UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
Amendment
No. 6 to the
FORM
SB-2/A
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
FINDEX.COM,
INC.
(Name
of
Small Business Issuer in Its Charter)
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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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$.001
per share
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150,000
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(4)
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$
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0.010
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(5)
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$
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1,500
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$
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0.19
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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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47,491,666
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$
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10,860,300
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$
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1,376.00
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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 $1,376.00 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 January 19, 2006
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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.
47,491,666
SHARES OF COMMON STOCK
OFFERED
BY SELLING STOCKHOLDERS
This
prospectus relates to the resale of up to 47,491,666 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 $8,669,550.
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 January 18, 2006, the average of the bid and asked prices of our common
stock was $0.095 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 4 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 January 19, 2006.
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 January
19, 2006, 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.
PROSPECTUS
SUMMARY
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 5 through 14 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 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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•
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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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•
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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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•
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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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•
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1,275,000
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 23,150,000 additional shares
of
common stock issuable upon exercise of the warrants described above.
On January 19, 2006, there were 48,619,855 shares of our common stock
outstanding. Upon the exercise of the warrants described above, the number
of
shares offered by this prospectus represents 66.2% of our total common
stock
outstanding on January 19, 2006.
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Total
common stock outstanding prior to this offering
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48,619,855
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Total
common stock offered for resale to the public in this
offering
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47,491,666
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Common
stock outstanding after this Offering
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71,769,855
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Percentage
of common stock outstanding following this offering that shares
being
offered for resale represent
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66.2
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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 $8,669,550 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 January 18,
2006, the average of the bid and asked prices of our common stock was
$0.095 per
share.
EXPLANATORY
NOTES
On
July
21, 2005, our management and board of directors, in consultation with
Chisholm,
Bierwolf & Nilson, P.C., our then independent registered accounting firm,
determined that we would revise our previously issued consolidated balance
sheets, statements of operations, statements of stockholders’ equity, and
statements of cash flows for the fiscal years ended December 31, 1999,
December
31, 2000, December 31, 2002, December 31, 2003 and December 31, 2004
and for
each of the three month periods ended June 30, 2002, September 30, 2002,
March
31, 2003, June 30, 2003, September 30, 2003, March 31, 2004, June 30,
2004,
September 30, 2004, March 31, 2005,and June 30, 2005 to reflect certain
issues
identified during a regulatory review of our financial statements associated
with this registration statement as originally filed with the SEC on
November
22, 2004 on Form SB-2. Our management and our board of directors have
concluded
these restatements are necessary to reflect the following
changes:
The
following revisions affected the reported results of operations for the
periods
indicated:
| § |
During
the year ended December 31, 1999, we erroneously recognized
revenue of
$559,201, cost of sales of $156,280 and an income tax expense
of $168,000,
associated with inventory retained by The Learning Company
(“TLC”) as part
of a certain amended Asset Purchase Agreement dated June 30,
1999.
Accordingly, we have restated our consolidated balance sheet
as of
December 31, 1999 and our consolidated statements of operations,
consolidated statements of stockholders’ equity, and consolidated
statements of cash flows for the year then
ended.
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| § |
During
the year ended December 31, 2004, we discovered that unpaid rebate
claims from the year ended December 31, 2000, totaling $98,946,
had been
duplicated. Accordingly, we have restated the liability recorded
for
unpaid rebate claims for the fiscal year end December 31,
2000 as a
decrease to rebates payable rather than as an adjustment
to the beginning
retained earnings of the period commencing January 1,
2003.
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| § |
During
the quarter ended June 30, 2002, we reached a tentative
settlement
agreement in an arbitration with TLC which forgave the
final, unpaid
installment due on a certain software license agreement
entered into in
1999 (the
“1999 license”) and extended the license term from 10
years to 50 years. We originally recorded the final, unpaid
installment of
$1,051,785 as an offset against the recorded historical
cost of the 1999
license and recalculated the amortization based on this
reduced amount and
the extension of the useful life to 50 years. Our management
has concluded
that too much time had elapsed between the date of the
1999 license and
the date of the tentative settlement agreement for such
an offset to be
appropriate. Accordingly, we have restated our statement
of operations for
the year ended December 31, 2002 recognizing the extinguishment
of the
liability owed to TLC.
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| § |
During
the year ended December 31, 2003, we reached a final
settlement agreement
in a second dispute arising out of the 1999 license with
The
Zondervan Corporation (“Zondervan”) and TLC which extended the
life of the 1999 license, and the trademarks included
therein,
indefinitely. Our management has since concluded a 10
year life is
appropriate on the basis of our going concern opinions
for the years ended
December 31, 2002 and 2003. Accordingly, we have restored
the estimated
economic useful life to the original 10 years and have
recalculated annual
amortization accordingly for the years ended December
31, 2003 and 2004
and subsequent periods.
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The
following revisions resulted only in reclassifications or clarification
and had
no net effect on the reported results of operations:
| § |
During
the year ended December 31, 2003, we decided to no
longer provide support
for and to destroy all remaining inventory of certain
of our products.
Accordingly, we revised our consolidated statement
of operations for the
year ended December 31, 2003 to reflect obsolete
inventory of $60,792 in
the “Cost of Sales” section.
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| § |
As
part of the 2003 final settlement process with
Zondervan and TLC, an
internal audit (verified by an independent auditor
provided by TLC) of the
accrued royalties owed Zondervan revealed that
accrued royalties had been
overstated due to our 2001 bad debt recognition
of TLC’s trade accounts
receivable balance. Accordingly, we revised our
condensed consolidated
statements of operations for the year ended December
31, 2003 to reflect
the $583,628 adjustment as “Other income” in the “Other income (expense)”
section.
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| § |
During
the year ended December 31, 2003, we reclassified
loan proceeds, and the
corresponding accrued interest payable, previously
recorded as an
unsecured note payable. Accordingly, we revised
our condensed consolidated
statements of operations for the year ended December
31, 2003 to reflect
the $866,516 adjustment as “Other income” in the “Other income (expense)”
section.
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| § |
During
the three months ended March 31, 2004, and
as a direct result of the final
settlement agreement with Zondervan and TLC,
we wrote-off certain
inventory containing Zondervan-owned content.
Accordingly, we revised our
condensed consolidated statement of operations
for the year ended December
31, 2004 to reflect this $32,396 inventory
adjustment in the “Cost of
Sales” section.
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| § |
During
each of the above referenced reporting periods,
we reclassified rebates
from sales and marketing expenses as an adjustment to
revenue.
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| § |
During
the three months ended September 30, 2004,
we settled a dispute for early
termination arising out of an agreement
with Swartz Private Equity and
originally recorded this transaction as
a non-recurring item of $154,569
in our condensed consolidated statements
of operations. Our revised
condensed consolidated statement of operations
for the year ended December
31, 2004 reflects this transaction as “Other expenses” in the “Other
income (expense)”
section.
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| § |
During
the three months ended September 30, 2004,
we negotiated a settlement
agreement for debt extinguishment with
several of our creditors totaling
$1,002,090 in the aggregate. Our revised
condensed consolidated statement
of operations for the year ended December
31, 2004 reflects this
transaction in the “Other income”
section.
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On
October 3, 2005, our management and board of directors, in consultation
with
Chisholm, Bierwolf & Nilson, P.C., our then independent registered
accounting firm, determined that we would revise our previously issued
consolidated balance sheets, statements of operations, statements of
stockholders’ equity, and statements of cash flows for the fiscal years ended
December 31, 2003 and December 31, 2004 and for each of the three month
periods
ended June 30, 2003, September 30, 2003, March 31, 2004, and June 30,
2004 to
reflect a certain issue identified during a regulatory review of our
financial
statements associated with this registration statement as originally
filed with
the SEC on November 22, 2004 on Form SB-2. Our management and our board
of
directors have concluded this restatement is necessary to reflect the
following change:
| § |
During
the three months ended June 30, 2004, we originally recorded
an adjustment
to our rebates reserve in the amount of $266,301 and an adjustment
to
rebates payable in the amount of $12,599. Upon reassessment of the
adequacy of our reserve at December 31, 2003, we have allocated
$124,262
of the total adjustment to fiscal year 2003 and $142,039
to fiscal year
2004 with $66,575 allocated to the three months ended March
31, 2004 and
$75,464 allocated to the three months ended June 30, 2004.
