
|
17,143
|
(A)(2)
|
|
|||||||||
|
3/7/2002
|
Common
Stock
|
Business
Investor Services, Inc.
|
360,000
|
$
|
102,857
|
(A)(2)
|
|
|||||||||
|
3/7/2002
|
Common
Stock
|
Charles
M. Jager
|
10,500
|
$
|
3,000
|
(A)(2)
|
|
|||||||||
|
3/7/2002
|
Common
Stock
|
Cory
J. Rueb
|
75,000
|
$
|
21,429
|
(A)(2)
|
|
|||||||||
|
3/7/2002
|
Common
Stock
|
D.R.
Jack Sullivan
|
45,000
|
$
|
12,857
|
(A)(2)
|
|
|||||||||
|
3/7/2002
|
Common
Stock
|
Donald
Harrison
|
75,000
|
$
|
21,429
|
(A)(2)
|
|
|
3/7/2002
|
Common
Stock
|
Hugh
B. Jacks
|
45,000
|
$
|
12,857
|
(A)(2)
|
|
|||||||||
|
3/7/2002
|
Common
Stock
|
Jager
Companies, Inc.
|
9,000
|
$
|
2,571
|
(A)(2)
|
|
|||||||||
|
3/7/2002
|
Common
Stock
|
James
O. Walker
|
60,000
|
$
|
17,143
|
(A)(2)
|
|
|||||||||
|
3/7/2002
|
Common
Stock
|
Jeff
Morgan
|
36,000
|
$
|
10,286
|
(A)(2)
|
|
|||||||||
|
3/7/2002
|
Common
Stock
|
Jernigan
Family Partnership II
|
75,000
|
$
|
21,429
|
(A)(2)
|
|
|||||||||
|
3/7/2002
|
Common
Stock
|
John
B. Padgett
|
15,000
|
$
|
4,286
|
(A)(2)
|
|
|||||||||
|
3/7/2002
|
Common
Stock
|
John
B. Richardson
|
15,000
|
$
|
4,286
|
(A)(2)
|
|
|||||||||
|
3/7/2002
|
Common
Stock
|
Kent
A. Upton
|
45,000
|
$
|
12,857
|
(A)(2)
|
|
|||||||||
|
3/7/2002
|
Common
Stock
|
Lifeway
Christian Resources
|
120,000
|
$
|
34,286
|
(A)(2)
|
|
|||||||||
|
3/7/2002
|
Common
Stock
|
Lifeway
Christian Resources
|
480,000
|
$
|
137,143
|
(A)(2)
|
|
|||||||||
|
3/7/2002
|
Common
Stock
|
Ollie
Sandlin
|
45,000
|
$
|
12,857
|
(A)(2)
|
|
|||||||||
|
3/7/2002
|
Common
Stock
|
Ralph
Ewing
|
36,000
|
$
|
10,286
|
(A)(2)
|
|
|||||||||
|
3/7/2002
|
Common
Stock
|
Robert
R. Crowe
|
30,000
|
$
|
8,571
|
(A)(2)
|
|
|||||||||
|
3/7/2002
|
Common
Stock
|
Ronald
Ardt
|
213,000
|
$
|
60,857
|
(A)(2)
|
|
|||||||||
|
3/7/2002
|
Common
Stock
|
Roy
W. Gilbert, Jr.
|
30,000
|
$
|
8,571
|
(A)(2)
|
|
|||||||||
|
3/7/2002
|
Common
Stock
|
Stan
Blair
|
30,000
|
$
|
8,571
|
(A)(2)
|
|
|||||||||
|
3/7/2002
|
Common
Stock
|
Steve
Jager
|
10,500
|
$
|
3,000
|
(A)(2)
|
|
|||||||||
|
3/7/2002
|
Common
Stock
|
Thomas
Ardt
|
24,000
|
$
|
6,857
|
(A)(2)
|
|
|||||||||
|
3/7/2002
|
Common
Stock
|
Thomas
E. Bradford, Jr.
|
30,000
|
$
|
8,571
|
(A)(2)
|
|
|||||||||
|
3/7/2002
|
Common
Stock
|
W.P.
Buck
|
30,000
|
$
|
8,571
|
(A)(2)
|
|
|||||||||
|
Footnotes:
|
||||||||||||||||
|
(1)
$1,750,000
($0.08 per share) total offering price, including warrants.
Amount listed
represents amount allocated to shares of common stock.
|
||||||||||||||||
|
(2)
$750,000
($0.29 per share) total offering price. Amount listed represents
amount
allocated to 2nd tranche.
|
||||||||||||||||
|
There
were no underwriter discounts or commissions associated with
these sales
of common stock for cash.
|
||||||||||||||||
|
Issued
for compensation to employees, executive officers and board
of
directors
|
||||||||||||||||
| 10/26/2006 |
Common
Stock
|
Independent
Board of Director
|
480,000 |
$
|
12,000 |
(A)
|
||||||||||
| 3/31/2006 |
Common
Stock
|
Independent
Board of Directors
|
438,462 |
$
|
57,000 |
(A)
|
||||||||||
|
6/4/2004
|
Common
Stock
|
Independent
Board of Directors
|
324,074
|
$
|
26,250
|
(A)
|
|
|||||||||
|
4/28/2004
|
Common
Stock
|
Non-Executive
Employees
|
635,000
|
$
|
13,970
|
(C)
|
|
|||||||||
|
4/7/2004
|
Common
Stock
|
Executive
Officers
|
1,519,349
|
$
|
33,426
|
(A)
|
|
|||||||||
|
7/25/2003
|
Common
Stock
|
Executive
Officer
|
250,000
|
$
|
10,000
|
(A)
|
|
|||||||||
|
7/25/2003
|
Common
Stock
|
Independent
Board of Directors
|
600,000
|
$
|
27,000
|
(A)
|
|
|||||||||
|
4/1/2002
|
Common
Stock
|
Executive
Officers
|
2,460,000
|
$
|
61,500
|
(A)
|
|
|||||||||
|
4/1/2002
|
Common
Stock
|
Independent
Board of Directors
|
2,000,000
|
$
|
50,000
|
(A)
|
|
|||||||||
|
4/1/2002
|
Common
Stock
|
Non-Executive
Employees
|
1,367,280
|
$
|
34,182
|
(C)
|
|
|||||||||
|
Issued
for compensation to independent
contractors
|
||||||||||||||||
| 4/3/2006 |
Common
Stock
|
Alliance
Advisors, LLC
|
250,000 |
$
|
32,500 |
(A)(5)(a)
|
||||||||||
|
7/16/2004
|
Common
Stock
|
Swartz
Private Equity, LLC
|
295,692
|
$
|
29,569
|
(A)(1)
|
|
|||||||||
|
7/25/2003
|
Common
Stock
|
Edward
Gerskovich
|
75,000
|
$
|
3,375
|
(A)(2)
|
|
|||||||||
|
7/25/2003
|
Common
Stock
|
Frank
Quinby
|
200,000
|
$
|
9,000
|
(A)(3)
|
|
|||||||||
|
7/25/2003
|
Common
Stock
|
Rick
Cosaro
|
25,000
|
$
|
1,125
|
(A)(2)
|
|
|||||||||
|
7/25/2003
|
Common
Stock
|
StandAlone,
Inc.
|
50,000
|
$
|
2,250
|
(A)(2)
|
|
|||||||||
|
11/15/2002
|
Common
Stock
|
Ardt
Investment Management, Inc.
|
296,308
|
$
|
8,889
|
(A)(4)
|
|
|||||||||
|
7/23/2002
|
Common
Stock
|
Charles
Moskowitz
|
205,000
|
$
|
10,250
|
(A)(5)
|
|
|||||||||
|
12/15/2001
|
Common
Stock
|
Charles
Moskowitz
|
10,750
|
$
|
430
|
(A)(5)
|
|
|||||||||
|
11/15/2001
|
Common
Stock
|
Charles
Moskowitz
|
10,750
|
$
|
645
|
(A)(5)
|
|
|||||||||
|
10/25/2001
|
Common
Stock
|
World
Trade Partners, Inc.