Our revised
condensed consolidated statement of operations for the years
ended
December 31, 2003 and 2004 reflect these adjustments as an
adjustment to
revenue.
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On
November 30, 2005, our management and board of directors, in consultation
with
Chisholm, Bierwolf & Nilson, P.C., our then independent registered
accounting firm, determined that we would revise our previously
issued
consolidated balance sheets, statements of operations, statements
of
stockholders’ equity, and statements of cash flows for the fiscal year ended
December 31, 2004 and for each of the three month periods ended
September 30,
2004, March 31, 2005, June 30, 2005 and September 30, 2005 to reflect
a certain
issue identified during a regulatory review of our financial statements
associated with this registration statement as originally filed
with the SEC on
November 22, 2004 on Form SB-2. Our management and our board of
directors have
concluded this restatement is necessary to reflect the following
change:
-4-
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On
July 19, 2004 we completed an equity financing
in the amount of $1,750,000
through a private placement with Barron Partners,
LP, a New York based
institutional investor, pursuant to 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 erroneously treated
the warrants issued to
Barron Partners as equity. The correct presentation
is as a liability
adjusted for changes in fair value, at each
balance sheet date, through
the consolidated statements of operations,
as provided by EITF 00-19,
Accounting
for Derivative Financial Instruments Indexed
to, and Potentially Settled
in, a Company’s Own Stock.
Accordingly, we have reclassified the initial
fair value of the warrants
($4,375,000 at July 19, 2004) as a current
liability ($2,843,742 at
September 30, 2005) and have included the net
change in fair value through
September 30, 2005 ($874,992) and 2004 ($1,385,422)
in “Other Expenses” on
our consolidated statements of
operations.
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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.
We
believe that the net proceeds received from our 2004 sales of common stock
and
warrants, and convertible promissory notes together with future cash flow
from
operations, and funds from external sources of credit-based debt financing,
will
be adequate to meet our anticipated liquidity requirements over the next
twelve
months and will provide additional capital for potential acquisitions.
Given our
initiative towards rapid revenue growth, there can be no assurance, however,
that our operations and access to external sources of financing will continue
to
provide resources sufficient to satisfy our liabilities arising in the
ordinary
course of business. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources”.
Our
accumulated deficit makes it harder for us to borrow
funds.
As
of September 30, 2005, and as a result of historical losses in prior years,
our accumulated deficit was $7,764,059. 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”.
RISKS
ASSOCIATED WITH OUR BUSINESS AND INDUSTRY
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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publisher’s
access to retail shelf space;
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the
price of each title; and
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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 2004, approximately 91% of our total revenue was derived from two
software
titles; QuickVerse®, comprising 63% of total revenue, and Membership
Plus®, comprising 28% of total revenue. We expect that a very
limited
number of popular 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 systems (such as PDA) 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. While
our
most recent title version, QuickVerse®
2006,
was introduced as planned in September 2005, it remains 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 or the expectations of public market analysts and investors,
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. The
majority of sales for a new title or title version occur within the
first
thirty to one hundred and twenty days following release and net revenue
associated with the initial introduction generally constitutes a
high percentage
of the total net revenue over the life of the title or title version.
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 in 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, there
can
be no assurance 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 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 after their
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
product development cash outlays for the fiscal year ended December
31, 2004
were higher than those for the fiscal year ended December 31, 2003
and 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 currently have an employment agreement with Steven Malone and are
in the
process of reviewing for extension the recently expired employment
agreements of
Kirk R. Rowland and William Terrill, there can be no assurance that
we will be able to retain our existing key personnel or attract and
retain
additional key personnel. 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
97% of our revenues in 2004, 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 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. 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, generating only about 29% 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
have incurred a total of $469,472 (272 days at $1,726 per day) in
registration rights penalties as of the date of this amendment.
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,
and warrants to purchase another 21,875,000 shares of our common stock,
to
Barron Partners, LP, a New York based institutional investor. 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. Such 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 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 January 19, 2006 we have accrued $469,472 (272 days at $1,726 per
day) in
penalties under the Registration Rights 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 continue to accrue
from June
21, 2005 until this registration statement is declared effective,
at which
time a negotiated reduction of such total amount is expected to be
reached, the
extent of which is as yet unknown, and terms of payment of which are
expected to
be agreed to which will allow us to reasonably meet our ongoing operating
needs.
We have
experienced continued delays in the effectiveness of this registration
statement
due principally to ongoing efforts made necessary by our determination
to
restate certain of our historical financial information. Although
there can be no assurance, management is hopeful that we will cause
this
registration statement to be declared effective in the near future.
The
amount paid by us to date to satisfy this obligation has, and any continued
delays in our ability to cause this registration statement to be declared
effective coupled with additional amounts which we are and may be required
to
pay, will 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.
We
may incur derivative liabilities in an as yet unknown amount in connection
with
our issuance of two common stock warrants.
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.
The
fair
value of each warrant was initially assessed at $2,187,500 ($4,375,000
total)
using the Black-Scholes valuation method. In accordance with accounting
mandates, the derivative liability associated with these warrants has
been and
shall continue until this registration statement is declared effective
to be
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. At December
31, 2004,
the fair value of the derivative liability was approximately $1,969,000,
and a
fair value adjustment of approximately $292,000 has been included in
other
expenses for the year then ended. The fair value of the derivative
liability is
directly related and will fluctuate in response to the share price
of our common
stock. 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 47,491,666 shares of our common stock will become eligible for public
sale as
a result of this registration which is likely to depress our stock
price.
When
this
registration statement is declared effective by the SEC, 24,341,666 shares
of
our common stock will be eligible for immediate resale on the public market
and
23,150,000 shares of our common stock underlying warrants, upon their exercise,
will be 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 66.2%. 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 will be freely transferable thereafter 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.
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:
|
|
•
|
deliver
a standardized risk disclosure document that provides information
about
penny stocks and the nature and level of risks in the penny stock
market;
|
|
|
•
|
provide
the customer with current bid and offer quotations for the penny
stock;
|
|
|
•
|
explain
the compensation of the broker-dealer and its salesperson in the
transaction;
|
|
|
•
|
provide
monthly account statements showing the market value of each penny
stock
held in the customer’s
account; and
|
|
|
•
|
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.
|
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:
|
|
•
|
the
trading volume of our shares;
|
|
|
•
|
the
number of securities analysts, market-makers and brokers following
our
common stock;
|
|
|
•
|
changes
in, or failure to achieve, financial estimates by securities analysts;
|
|
|
•
|
new
products introduced or announced by us or our competitors;
|
|
|
•
|
announcements
of technological innovations by us or our competitors;
|
|
|
•
|
our
ability to produce and distribute retail packaged versions of our
software
in advance of peak retail selling seasons;
|
|
|
•
|
actual
or anticipated variations in quarterly operating results;
|
|
|
•
|
conditions
or trends in the consumer software and/or Christian products industries;
|
|
|
•
|
announcements
by us of significant acquisitions, strategic partnerships, joint
ventures,
or capital commitments;
|
|
|
•
|
additions
or departures of key personnel;
|
|
|
•
|
sales
of our common stock; and
|
|
|
•
|
stock
market price and volume fluctuations of publicly-traded, particularly
microcap, companies generally.
|
The
volatility of our common stock is illustrated by reference to the fact
that,
during fiscal year 2005, our trading price fluctuated from a low of $0.07
to a
high of $0.17 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.
Any
shares owned by our officers or directors which are either registered in
another
registration statement or which otherwise may be sold in the future without
registration under the Securities Act to the extent permitted by Rule 144
or
other exemptions under the Securities Act, may be sold in the future by them.
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 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 or quotation system.
We
are
not currently subject to the listing requirements of any national securities
exchange or quotation system. The listing standards of the national securities
exchanges and automated quotation systems 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
three members, all of whom are independent. Similarly, the compensation
and nominating committees of company boards of directors must also consist
of
independent directors. Currently, only two of our directors, who are the
only members of our audit committee, meet the definition of an “independent”
director as defined by the Sarbanes-Oxley Act of 2002 and as defined by listing
standards. Further, two of our four directors are currently executive
officers and thereby do not satisfy these independence standards. There is
no guarantee that we will be able to appoint an additional director who will
satisfy these independence requirements. If we are unable to appoint an
additional independent director to our board, we will be precluded from listing
any of our capital stock on a national securities exchange or quotation
system.
The
even number of members on each of our board of directors, audit committee
and
compensation committee could result in a stalemate on important company
matters.
The
fact
that we currently have four members on our board of directors, and two
members
on each of our board of directors’ audit and compensation committees, could
result in a tie vote on company matters, including those involving highly
material corporate governance issues. Moreover, we do not currently have
any
duly adopted resolution procedures in place that would provide a means
for
resolving any stalemate that might occur in this regard. Although we are
currently in the process of considering potential alternative procedures
in
order to be prepared for having to face such a potential situation, our
current
lack of any such procedure could result in our inability to be able to
act under
circumstances in which the failure to act or any delay in acting could
have a
material adverse effect on our business, our financial condition, including
liquidity and profitability, and our results of operations.
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 warrants to the law firm of Membrado & Montell,
LLP, and to Michael M. Membrado, our corporate counsel. 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 $8,020,078. 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 $8,020,078 in net proceeds,
and
although there can be no assurance, we intend to use the net proceeds
from this
offering as follows:
|
Product
Development
|
$
|
2,000,000
|
||
|
Marketing
and Promotion
|
500,000
|
|||
|
Other
Working Capital Needs
|
5,020,078
|
|||
|
New
Content License Acquisitions
|
500,000
|
|||
|
Total
Net Proceeds
|
$
|
8,020,078
|
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, 2005 and the notes to those
consolidated financial statements.
Management
Overview
During
the third quarter of 2005, we released an upgrade to our flagship product,
QuickVerse®,
which
was three months earlier compared to our upgrade release of
QuickVerse®
in 2004.
Furthermore, this is the first upgrade release of QuickVerse®
in over
five years that will be in the retail stores before the Holiday season begins.
QuickVerse®
2006 is
currently available in five editions, QuickVerse®
2006
Essentials, QuickVerse®
2006
Standard, QuickVerse®
2006
Expanded, QuickVerse®
2006
Deluxe and QuickVerse®
2006
Platinum. We believe that the unique features of the new QuickVerse®
2006
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. The QuickVerse®
2006
editions range in retail price from $49.95 to $799.95. In addition, during
the
second quarter of 2005 and for the first time in our operating history, we
introduced QuickVerse®
to the
Macintosh®
Operating System platform. QuickVerse®
Macintosh
is available in two new editions, QuickVerse®
Macintosh Black which has a suggested retail price of $99.95 and
QuickVerse®
Macintosh
White which has a suggested retail price of $49.95. We believe we are now
the
only publisher of Bible reference software for each of the Windows®,
Macintosh®,
PocketPC®
and
Palm®
OS
platforms. We also released an updated version of Bible Illustrator®
3.0
titled Sermon Builder®
4.0
during the second quarter of 2005. Sermon Builder®
4.0 was
the first update to this particular program in over six years and has a
suggested retail price of $69.95. Sermon Builder®
4.0 is
ideal for pastors and teachers who want to create punctuated sermons,
comprehensive lessons, and in-depth Bible studies. Furthermore, during the
first
quarter of 2005, and for the second consecutive year, we released an upgrade
to
our top-selling financial and data management software, Membership
Plus®,
and
introduced two new QuickVerse®
editions, QuickVerse®
2005
Essentials and QuickVerse®
2005
Platinum. As a result of these releases, our third quarter 2005 revenues
were
higher than those during the third quarter of 2004. Although there can be
no
assurance, we believe that we can sustain our revenue growth through the
fourth
quarter based upon our development schedule which includes an update to our
QuickVerse®
PDA
software.
|
Statement
of Operations for Nine Months Ended September 30
|
2005
|
2004
|
Change
|
|
%
|
||||||||||
|
Net
revenues
|
$
|
3,978,019
|
$
|
3,664,060
|
$
|
313,959
|
9
|
%
|
|||||||
|
Cost
of sales
|
$
|
1,276,227
|
$
|
1,171,661
|
$
|
104,566
|
9
|
%
|
|||||||
|
Gross
profit
|
$
|
2,701,792
|
$
|
2,492,399
|
$
|
209,393
|
8
|
%
|
|||||||
|
Total
operating expenses
|
$
|
(3,317,410
|
)
|
$
|
(2,876,077
|
)
|
$
|
(441,333
|
)
|
15
|
%
|
||||
|
Other
income
|
$
|
75
|
$
|
1,010,288
|
$
|
(1,010,213
|
)
|
-100
|
%
|
||||||
|
Loss
on valuation adjustment of derivatives
|
$
|
(874,992
|
)
|
$
|
(1,385,422
|
)
|
$
|
510,430
|
-37
|
%
|
|||||
|
Other
expenses
|
$
|
(289,876
|
)
|
$
|
(193,344
|
)
|
$
|
(96,532
|
)
|
50
|
%
|
||||
|
Loss
before income taxes
|
$
|
(1,780,411
|
)
|
$
|
(952,156
|
)
|
$
|
(828,255
|
)
|
87
|
%
|
||||
|
Provision
for income taxes
|
$
|
187,182
|
$
|
(92,417
|
)
|
$
|
279,599
|
-303
|
%
|
||||||
|
Net
loss
|
$
|
(1,593,229
|
)
|
$
|
(1,044,573
|
)
|
$
|
(548,656
|
)
|
53
|
%
|
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, generating only
about
29% of our annual sales.
For
the
nine months ended September 30, 2004, we wrote down the reserve for rebates
payable from a change in accounting estimate of approximately $142,000
and wrote
down actual rebates payable of approximately $61,000 due to an overstatement.
Both of these write down items are recognized as an adjustment to revenue.
We
also wrote down a distinct category of obsolete inventory of approximately
$32,000 which is included in cost of sales, and incurred an expense of
approximately $155,000 related to a settlement with an institutional
private
equity investor which is included in other expenses. Furthermore, for
the nine
months ended September 30, 2004, we recognized approximately a $1,000,000
gain
from extinguishment of debt which is classified as other income. The
extinguishment of debt is a direct result of our settling with various
vendors
and content providers for lump-sum payments at a reduced amount of balances
owed. We
recognized a loss of approximately $1,385,000 for the nine months ended
September 30, 2004 and a loss of approximately $875,000 for the nine
months
ended September 30, 2005 related to the fair value adjustment of derivatives
in
other expenses. Warrants issued with shares of common stock in a private
placement are considered derivative liabilities. The derivative liability
associated with the warrants has been 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. See “Derivatives” below. For
the
nine months ended September 30, 2005, we incurred penalties of approximately
$278,000 in connection with a certain Registration Rights Agreement entered
into
with Barron Partners, LP and our registration statement on Form SB-2
originally
filed on November 22, 2004, and which, as of the date of this filing,
has yet to
be declared effective. These penalties are included in other expenses.