|
500,000
|
$
|
65,000
|
(A)(6)
|
|
|||||||||
|
10/15/2001
|
Common
Stock
|
Charles
Moskowitz
|
10,750
|
$
|
1,398
|
(A)(5)
|
|
|||||||||
|
9/15/2001
|
Common
Stock
|
Charles
Moskowitz
|
10,750
|
$
|
1,828
|
(A)(5)
|
|
|
8/15/2001
|
Common
Stock
|
Charles
Moskowitz
|
10,750
|
$
|
957
|
(A)(5)
|
|
|||||||||
|
7/15/2001
|
Common
Stock
|
Charles
Moskowitz
|
10,750
|
$
|
1,398
|
(A)(5)
|
|
|||||||||
|
6/15/2001
|
Common
Stock
|
Charles
Moskowitz
|
10,750
|
$
|
2,473
|
(A)(5)
|
|
|||||||||
|
5/15/2001
|
Common
Stock
|
Charles
Moskowitz
|
10,750
|
$
|
2,903
|
(A)(5)
|
|
|||||||||
|
4/15/2001
|
Common
Stock
|
Charles
Moskowitz
|
10,750
|
$
|
3,225
|
(A)(5)
|
|
|||||||||
|
3/15/2001
|
Common
Stock
|
Charles
Moskowitz
|
10,750
|
$
|
7,310
|
(A)(5)
|
|
|||||||||
|
2/15/2001
|
Common
Stock
|
Charles
Moskowitz
|
12,500
|
$
|
5,250
|
(A)(5)
|
|
|||||||||
|
1/15/2001
|
Common
Stock
|
Charles
Moskowitz
|
12,500
|
$
|
5,625
|
(A)(5)
|
|
|||||||||
|
Footnotes:
|
||||||||||||||||
|
(1)
Issued
as compensation for a withdrawn public offering.
|
||||||||||||||||
|
(2)
Issued
as compensation for software development services.
|
||||||||||||||||
|
(3)
Issued
as compensation for preparation of written corporate
materials.
|
||||||||||||||||
|
(4)
Issued
as compensation for consulting and valuation services.
|
||||||||||||||||
|
(5)
Issued
as compensation for investor relations services.
|
||||||||||||||||
|
(6)
Issued
as compensation for consulting, planning, development and
enhancement of
sales opportunities.
|
||||||||||||||||
| (a) Original issuance was a total of 500,000 restricted shares of common stock; however, subsequent to September 30, 2006, the issuance was reduced to a total of 250,000 restricted shares of common stock. | ||||||||||||||||
|
Issued
upon conversion of promissory note
|
||||||||||||||||
|
12/31/2004
|
Common
Stock
|
Business
Investor Services, Inc.
|
466,666
|
NA
|
(B)
|
|
||||||||||
|
11/16/2004
|
Common
Stock
|
2030
Investors, LLC
|
1,000,000
|
NA
|
(B)
|
|
||||||||||
|
11/16/2004
|
Common
Stock
|
C.
James Jensen
|
1,000,000
|
NA
|
(B)
|
|
||||||||||
|
|
||||||||||||||||
|
These
represent the number of shares of common stock issued upon
conversion of
previously issued convertible
promissory notes. No additional consideration was received
for these
conversions.
|
||||||||||||||||
|
Issued
upon conversion of preferred stock and/or preferred stock
dividends
|
||||||||||||||||
|
7/16/2004
|
Common
Stock
|
Robert
Wohlfeld
|
71,356
|
$
|
4,125
|
(B)(1)
|
|
|||||||||
|
7/16/2004
|
Common
Stock
|
Abraham
Garfinkel
|
20,000
|
$
|
---
|
(B)(2)
|
|
|||||||||
|
7/16/2004
|
Common
Stock
|
Carlos
E. Vazquez
|
10,000
|
$
|
---
|
(B)(2)
|
|
|||||||||
|
7/16/2004
|
Common
Stock
|
Ed
Toon
|
20,000
|
$
|
---
|
(B)(2)
|
|
|||||||||
|
7/16/2004
|
Common
Stock
|
First
Atlantic Capital Management, Inc.
|
66,667
|
$
|
---
|
(B)(3)
|
|
|||||||||
|
7/16/2004
|
Common
Stock
|
Ian
G. Landies
|
16,000
|
$
|
---
|
(B)(2)
|
|
|||||||||
|
7/16/2004
|
Common
Stock
|
Ionian
International Limited
|
200,000
|
$
|
---
|
(B)(4)
|
|
|||||||||
|
7/16/2004
|
Common
Stock
|
Ira
N. Kalfus
|
25,000
|
$
|
---
|
(B)(5)
|
|
|||||||||
|
7/16/2004
|
Common
Stock
|
Irwin
B. Finch Pension Trust
|
30,000
|
$
|
---
|
(B)(2)
|
|
|||||||||
|
7/16/2004
|
Common
Stock
|
Irwin
B. Finch Profit Sharing
|
20,000
|
$
|
---
|
(B)(2)
|
|
|||||||||
|
7/16/2004
|
Common
Stock
|
Jasmina
K. Skubic
|
30,000
|
$
|
---
|
(B)(2)
|
|
|||||||||
|
7/16/2004
|
Common
Stock
|
Kenneth
C. Jameson
|
16,000
|
$
|
---
|
(B)(2)
|
|
|||||||||
|
7/16/2004
|
Common
Stock
|
Randall
G. Darling
|
16,000
|
$
|
---
|
(B)(2)
|
|
|||||||||
|
7/15/2001
|
Common
Stock
|
Gordon
Landies
|
41,103
|
$
|
4,200
|
(B)(1)
|
|
|||||||||
|
Footnotes:
|
||||||||||||||||
|
(1)
Converted
at 10 shares of common stock for 1 share of preferred stock,
plus
accumulated preferred dividends.