Furthermore, due to the continued delays in effectiveness of such registration
statement, due principally to ongoing efforts made necessary by our
determination to restate certain of our historical financial information,
we
have experienced an increase in legal expenses of approximately $136,000
for the
nine months ended September 30, 2005 compared to the nine months ended
September
30, 2004. Due mainly to the items stated above, our net loss increased
approximately $51,000 from a net loss of approximately $907,000 for the
three
months ended September 30, 2004 to a net loss of approximately $958,000
for the
three months ended September 30, 2005 and increased approximately $548,000
from
a net loss of approximately $1,045,000 for the nine months ended September
30,
2004 to a net loss of approximately $1,593,000 for the nine months ended
September 30, 2005.
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 elements and include
software products, we allocate and defer revenue for the undelivered
elements
based on their vendor-specific objective evidence of fair value, which
is
generally the price charged when that element 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 65% of our 2004 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
three and nine months ended September 30, 2004 and 2005, 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 or price protection 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. We did implement a price protection program within the third
quarter of
2005 on our QuickVerse®
2005
titles within the Christian Booksellers Association retail channel due
to our
updated release of QuickVerse®
2006.
QuickVerse®
2006 was
released in late September 2005, and we believe we reserved appropriately
for
the price protections.
Software
products are sold separately, without 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
|
2005
|
%
to Sales
|
2004
|
%
to Sales
|
Change
|
|
%
|
||||||||||||||
|
Gross
sales
|
$
|
1,233,389
|
100
|
%
|
$
|
1,125,275
|
100
|
%
|
$
|
108,114
|
10
|
%
|
|||||||||
|
Add
rebate adjustment
|
4,910
|
0
|
%
|
---
|
0
|
%
|
4,910
|
0
|
%
|
||||||||||||
|
Less
reserve for sales returns and allowances
|
(214,691
|
)
|
-17
|
%
|
(115,068
|
)
|
-10
|
%
|
(99,623
|
)
|
87
|
%
|
|||||||||
|
Net
sales
|
$
|
1,023,609
|
83
|
%
|
$
|
1,010,207
|
90
|
%
|
$
|
13,401
|
1
|
%
|
|
Revenues
for Nine Months Ended September 30
|
2005
|
%
to Sales
|
2004
|
%
to Sales
|
Change
|
|
%
|
||||||||||||||
|
Gross
sales
|
$
|
4,744,759
|
100
|
%
|
$
|
3,898,250
|
100
|
%
|
$
|
846,510
|
22
|
%
|
|||||||||
|
Add
rebate adjustment
|
14,730
|
0
|
%
|
202,548
|
5
|
%
|
(187,817
|
)
|
-93
|
%
|
|||||||||||
|
Less
reserve for sales returns and allowances
|
(781,471
|
)
|
-16
|
%
|
(436,737
|
)
|
-11
|
%
|
(344,733
|
)
|
79
|
%
|
|||||||||
|
Net
sales
|
$
|
3,978,019
|
84
|
%
|
$
|
3,664,060
|
94
|
%
|
$
|
313,959
|
8
|
%
|
Gross
revenues increased approximately $108,000 from approximately $1,125,000
for the
three months ended September 30, 2004 to approximately $1,233,000
for the three
months ended September 30, 2005 and increased approximately $847,000
from
approximately $3,898,000 for the nine months ended September 30,
2004 to
approximately $4,745,000 for the nine months ended September 30,
2005. Such
increase is due to our new title version releases during the nine
months ended
September 30, 2005 including an enhanced version of our top financial
and data
management product, Membership Plus®,
and
enhanced versions of QuickVerse®
2005
Essentials and QuickVerse®
2005
Platinum editions during the first quarter of 2005. During the second
quarter of
2005, we introduced QuickVerse®
Macintosh in two editions, White Box edition at the suggested retail
price of
$49.95 and Black Box edition at the suggested retail price of $99.95.
This was
our first product release on the Macintosh®
Operating System platform. We also released an enhanced version of
Bible
Illustrator®
3.0
entitled Sermon Builder®
4.0
during the second quarter of 2005. Sermon Builder®
4.0 was
the first update to this particular program in over six years and
has a
suggested retail price of $69.95. During the third quarter of 2005,
we released
an upgrade to our flagship product, QuickVerse®,
three
months earlier as compared to our upgrade release of QuickVerse®
in 2004.
QuickVerse®
2006 is
the first upgrade release in over five years that will be in the
retail stores
prior to the beginning of the holiday season. The five QuickVerse®
2006
editions that are currently available are QuickVerse®
2006
Essentials, QuickVerse®
2006
Standard, QuickVerse®
2006
Expanded, QuickVerse®
2006
Deluxe and QuickVerse®
2006
Platinum, and they range in suggested retail price from $49.95 to
$799.95.
Comparatively, during the nine months ended September 30, 2004, we
had only two
product releases which included Membership Plus®
8.0 with
a suggested retail price of $199.95 to $299.95 and QuickVerse®
2005 PDA
with a suggested retail price of $14.95 to $39.95. We anticipate
that revenues
will continue to increase throughout the year as the QuickVerse®
2006
editions reach retail stores in time for the holiday season and we
will be
releasing an update to our QuickVerse®
PDA
software within the fourth quarter of 2005.
Sales
returns and allowances increased approximately $100,000 from approximately
$115,000 for the three months ended September 30, 2004 to approximately
$215,000
for the three months ended September 30, 2005 and increased approximately
$345,000 from approximately $437,000 for the nine months ended September
30,
2004 to approximately $782,000 for the nine months ended September 30,
2005. As
a percentage of gross sales, sales returns and allowances increased from
approximately 10% for the three months ended September 30, 2004 to approximately
17% for the three months ended September 30, 2005 and increased from
approximately 11% for the nine months ended September 30, 2004 to approximately
16% for the nine months ended September 30, 2005. The upward trend in sales
returns and allowances as a percentage is attributable to our release of
enhanced versions of QuickVerse®
in
December 2004 and late September 2005 and Membership Plus®
in
February of 2005. The release of these enhanced products resulted in an
increased quantity of sales returns and allowances, such as price protections,
of prior versions as the enhancements for both of these titles are approximately
one year. In the past, product enhancements were typically extended over
two to
three years. We have also increased our reserve for sales returns due to
a
higher price point in connection with QuickVerse®
Platinum
being released in the first quarter of 2005. Furthermore, due to the resignation
of the primary developer of Membership Plus®
and some
unresolved maintenance issues, we have experienced higher actual returns
on the
Membership Plus®
2005
product line. However, we are currently utilizing both domestic and
international contracted developers to not only resolve the maintenance
issues
but to also continue the development for our annual update on the Membership
Plus®
program.
We are on track to continue to release enhanced versions of our products
on an
annual basis; however, we do anticipate the sales return and allowances
as a
percentage to follow a downward trend in the future due to the increased
focus
of our sales efforts to the end-user and our decreased presence in the
retail
market. Incidents of return are lower for sales direct to the end-user
than
sales into the retail stores.
Cost
of
sales consists primarily of royalties 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 decreased approximately $21,000 from approximately $274,000 for
the
three months ended September 30, 2004 to approximately $253,000 for the
three
months ended September 30, 2005 and increased approximately $77,000 from
approximately $899,000 for the nine months ended September 30, 2004 to
approximately $976,000 for the nine months ended September 30, 2005. As
a
percentage of gross revenues, the direct costs and manufacturing overhead
decreased approximately 4% for the three months ended September 30, 2005
and
decreased approximately 2.5% for the nine months ended September 30, 2005.
The
nine months ended September 30, 2004 include the write down of a distinct
category of obsolete inventory of approximately $32,000. Fulfillment costs
from
a third-party warehouse and included in the manufacturing overhead costs
noted
above decreased approximately $8,000 from approximately $53,000 for the
nine
months ended September 30, 2004 to approximately $45,000 for the nine months
ended September 30, 2005 as we moved our retail fulfillment to a new outside
entity in late October 2004. The 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 and the increased amortization
of
those software development costs. The amortization recognized during the
nine
months ended September 30, 2004 resulted from several new software releases
in
late 2003 and early 2004 including QuickVerse®
8.0 and
Membership Plus®
8.0.
Similarly, the amortization recognized during the nine months ended September
30, 2005 resulted from the December 2004 release of QuickVerse®
2005,
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
the 2005 levels as working capital remains more consistent and as more
development projects are implemented in a shortened timeframe.
Royalties
to third party providers of intellectual property decreased approximately
$94,000 from approximately $158,000 for the three months ended September
30,
2004 to approximately $64,000 for the three months ended September
30, 2005 and
increased approximately $27,000 from approximately $273,000 for the
nine months
ended September 30, 2004 to approximately $300,000 for the nine months
ended
September 30, 2005. As a percentage of gross revenues, royalties decreased
from
approximately 14% for the three months ended September 30, 2004 to
approximately
5% for the three months ended September 30, 2005 and slightly decreased
from
approximately 7% for the nine months ended September 30, 2004 to approximately
6.3% for the nine months ended September 30, 2005. The decrease of
royalties for
the three months ended September 30, 2004 and 2005 reflects the sale
of some of
the older QuickVerse®
versions
to liquidators at a reduced price in 2004 compared to no sales to liquidators
during the same three month period in 2005. However, the overall steady
percentage for the nine months ended September 30, 2004 and 2005 reflects
the
release of the QuickVerse®
2005
editions in early December 2004, and the three additional QuickVerse®
editions, specifically QuickVerse®
Essentials and QuickVerse®
Platinum, which were released in early March of 2005 and QuickVerse®
Macintosh which was released in June 2005. We also released Sermon
Builder®
4.0 in
June 2005 which was an update to Bible Illustrator®
3.0.
This was the first update to Bible Illustrator®
3.0 in
over six years and included not only technological updates but content
additions. During the year ended 2004, we renegotiated several royalty
contracts
which resulted in some cases in a higher royalty rate along with access
to more
content. The royalty rate for the fourth quarter of 2005 is expected
to increase
as the QuickVerse®
2006
retail products began to ship in early October 2005 compared to the
QuickVerse®
2005
retail products shipping in December 2004. In addition, 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 and as more development projects are
implemented
for new and/or enhanced products. However, upgrade sales will continue
to be
subject to royalties only on content additions of the upgraded version.
Software
development costs are expensed as incurred until technological feasibility
and
marketability has been established, at which time development costs are
capitalized until the software title is available for general release to
customers. 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 is segregated by title and technology platform. Once a product
has
been successfully released, subsequent revisions and upgrades are considered
development and the costs of the revision and upgrade are capitalized.
Capitalized costs are amortized on a product-by-product basis using the
greater
of (i) the straight-line amortization over the estimated life of the product
(generally from 12 to 18 months), 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.
Software
development costs are summarized in the table below. The software development
costs, consisting primarily of direct and indirect labor and related
overhead
charges, capitalized during the three months ended September 30, 2004
and 2005
were approximately $237,000 and approximately $172,000, respectively
and
approximately $415,000 and $766,000 for the nine months ended September
30, 2004
and 2005, respectively. Accumulated amortization of these development
costs
included in cost of sales totaled approximately $139,000 and approximately
$161,000 for the three months ended September 30, 2004 and 2005, respectively
and approximately $398,000 and $525,000 for the nine months ended September
30,
2004 and 2005, respectively. The overall increase in both the capitalization
and
amortization is a direct result of the increase in the number of development
projects we have undertaken in the last two years and the consistent
one year
turn around on enhanced versions of our two major product lines
QuickVerse®
and
Membership Plus®.
|
|
Three
Months Ended September
30,
|
Nine
Months Ended September
30,
|
|||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
Beginning
balance
|
$
|
931,103
|
$
|
504,497
|
$
|
701,289
|
$
|
584,706
|
|||||
|
Capitalized
|
171,990
|
237,148
|
766,151
|
415,196
|
|||||||||
|
Amortized
(Cost of sales)
|
160,642
|
139,369
|
524,989
|
397,626
|
|||||||||
|
Ending
Balance
|
$
|
942,451
|
$
|
602,276
|
$
|
942,451
|
$
|
602,276
|
|||||
|
Research
and development expense (General and administrative)
|
$
|
63,164
|
$
|
532
|
$
|
130,407
|
$
|
44,228
|
|||||
|
Sales,
General and Administrative Costs for Nine Months Ended September
30
|
2005
|
%
to Sales
|
2004
|
%
to Sales
|
Change
|
|
%
|
||||||||||||||
|
Selected
expenses:
|
|||||||||||||||||||||
|
Commissions
|
$
|
611,653
|
13
|
%
|
$
|
576,482
|
15
|
%
|
$
|
35,171
|
6
|
%
|
|||||||||
|
Advertising
and direct marketing
|
419,217
|
9
|
%
|
221,928
|
6
|
%
|
197,288
|
89
|
%
|
||||||||||||
|
Total
sales and marketing
|
$
|
1,030,870
|
22
|
%
|
$
|
798,410
|
20
|
%
|
$
|
232,459
|
29
|
%
|
|||||||||
|
Research
and development
|
$
|
130,407
|
3
|
%
|
$
|
44,228
|
1
|
%
|
$
|
86,180
|
195
|
%
|
|||||||||
|
Personnel
costs
|
973,620
|
21
|
%
|
946,222
|
24
|
%
|
27,398
|
3
|
%
|
||||||||||||
|
Legal
|
157,970
|
3
|
%
|
21,742
|
1
|
%
|
136,228
|
627
|
%
|
||||||||||||
|
Telecommunications
|
42,605
|
1
|
%
|
107,720
|
3
|
%
|
(65,115
|
)
|
-60
|
%
|
|||||||||||
|
Corporate
services
|
73,972
|
2
|
%
|
53,965
|
1
|
%
|
20,007
|
37
|
%
|
||||||||||||
|
Administration
|
13,263
|
0
|
%
|
101,756
|
3
|
%
|
(88,493
|
)
|
-87
|
%
|
|||||||||||
|
Other
general and administrative costs
|
428,150
|
9
|
%
|
374,723
|
10
|
%
|
53,427
|
14
|
%
|
||||||||||||
|
Total
general and administrative
|
$
|
1,819,987
|
38
|
%
|
$
|
1,650,355
|
42
|
%
|
$
|
169,632
|
10
|
%
|
Gross
revenues increased approximately $108,000 from approximately $1,125,000 for
the
three months ended September 30, 2004 to approximately $1,233,000 for the three
months ended September 30, 2005 and increased approximately $847,000 from
approximately $3,898,000 for the nine months ended September 30, 2004 to
approximately $4,745,000 for the nine months ended September 30, 2005. However,
sales and marketing expenses also increased approximately $8,000 from
approximately $288,000 for the three months ended September 30, 2004 to
approximately $296,000 for the three months ended September 30, 2005 and
increased approximately $233,000 from approximately $798,000 for the nine months
ended September 30, 2004 to approximately $1,031,000 for the nine months ended
September 30, 2005. Included in sales expenses, commissions to a third-party
telemarketing firm increased approximately $35,000 from approximately $577,000
for the nine months ended September 30, 2004 to approximately $612,000 for
the
nine months ended September 30, 2005. This increase is attributed to the
increased
focus of our sales to the direct consumer along with the number of new and
enhanced product releases during the nine months ended September 30, 2005
compared with two product releases during the nine months ended September 30,
2004. However, as a percentage of gross revenues commissions decreased from
approximately 15% to approximately 13% for the nine months ended September
30,
2004 and 2005, respectively. This decrease is attributed to the in-house
development of our direct telemarketing sales team as we attempt to reduce
the
reliance on the third-party telemarketing firm. Advertising and direct marketing
costs increased approximately $197,000 from approximately $222,000 for the
nine
months ended September 30, 2004 to approximately $419,000 for the nine months
ended September 30, 2005 and increased as a percentage of gross revenues from
approximately 6% to approximately 9%, respectively. This increase is a direct
result in continuing to market our products online through multiple sources,
continuing to increase and focus more on our direct marketing efforts, and
the
increased number of publication advertisements due to the new product
enhancements of QuickVerse®
2006 and
Membership Plus®
2005
along with the introduction of the three new QuickVerse®
editions
(QuickVerse®
Platinum, Macintosh and Essentials) and the updated Sermon Builder®
4.0
during the nine months ended September 30, 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 $500 for the
three
months ended September 30, 2004 compared to approximately $63,000 incurred
for
the three months ended September 30, 2005 and approximately $44,000 for
the nine
months ended September 30, 2004 compared to approximately $130,000 for
the nine
months ended September 30, 2005. The increase in 2005 reflects more research
and
development costs associated with maintenance issues on titles after they
are
released to the general public along with exploring new platforms for future
products. Research and development expenses are expected to increase in
future
periods as we add new products and versions to our product mix along with
new
platforms for our current and future products.