|
||||||||||||||||
|
(2)
Converted
at 20 shares of common stock for 1 share of preferred
stock.
|
||||||||||||||||
|
(3)
Converted
at $3.00 per share of original investment.
|
||||||||||||||||
|
(4)
Converted
at 10 shares of common stock for 1 share of preferred
stock.
|
||||||||||||||||
|
(5)
Converted
at 25 shares of common stock for 1 share of preferred
stock.
|
||||||||||||||||
|
Common
Stock Warrant Issuances
|
||||||||||||||||
|
Sold
for Cash
|
||||||||||||||||
|
11/10/2004
|
Common
Stock
|
Barron
Partners, LP
|
10,937,500
|
$
|
838,539
|
(A)
|
|
|||||||||
|
11/10/2004
|
Common
Stock
|
Barron
Partners, LP
|
10,937,500
|
$
|
838,539
|
(A)
|
|
|||||||||
|
These
warrants were issued in connection with the sale of common
stock. The
total proceeds received were allocated
between the common stock and the warrants.
|
||||||||||||||||
|
Issued
for compensation to independent
contractors
|
||||||||||||||||
| 3/31/2006 |
Common
Stock
|
Michael
Membrado
|
300,000 |
$
|
7,958 |
(A)(2)
|
||||||||||
|
5/21/2004
|
Common
Stock
|
Joseph
Abrams
|
600,000
|
$
|
59,915
|
(A)(1)
|
|
|||||||||
|
4/7/2004
|
Common
Stock
|
Michael
Membrado
|
150,000
|
$
|
3,300
|
(A)(2)
|
|
|||||||||
|
6/3/2002
|
Common
Stock
|
Ronald
Ardt
|
250,000
|
$
|
12,500
|
(A)(3)
|
|
|||||||||
|
5/11/2001
|
Common
Stock
|
Membrado
& Montell, LLP
|
50,000
|
$
|
13,464
|
(A)(2)
|
|
|||||||||
|
3/7/2001
|
Common
Stock
|
Membrado
& Montell, LLP
|
100,000
|
$
|
13,464
|
(A)(2)
|
|
|||||||||
|
2/19/2001
|
Common
Stock
|
Kevin
Reagan
|
62,500
|
$
|
19,750
|
(A)(4)
|
|
|||||||||
|
2/19/2001
|
Common
Stock
|
Robert
Chamberlain
|
62,500
|
$
|
19,750
|
(A)(4)
|
|
|||||||||
|
Footnotes:
|
||||||||||||||||
|
(1)
Issued
as compensation for corporate business planning, financing
and merger and
acquisition assistance.
|
||||||||||||||||
|
(2)
Issued
as compensation for legal services.
|
||||||||||||||||
|
(3)
Issued
as compensation for business development services.
|
||||||||||||||||
|
(4)
Issued
as compensation for consulting.
|
||||||||||||||||
|
Issued
in connection with Equity Line Agreement
|
||||||||||||||||
|
3/26/2001
|
Common
Stock
|
Swartz
Private Equity
|
510,000
|
$
|
181,392
|
(A)
|
|
|||||||||
|
The
above warrant was issued as consideration for entering
into an equity line
agreement.
|
||||||||||||||||
|
Issued
in connection with Convertible Secured Note Payable
Agreement
|
||||||||||||||||
| 7/26/2006 |
Common
Stock
|
W.
Sam Chandoha
|
100,000 |
$
|
4,997 |
(A)
|
||||||||||
|
The
above warrant was issued as consideration for entering
into a loan
agreement evidenced by a convertible secured promissory
note.