Total
personnel costs increased approximately $27,000 from approximately $946,000
for
the nine months ended September 30, 2004 to approximately $973,000 for
the nine
months ended September 30, 2005. However, direct salaries and wages increased
approximately $115,000 from approximately $1,083,000 for the nine months
ended
September 30, 2004 to approximately $1,198,000 for the nine months ended
September 30, 2005. As a percentage of gross revenues, direct salaries
and wages
decreased approximately 2.5% from approximately 27.8% for the nine months
ended
September 30, 2004 to approximately 25.3% for the nine months ended September
30, 2005. The direct salaries and wages include approximately $36,000 and
$-0-
in expense for upper management year-end bonus accrual for the year ends
December 31, 2004 and 2005, respectively. Furthermore, we recognized
approximately $14,000 of expense related to 635,000 restricted common shares
issued to employees during the nine months ended September 30, 2004. The
increase in direct salaries and wages is a direct result of increasing
our sales
and marketing team, our development staff and our direct telemarketing
sales
team. The associated health care costs decreased approximately $16,000
from
approximately $121,000 for the nine months ended September 30, 2004 to
approximately $105,000 for the nine months ended September 30, 2005 as
we
restructured our health benefits plans in late October 2004. The capitalization
of direct and indirect labor and related overhead charges as software
development costs (see “Cost of Sales” above) increased by approximately
$155,000 from approximately $206,000 for the nine months ended September
30,
2004 to approximately $361,000 for the nine months ended September 30,
2005.
This increase is due to the addition of development staff and the increased
amount of new development projects. It is anticipated that personnel costs
will
increase in future periods as operating capital is available to fund full
staffing of our product development team and expansion of the direct sales
staff.
Direct
legal costs increased approximately $136,000 for the nine months ended
September
30, 2005 as the company continues to work through the registration process
for
the SB-2 registration statement. It is anticipated that legal costs will
continue at increased levels as we pursue our business plan for growth
by
acquiring companies that are synergistic with our current product line
and
customer base. Telecommunications costs decreased approximately $65,000
for the
nine months ended September 30, 2005 as we switched our local and long
distance
carriers in order to take advantage of the provider’s current technology. Our
increased call volume enabled us to change our service to dedicated T-1
lines
which in turn reduced the long distance charges. Furthermore, we 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 release of the two major product upgrades in December
2004 and
February 2005 along with the three new product releases during the nine
months
ended September 30, 2005. Corporate service fees increased approximately
$20,000
for the nine months ended September 30, 2005. These fees are related
to the
hiring of an outside consultant and the expense for a 2004 issuance of
a warrant
to purchase 600,000 shares of common stock allocated over the term of
the
consulting contract. Administration expenses decreased approximately
$88,000 for
the nine months ended September 30, 2005 due to not incurring interest
and
penalty fees on back payroll taxes as we did during the nine months ended
September 30, 2004. Finally, bad debt expense increased approximately
$19,000
for the nine months ended September 30, 2005 as we were notified by one
of our
liquidation customers of the possibility that they will not be able to
pay on
their full balance due to us.
During
the quarter ended September 30, 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. We do not anticipate
this
to be a recurring event in the future.
Furthermore
during the quarter ended September 30, 2004, we 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 expenses.
On
July
19, 2004, we completed an equity financing in the amount of $1,750,000
through a
private placement with Barron Partners, LP where 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. Such 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 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
September 30, 2005, we had accrued a total of $278,000 (161 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
continue to accrue from June 21, 2005 until the registration statement
is
declared effective, at which time a negotiated reduction of such total
amount is
expected to be reached, the extent of which is as yet unknown, and terms
of
payment of which are expected to be agreed to so as to allow us to reasonably
meet our ongoing operating needs. The penalties have been included in
other
expenses. We have 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.
Although there can be no assurance, management is hopeful that we will
cause
such registration statement to be declared effective in the near future.
The
amount paid by us to date to satisfy this obligation has, and any continued
delays in our ability to cause the registration statement to be declared
effective coupled with additional amounts which we are and may be required
to
pay, will 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.
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 until our registration statement
on
Form SB-2 originally filed on November 22, 2004 is declared effective
to be
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 September 30, 2004 and September
30, 2005,
the fair value of the derivative liability was approximately $3,063,000
and
approximately $2,844,000, respectively, and a fair value adjustment
of
approximately $1,385,000 and approximately $875,000, respectively,
has been
included in other expenses for the nine months then
ended.
Amortization
expense increased approximately $12,000 for the nine months ended September
30,
2005. The software license acquired from The Learning Company in July
of 1999 is
amortized over a 10 year useful life. Amortization expense for 2005 reflects
the
continual amortization of the software license along with the amortization
for
the launch of our website, www.quickverse.com, 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, 2005, management established
the
valuation allowance based on the assessment that the company will
produce
sufficient income in the future to realize its net deferred tax asset.
The
resulting deferred tax liability reflects income taxes payable in
future periods
on the net deductible differences related to the software license
agreement. We
currently have net operating loss carryforwards, for income tax purposes,
of
approximately $7,648,000. The carryforwards are the result of income
tax losses
generated in 2000 ($2,480,000 expiring in 2020) and 2001 ($5,168,000
expiring in
2021). We will need to achieve a minimum annual taxable income over
the
remaining life of the carryforward, before deduction of operating
loss
carryforwards, of approximately $450,000 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 September 30
|
2005
|
2004
|
Change
|
|
%
|
||||||||||
|
Current
assets
|
$
|
1,025,946
|
$
|
1,138,544
|
$
|
(112,598
|
)
|
-10
|
%
|
||||||
|
Current
liabilities
|
$
|
4,438,500
|
$
|
4,395,404
|
$
|
43,096
|
1
|
%
|
|||||||
|
Retained
deficit
|
$
|
(7,764,059
|
)
|
$
|
(8,179,456
|
)
|
$
|
415,397
|
-5
|
%
|
As
of
September 30, 2005, we had $1,025,946 in current assets, $4,438,500
in current
liabilities and a retained deficit of $7,764,059. We had a loss before
income
taxes of $846,416 for the three months ended September 30, 2005 and
a loss
before income taxes of $1,780,411 for the nine months ended September
30, 2005.
In comparison, we had a loss before income taxes of $876,208 for
the three
months ended September 30, 2004 and a loss before income taxes of
$952,156 for
the nine months ended September 30, 2004.
|
Cash
Flows for Nine Months Ended September 30
|
2005
|
2004
|
Change
|
|
%
|
||||||||
|
Cash
flows provided (used) by operating activities
|
$
|
479,934
|
$
|
(795,389
|
)
|
$
|
1,275,323
|
-160
|
%
|
||||
|
Cash
flows (used) by investing activities
|
$
|
(750,851
|
)
|
$
|
(422,349
|
)
|
$
|
(328,502
|
)
|
78
|
%
|
||
|
Cash
flows provided (used) by financing activities
|
$
|
(30,604
|
)
|
$
|
1,715,469
|
$
|
(1,746,073
|
)
|
-102
|
%
|
Net
cash
used by operating activities was approximately $795,000 for the
nine months
ended September 30, 2004, and net cash provided by operating
activities was
approximately $480,000 for the nine months ended September 30,
2005. The
increase in cash provided was primarily due to an increase in
the amounts
received from customers resulting from increased sales along
with a decrease in
the amount paid out to suppliers and employees.
Net
cash
used in investing activities was approximately $422,000 for the
nine months
ended September 30, 2004 and approximately $751,000 for the nine
months ended
September 30, 2005. The increase in cash used for investing activities
results
from capitalizing costs associated with software development and
Website
development along with upgrading our internal computer equipment
and software in
order to increase our operating efficiency capabilities. Furthermore,
during the
nine months ended September 30, 2005 the restriction on the cash
held in reserve
by our merchant banker was lifted and made available to us.
Net
cash
provided by financing activities was approximately $1,715,000 for
the nine
months ended September 30, 2004, and net cash used by financing
activities was
approximately $31,000 for the nine months ended September 30, 2005.
The net cash
provided by financing activities for the nine months ended September
30, 2004
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 for Barron Partners. Cash
used by financing
activities for the nine months ended September 30, 2005 reflects
payments made
on long-term note payables.
-25-
On
July
19, 2004, we completed an equity financing in the amount of
$1,750,000 through a
private placement with Barron Partners, LP. Under the terms
of the agreement,
Barron purchased 21,875,000 restricted shares of common stock
at a price of
$0.08 per share. In addition, according to the terms of the
agreement, Barron
received two warrants to purchase common stock. The first warrant
entitles
Barron to purchase up to 10,937,500 shares of common stock
at a price of $0.18
per share and the second warrant entitles Barron to purchase
up to 10,937,500
additional shares of common stock at a price of $0.60 per share;
each warrant is
subject to standard adjustment provisions. These warrants have
been accounted
for as a liability according to EITF 00-19. In accordance with
the accounting
mandate, the derivative liability associated with these 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 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
September 30, 2004 and September 30, 2005, the fair value of
the derivative
liability was approximately $3,063,000 and approximately $2,844,000,
respectively, and a fair value adjustment of approximately
$1,385,000 and
approximately $875,000, respectively, has been included in
other expenses for
the nine months then ended.
As
part
of the July 19, 2004 financing transaction with Barron Partners,
LP, we also
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
September 30, 2005 we have accrued $278,000 (161 days at $1,726
per day) in
penalties under the terms of the Registration Rights 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
continue to accrue from June 21, 2005 until the registration statement
is
declared effective, at which time a negotiated reduction of such
total amount is
expected to be reached, the extent of which is as yet unknown,
and terms of
payment of which are expected to be agreed to so as to allow us
to reasonably
meet our ongoing operating needs. Although there can be no assurance,
management
is hopeful that we will cause such registration statement to be
declared
effective in the near future. The amount paid by us to date to
satisfy this
obligation has, and any continued delays in our ability to cause
the
registration statement to be declared effective coupled with additional
amounts
which we are and may be required to pay, will 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 Exhibits
10.10, 10.11,
10.12, and 10.13.
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, 2005, the future minimum rental payments required
under these
leases are as follows:
|
2005
|
$
|
20,333
|
||
|
2006
|
69,451
|
|||
|
2007
|
27,288
|
|||
|
Total
future minimum rental payments
|
$
|
117,072
|
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, 2005 for each of
the next five years and in the aggregate are:
|
2005
|
$
|
3,432
|
||
|
2006
|
13,726
|
|||
|
2007
|
13,726
|
|||
|
2008
|
13,726
|
|||
|
2009
|
12,582
|
|||
|
Total
minimum lease payments
|
57,192
|
|||
|
Less:
Amount representing interest
|
12,086
|
|||
|
Total
obligations under capital lease
|
45,106
|
|||
|
Less:
Current installments of obligations under capital
lease
|
8,922
|
|||
|
Long-term
obligation under capital lease
|
$
|
36,184
|
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 the company the first quarter of fiscal 2006.
We did not
grant any form of share-based awards during the nine months ended
September 30,
2005.
The
following discussion should be read together with our consolidated
financial statements for the period ended December 31, 2004 and the notes
to the
consolidated financial statements.
Our
income before taxes decreased approximately $1,525,000 from an income
of
approximately $1,473,000 for the twelve months ended December 31, 2003
to a loss
of approximately $52,000 for the twelve months ended December 31, 2004,
and our
net income decreased approximately $735,000 from a net income of approximately
$1,699,000 for the twelve months ended December 31, 2003 to a net income
of
approximately $964,000 for the twelve months ended December 31, 2004.
These
decreases are a result of the following items. For the twelve months
ended
December 31, 2003, we wrote down accrued royalties of approximately
$584,000 and
wrote off a note payable of approximately $650,000 and the interest
associated
with the note of approximately $217,000. Both of these write down items
are
included in other income. We also wrote down a distinct category of
obsolete
inventory of approximately $61,000, which is included in cost of sales.
For the
twelve months ended December 31, 2004, we wrote down the reserve for
rebates
payable from a change in accounting estimate of approximately $142,000
and wrote
down actual rebates payable of approximately $61,000 due to an overstatement.
Both of these write down items are recognized as an adjustment to revenue.
We
also wrote down a distinct category of obsolete inventory of approximately
$32,000 which is included in cost of sales, and incurred an expense
of
approximately $155,000 related to a settlement with an institutional
private
equity investor which is included in other adjustments. Furthermore,
for the
twelve months ended December 31, 2004, we recognized approximately
a $1,000,000
gain from extinguishment of debt which is classified as other income.
The
extinguishment of debt is a direct result from settling with various
vendors and
content providers for lump-sum payments at a reduced amount of balances
owed.
Finally,
we recognized a loss of approximately $292,000 related to the fair
value
adjustment of derivatives in other expenses for the twelve months ended
December
31, 2004. Warrants issued with shares of common stock in a private
placement are
considered derivative liabilities. The derivative liability associated
with the
warrants has been 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. See “Derivatives” below.
Non-cash
expenses related to shares of common stock issued for services increased
by
approximately $126,000. For the year ended December 31, 2004, we recognized
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 a settlement agreement.
Comparatively, for the year ended December 31, 2003, we recognized expenses
of
approximately $53,000 relating to shares of common stock issued for services.
Overall, interest expense for the twelve months ended December 31, 2004
decreased by approximately $45,000 compared to 2003. This is due to our
reducing
trade payables and meeting the scheduled terms. Furthermore, the note
liabilities interest was reduced due in part to the reclassification of
the note
payable in the fourth quarter of 2003. Amortization expense for the twelve
months ended December 31, 2004 increased by approximately $15,000 compared
to
2003. This reflects the continual amortization of the software license
along
with the amortization for the launch of our Website, www.quickverse.com,
during
the second quarter of 2004. Amortization expense related to software development
costs, which is included in cost of sales, increased approximately $220,000
for
the twelve months ended December 31, 2004 compared to 2003. This is a direct
result from QuickVerse®
8.0
shipping in late December 2003, Membership Plus®
8.0
shipping in January 2004, QuickVerse®
PDA 2005
shipping in September 2004, and QuickVerse®
2005
shipping in early December 2004.
|
Revenues
for Twelve Months Ended December 31
|
2004
|
%
to Gross Sales
|
2003
|
%
to Gross Sales
|
Change
|
|
%
|
|||||||||||
|
Gross
sales
|
$
|
5,786,427
|
100
|
%
|
$
|
4,787,545
|
100
|
%
|
$
|
998,882
|
21
|
%
|
||||||
|
Add
rebate adjustments
|
203,313
|
4
|
%
|
170,154
|
4
|
%
|
33,159
|
19
|
%
|
|||||||||
|
Less
reserve for sales returns and allowances
|
(567,643
|
)
|
-10
|
%
|
(396,788
|
)
|
-8
|
%
|
(170,855
|
)
|
43
|
%
|
||||||
|
Net
sales
|
$
|
5,422,097
|
94
|
%
|
$
|
4,560,911
|
96
|
%
|
$
|
861,186
|
19
|
%
|
Gross
revenues increased approximately $999,000 from approximately $4,788,000
for the
year ended December 31, 2003 to approximately $5,787,000 for the year
ended
December 31, 2004. Such increase is due to our release of an enhanced
version of
Membership Plus®,
during
the first quarter of 2004 and an enhanced version of QuickVerse®,
during
the fourth quarter of 2004. However, 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. Due to these delays, we believe we experienced reduced revenues
of
approximately $500,000 for the year ended December 31, 2004. In addition
to the
QuickVerse®
and
Membership Plus®
releases, there were several other new product releases in the year 2004
such as
an enhanced version of our QuickVerse®
PDA.