|
||||||||||||||||
|
Common
Stock Option Issuances
|
||||||||||||||||
| 10/26/2006 |
Common
Stock
|
Non-Executive
Employees
|
850,000 |
$
|
21,250 |
(A)
|
||||||||||
|
7/7/2003
|
Common
Stock
|
Executive
Officer
|
500,000
|
$
|
---
|
(A)
|
|
|||||||||
|
6/7/2002
|
Common
Stock
|
Executive
Officer
|
500,000
|
$
|
---
|
(A)
|
|
|||||||||
|
8/21/2001
|
Common
Stock
|
Independent
Board of Directors
|
525,000
|
$
|
---
|
(A)
|
|
|||||||||
|
7/18/2001
|
Common
Stock
|
Executive
Officers
|
500,000
|
$
|
---
|
(A)
|
|
|||||||||
|
7/18/2001
|
Common
Stock
|
Non-Executive
Employees
|
950,000
|
$
|
---
|
(C)
|
|
|||||||||
|
6/12/2001
|
Common
Stock
|
Non-Executive
Employee
|
2,000
|
$
|
---
|
(C)
|
|
|||||||||
|
5/3/2001
|
Common
Stock
|
Non-Executive
Employee
|
2,000
|
$
|
---
|
(C)
|
|
|||||||||
|
3/5/2001
|
Common
Stock
|
Executive
Officer
|
25,000
|
$
|
---
|
(A)
|
|
|||||||||
|
3/5/2001
|
Common
Stock
|
Non-Executive
Employees
|
31,000
|
$
|
---
|
(C)
|
|
|||||||||
|
The
above non-qualified common stock options were issued for
employment
incentives to our executive officers and
non-executive employees and issued as consideration for
service rendered
as an independent board member.
For
options issued prior to January 1, 2006, we did not recognize
consideration upon the issuance of the options, but would
rather recognize
the consideration when the options are exercised, as approved
by APB
Opinion No. 25 and allowed under SFAS No. 123. For
options issued after January 1, 2006, and according to
SFAS No. 123 (R),
we do recognize consideration upon the issuance of the
options.
|
||||||||||||||||
|
Promissory
Notes Convertible into Common Stock
|
||||||||||||||||
|
9/30/2004
|
Common
Stock
|
2030
Investors, LLC
|
1,000,000
|
$
|
120,000
|
(A)
|
|
|||||||||
|
9/30/2004
|
Common
Stock
|
C.
James Jensen
|
1,000,000
|
$
|
120,000
|
(A)
|
|
|||||||||
|
5/31/2002
|
Common
Stock
|
AIM
Financial Advisors, Inc.
|
666,666
|
$
|
33,333
|
(A)
|
|
|||||||||
|
5/31/2002
|
Common
Stock
|
AIM
Securities, Inc.
|
666,666
|
$
|
33,333
|
(A)
|
|
|||||||||
|
5/31/2002
|
Common
Stock
|
Business
Investor Services, Inc.
|
666,666
|
$
|
33,333
|
(A)
|
|
|||||||||
|
Promissory
Notes
|
||||||||||||||||
| 7/23/2006 |
Note
Payable
|
W.
Sam Chandoha
|
NA |
$
|
150,000 |
(A)(1)
|
||||||||||
| 4/7/2006 |
Note
Payable
|
Barron
Partners, LP
|
NA |
$
|
336,000 |
(A)(2)
|
||||||||||
|
3/15/2004
|
Note
Payable
|
American
Bible Society
|
NA
|
$
|
90,700
|
(A)(3)
|
|
|||||||||
|
9/25/2003
|
Note
Payable
|
Ivy
Hill/Warner Media
|
NA
|
$
|
164,000
|
(A)(3)
|
|
|||||||||
|
(1)
Issued to fund an existing working capital deficit.
(2)
Issued in settlement of penalty fees incurred in connection
with a certain
Registration Rights Agreement entered into with Barron
on July 19,
2004.
(3)
Issued in settlement of outstanding trade account
payables.
|
||||||||||||||||
|
General
Footnotes:
|
||||||||||||||||
|
(A)
We relied in each case for these unregistered sales on the private
offering exemption of Section 4(2) of the Securities Act and/or the
private offering safe harbor provision of Rule 506 of Regulation
D
promulgated thereunder based on the following factors: (i) the number
of
offerees or purchasers, as applicable, (ii) the absence of general
solicitation, (iii) representations obtained from the acquirors relative
to their accreditation and/or sophistication (or from offeree or
purchaser
representatives, as applicable), (iv) the provision of appropriate
disclosure, and (v) the placement of restrictive legends on the
certificates reflecting the securities coupled with investment
representations obtained from the acquirors.
|
|||||
|
(B)
We relied on Section 3(a)(9) of the Securities Act as the basis for
our
exemption from registration of these offerings.
|
|||||
|
(C)
We relied in each case for these unregistered sales on the private
offering exemption of Section 4(2) of the Securities Act based on
the
following factors: (i) the number of offerees, (ii) the absence of
general
solicitation, (iii) representations obtained from the acquirors relative
to their sophistication (or from offeree representatives, as applicable),
(iv) the provision of appropriate disclosure, and (v) the placement
of
restrictive legends on the certificates reflecting the securities
coupled
with investment representations obtained from the
acquirors.
|
|||||
|
As
of the date of this registration statement, none of the common stock
option issuances or the common stock warrant issuances have been
exercised.
|
|||||
Exhibits
The
Exhibits to this registration statement are listed in the Exhibit Index
commencing at page EX-1 hereof.
Undertakings
The
undersigned registrant hereby undertakes the following:
1.
To
file,
during any period in which offers or sales are being made, a post-effective
amendment to this registration statement to:
(a)
include
any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
(b)
reflect
in the prospectus any facts or events which, individually or, together,
represent a fundamental change in the information in the registration statement.
Notwithstanding the forgoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed
that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate,
the
changes in the volume and price represent no more than a 20% change in
the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement; and
(c)
include
any additional or changed material information on the plan of distribution.
2.
For
determining liability under the Securities Act, to treat each such
post-effective amendment as a new registration statement of the securities
offered, and the offering of such securities at that time to be the initial
bona
fide offering.
3.
To
file a
post-effective amendment to remove from registration any of the securities
that
remain unsold at the end of the offering.
4.
For
determining liability of the undersigned small business issuer under the
Securities Act to any purchaser in the initial distribution of the securities,
that in a primary offering of securities of the undersigned small business
issuer pursuant to this registration statement, regardless of the underwriting
method used to sell the securities to the purchaser, if the securities
are
offered or sold to such purchaser by means of any of the following
communications, the undersigned small business issuer will be a seller
to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
|
|
i.
|
Any
preliminary prospectus or prospectus of the undersigned small
business
issuer relating to the offering required to be filed pursuant
to Rule 424;
|
|
|
ii.
|
Any
free writing prospectus relating to the offering prepared by
or on behalf
of the undersigned small business issuer or used or referred
to by the
undersigned small business issuer;
|
|
|
iii.
|
The
portion of any other free writing prospectus relating to the
offering
containing material information about the undersigned small business
issuer or its securities provided by or on behalf of the undersigned
small
business issuer; and
|
|
|
iv.
|
Any
other communication that is an offer in the offering made by
the
undersigned small business issuer to the purchaser.
|
5.
For
the
purpose of determining liability under the Securities Act to any purchaser
each prospectus filed pursuant to Rule 424(b) as part of a registration
statement relating to an offering, other than registration statements relying
on
Rule 430B or other than prospectus filed in reliance on Rule 430A, shall
be
deemed to be part of and included in the registration statement as of the
date
it is first used after effectiveness. Provided, however, that no statement
made
in a registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by
reference
into the registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior
to such
first use, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or
made in
any such document immediately prior to such date of first use.
Insofar
as indemnification for liabilities arising under the Securities Act may
be
permitted to our directors, officers and controlling persons pursuant to
the
provisions above, or otherwise, we have been advised that in the opinion
of the
Securities and Exchange Commission such indemnification is against public
policy
as expressed in the Securities Act, and is, therefore, unenforceable.
In
the
event that a claim for indemnification against such liabilities, other
than the
payment by us of expenses incurred or paid by one of our directors, officers,
or
controlling persons in the successful defense of any action, suit or proceeding,
is asserted by one of our directors, officers, or controlling persons in
connection with the securities being registered, we will, unless in the
opinion
of our counsel the matter has been settled by controlling precedent, submit
to a
court of appropriate jurisdiction the question whether such indemnification
is
against public policy as expressed in the Securities Act, and we will be
governed by the final adjudication of such issue.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant certifies
that
it has reasonable grounds to believe that it meets all the requirements for
filing on Form SB-2 and has duly caused this registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Omaha, State of Nebraska, on the date below.
Dated: March
30, 2007
|
FINDEX.COM,
INC.
|
|||
|
By:
/s/
Steven Malone
|
|||
|
Steven
Malone, President
|
|||
|
&
Chief Executive Officer
|
POWER
OF ATTORNEY
We,
the
undersigned directors and officers of Findex.com, Inc., do hereby constitute
and
appoint Steven Malone, acting individually, our true and lawful attorney and
agent, to do any and all acts and things in our name and behalf in our
capacities as directors and officers, and to execute any and all instruments
for
us and in our names in the capacities indicated below, which said attorney
and
agent may deem necessary or advisable to enable said corporation to comply
with
the Securities Act of 1933, as amended, and any rules, regulations and
requirements of the SEC, in connection with this registration statement,
including specifically, but without limitation, power and authority to sign
for
us or any of us in our names and in the capacities indicated below, any and
all
amendments (including post-effective amendments) hereof; and we do hereby ratify
and confirm all that the said attorney and agent shall do or cause to be done
by
virtue hereof.
Pursuant
to the requirements of the Securities Act of 1933, this registration statement
has been signed by the following persons in the capacities and on the dates
indicated.
|
Signature
|
Title
|
Date
|
||||||
|
/s/
Steven Malone
|
|
Chairman
of the Board, President
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March
30, 2007
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Steven
Malone
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and
Chief Executive Officer (principal
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executive
officer)
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/s/
Kirk R. Rowland
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Chief
Financial Officer
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March
30, 2007
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Kirk
R. Rowland
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(principal
financial and accounting
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officer)
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/s/
John Kuehne
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Director
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March
30, 2007
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John
A. Kuehne
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EXHIBIT
INDEX
FINDEX.COM,
INC.
The
following exhibits are included as part of this registration statement, except
those which are identified as having been previously filed with the SEC and
which are incorporated by reference to another registration statement, report
or
document. References to the “company” in this Exhibit Index mean FINDEX.COM,
INC., a Nevada corporation.
|
Exhibit
No.
|
Description
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|
2.1
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Share
Exchange Agreement between FindEx.com, Inc. and the stockholders
of Reagan
Holdings, Inc. dated March 7, 2000, incorporated by reference
to Exhibit
2.1 on Form 8-K filed March 15, 2000.
|
|
3(i)(1)
|
Articles
of Incorporation of Findex.com, Inc., incorporated by reference
to Exhibit
3.1 on Form 8-K filed March 15, 2000.
|
|
3(i)(2)
|
Amendment
to Articles of Incorporation of Findex.com, Inc. dated November
12, 2004
incorporated by reference to Exhibit 3.1(ii) on Form 10-QSB filed
November 12, 2004.
|
|
3(ii)
|
By-Laws
of Findex.com, Inc., incorporated by reference to Exhibit 3.3 on
Form 8-K
filed March 15, 2000.
|
|
5.1
|
Legal
opinion of M.M. Membrado, PLLC dated March 30, 2007. FILED HEREWITH.
|
|
10.1
|
Stock
Incentive Plan of Findex.com, Inc. dated May 7, 1999, incorporated
by
reference to Exhibit 10.1 on Form 10-KSB/A filed May 13, 2004.
|
|
10.2
|
Share
Exchange Agreement between Findex.com, Inc. and the stockholders
of Reagan
Holdings Inc., dated March 7, 2000, incorporated by reference to
Exhibit
2.1 on Form 8-K filed March 15, 2000.
|
|
10.3
|
License
Agreement between Findex.com, Inc. and Parsons Technology, Inc.
dated June
30, 1999, incorporated by reference to Exhibit 10.3 on Form 10-KSB/A
filed
May 13, 2004.
|
|
10.4
|
Employment
Agreement between Findex.com, Inc. and Steven Malone dated July
25, 2003,
incorporated by reference to Exhibit 10.4 on Form 10-KSB/A filed
May 13,
2004.
|
|
10.5
|
Employment
Agreement between Findex.com, Inc. and Kirk Rowland dated July
25, 2003,
incorporated by reference to Exhibit 10.5 on Form 10-KSB/A filed
May 13,
2004.
|
|
10.6
|
Employment
Agreement between Findex.com, Inc. and William Terrill dated June
7, 2002,
incorporated by reference to Exhibit 10.6 on Form 10-KSB/A filed
May 13,
2004.
|
|
10.7
|
Restricted
Stock Compensation Agreement between Findex.com, Inc. and John
A. Kuehne
dated July 25, 2003, incorporated by reference to Exhibit 10.7
on Form
10-KSB/A filed May 13, 2004.
|
|
10.8
|
Restricted
Stock Compensation Agreement between Findex.com, Inc. and Henry
M.
Washington dated July 25, 2003, incorporated by reference to Exhibit
10.8
on Form 10-KSB/A filed May 13, 2004.
|
|
10.9
|
Restricted
Stock Compensation Agreement between Findex.com, Inc. and William
Terrill
dated July 25, 2003, incorporated by reference to Exhibit 10.9
on Form
10-KSB/A filed May 13, 2004.
|
|
10.10
|
Stock
Purchase Agreement, including the form of warrant agreement, between
Findex.com, Inc. and Barron Partners, LP dated July 19, 2004, incorporated
by reference to Exhibit 10.1 on Form 8-K filed July 28, 2004.
|
|
10.11
|
Amendment
No. 1 To Barron Partners, LP Stock Purchase Agreement dated September
30,
2004, incorporated by reference to Exhibit 10.3 on Form 8-K filed
October
6, 2004.
|
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10.12
|
Registration
Rights Agreement between Findex.com, Inc. and Barron Partners,
LP dated
July 26, 2004, incorporated by reference to Exhibit 10.2 on Form
8-K filed
on July 28, 2004.
|
|
10.13
|
Waiver
certificate between Findex.com, Inc. and Barron Partners, LP
dated
September 16, 2004, incorporated by reference to Exhibit 10.4
on Form 8-K
filed October 6, 2004.
|
|
10.14
|
Settlement
Agreement between Findex.com, Inc., The Zondervan Corporation,
Mattel,
Inc., TLC Multimedia, Inc., and Riverdeep, Inc. dated October
20, 2003,
incorporated by reference to Exhibit 10.14
on
Form 10-KSB/A filed on June 7, 2005.
|
|
10.15
|
Employment
Agreement Extension between FindEx.com, Inc. and Steven Malone
dated March
31, 2006, incorporated by reference to Exhibit 10.1 on Form
8-K filed
April 6, 2006.
|
|
10.16
|
Employment
Agreement Extension between FindEx.com, Inc. and William
Terrill dated
March 31, 2006 incorporated by reference to Exhibit 10.2
on Form 8-K filed
April 6, 2006.
|
|
10.17
|
Employment
Agreement Extension between FindEx.com, Inc. and Kirk R.
Rowland dated
March 31, 2006 incorporated by reference to Exhibit 10.3
on Form 8-K filed
April 6, 2006.
|
|
10.18
|
Promissory
Note to Barron Partners, LP dated April 7, 2006, incorporated
by reference
to Exhibit 10.1 on Form 8-K filed April 13,
2006.
|
|
10.19
|
Share
Exchange Agreement between FindEx.com, Inc. and the stockholders
of Reagan
Holdings Inc., dated March 7, 2000, incorporated by reference
to Exhibit
2.1 on Form 8-K filed March 15,
2000.
|
|
10.20
|
Convertible
Secured Promissory Note between FindEx.com, Inc. and W. Sam
Chandoha,
dated July 20, 2006, incorporated by reference to Exhibit
10.1 on Form 8-K
filed July 26, 2006.
|
|
10.21
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Security
Agreement between FindEx.com, Inc. and W. Sam Chandoha, dated
July 20,
2006 incorporated by reference to Exhibit 10.2 on Form 8-K
filed July 26,
2006.
|
|
10.22
|
Common
Stock Purchase Warrant between FindEx.com, Inc. and W. Sam
Chandoha, dated
July 20, 2006 incorporated by reference to Exhibit 10.3 on
Form 8-K filed
July 26, 2006.
|
|
10.23
|
Modification
and Extension Agreement Between FindEx.com, Inc. and W. Sam
Chandoha,
dated September 20, 2006, incorporated by reference to Exhibit
10.1 on
Form 8-K filed September
25,2006.
|
|
16.1
|
Letter
from Chisholm, Bierwolf, & Nilson, P.C., dated January 3, 2006
regarding change in certifying accountant, incorporated by
reference to
Exhibit 16.1 on Form 8-K/A filed January 4,
2006.
|
|
21.1
|
Share
Exchange Agreement between FindEx.com, Inc. and the stockholders
of Reagan
Holdings Inc., dated March 7, 2000, incorporated by reference to
Exhibit
2.1 on Form 8-K filed March 15, 2000.
|
|
21.2
|
Subsidiaries
of FindEx.com, Inc. as of December 31, 2005, incorporated by
reference to
Exhibit 21.1 on Form 10-KSB filed April 17,
2006.
|
|
23.1
|
Consent
of Chisholm, Bierwolf & Nilson, LLC, Independent Certified Public
Accountants dated March 28, 2007. FILED HEREWITH.
|
|
23.2
|
Consent
of M.M. Membrado, PLLC (contained in Exhibit 5.1 to this registration
statement).
|
|
23.3
|
Consent
of Brimmer, Burek & Keelan LLP, Independent Certified Public
Accountants dated March 28, 2007. FILED
HEREWITH.
|
|
24.1
|
Powers
of Attorney (included on the signature page to this registration
statement).
|