However, the retail value of the products ranged from $9.95 to $59.95
compared
to $99.95 to $349.95 for the QuickVerse®
and
Membership Plus®
titles.
During the year 2003, we only had one major product release,
QuickVerse®
8.0,
which shipped in late December 2003. During the years of 2003 and 2004,
our
sales efforts were focused on targeting end-users through telemarketing
and
Internet sales. These efforts resulted in more consistent sales during
the two
years. Sales into the retail market (both CBA and secular) continue to
increase;
however, they are not back to the levels of 1999 and 2000.
Sales
returns and allowances increased approximately $171,000 from approximately
$397,000 for the year ended December 31, 2003 to approximately $568,000
for the
year ended December 31, 2004 and increased as a percentage of gross sales
from
approximately 8% for the year ended December 31, 2003 to approximately
10% for
the year ended December 31, 2004. The upward trend in sales returns and
allowances as a percentage is attributable to our release of enhanced
versions
of QuickVerse®
and
Membership Plus®
in late
December of 2003 and January of 2004, respectively. The release of these
two
enhanced products resulted in an increased quantity of sales returns
and
allowances of prior versions as distributors and stores made shelf space
during
the first quarter of 2004. Furthermore, the release of QuickVerse®
8.0 in
late December of 2003 was the only enhancement to the product within
a three
year timeframe. We released QuickVerse®
2005
earlier in the fourth quarter of 2004 with only an eleven month difference
from
the last enhancement. Due to the earlier release, we anticipated stores
would
have more time to return the previous version of QuickVerse®
than
compared to a year ago. Product returns during the other quarters were
consistent. We anticipate the sales return and allowances as a percentage
to
follow a downward trend due to our focused sales efforts to the end-users
and
our decreased presence in the retail market, because incidents of return
are
lower for sales direct to the end-user than sales into the retail stores.
We
also wrote down a reserve for rebates payable due to a change in accounting
estimate of approximately $142,000 and approximately $124,000 and wrote
down
actual rebates payable due to an overstatement of approximately $61,000
and
approximately $46,000, both of which are included as an adjustment to
revenue in
accordance with EITF Issue No. 01-09 for the twelve months ended December
31,
2004 and 2003, respectively.
|
Cost
of Sales for Twelve Months Ended December 31
|
2004
|
%
to Gross Sales
|
2003
|
%
to Gross Sales
|
Change
|
|
%
|
|||||||||||
|
Direct
costs
|
$
|
579,946
|
10
|
%
|
$
|
539,595
|
11
|
%
|
$
|
40,351
|
7
|
%
|
||||||
|
Amortization
of software development costs
|
575,480
|
10
|
%
|
355,283
|
7
|
%
|
220,197
|
62
|
%
|
|||||||||
|
Royalties
|
417,604
|
7
|
%
|
264,050
|
6
|
%
|
153,554
|
58
|
%
|
|||||||||
|
Fulfillment
|
74,889
|
1
|
%
|
43,375
|
1
|
%
|
31,514
|
73
|
%
|
|||||||||
|
Freight-out
|
172,634
|
3
|
%
|
125,680
|
3
|
%
|
46,954
|
37
|
%
|
|||||||||
|
Cost
of sales
|
$
|
1,820,553
|
31
|
%
|
$
|
1,327,983
|
28
|
%
|
$
|
492,570
|
37
|
%
|
Cost
of
sales consists primarily of royalties 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 from 22.2% of gross revenues in 2003 to 24.3% of gross
revenues in 2004. The increase resulted directly from amortization of software
development costs. The amortization recognized during the twelve months
ended
December 31, 2003 resulted from several new software releases in 2003 including
the then newly released QuickVerse®
8.0.
However, the shorter timeframe between our product upgrades during the
year of
2004 led to an increased amount of amortization recognized. During the
twelve
months ended December 31, 2004 we continued to amortize the costs associated
with QuickVerse®
8.0
along with the newly released Membership Plus®
8.0, the
updated release of QuickVerse®
PDA 2005
and the release of QuickVerse®
2005.
Fulfillment costs from a third-party warehouse and included in the manufacturing
overhead costs noted above, increased approximately $32,000 as we released
three
major product upgrades beginning late December 2003 through December 2004.
Furthermore, the direct costs and manufacturing overhead include the write
downs
of obsolete inventory of approximately $61,000 and approximately $32,000
for the
twelve months ended December 31, 2003 and 2004, respectively. The direct
costs
and manufacturing overhead percentage is expected to continue at the 2004
levels
as working capital remains more consistent and as more development projects
are
implemented in a shortened timeframe.
Royalties
to third-party providers of intellectual property also increased from 5.5%
of
gross revenues in 2003 to 7.2% of gross revenues in 2004. The increase
of
royalties reflects the release of the QuickVerse®
8.0
editions in late December 2003 and the release of the QuickVerse®
2005
editions in early December 2004. Furthermore, we sold some of the older
QuickVerse®
versions
to liquidators at a reduced price throughout the year but had no such sales
during the year ended 2003. During the year ended 2004, we also renegotiated
several royalty contracts which resulted in some cases in a higher royalty
rate
along with access to more content. The royalty rate as a percentage of
gross
sales is expected to increase in the future as the new QuickVerse®
2005 is
released into the retail market and sales to new users are expected to
increase
significantly. However, upgrade sales will continue to be subject to royalties
only on content additions of the upgraded version.
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 considered development and the costs of the revision
and upgrade are capitalized. Capitalized costs are amortized on a
product-by-product basis using the greater of straight-line amortization
over
the estimated life of the product or 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. Software development costs are summarized
in the
table below. The software development costs, consisting primarily of direct
and
indirect labor and related overhead charges, capitalized during the twelve
months ended December 31, 2003 and 2004 were approximately $659,000 and
approximately $692,000, respectively. Accumulated amortization of these
development costs included in cost of sales totaled approximately $355,000
and
approximately $575,000 for the twelve months ended December 31, 2003 and
2004,
respectively. The increase in both the capitalization and amortization is
a
direct result of the increase in the number of development projects.
| Twelve Months Ended December 31, |
2004
|
2003
|
|||||
|
Beginning
balance
|
$
|
584,706
|
$
|
280,502
|
|||
|
Capitalized
|
692,063
|
659,487
|
|||||
|
Amortized
(cost of sales)
|
575,480
|
355,283
|
|||||
|
Ending
balance
|
$
|
701,289
|
$
|
584,706
|
|||
|
Research
and development expense (General and administrative)
|
$
|
64,653
|
$
|
128,159
|
|
Sales,
General and Administrative Costs for Twelve Months Ended December
31
|
2004
|
%
to Gross Sales
|
2003
|
%
to Gross Sales
|
Change
|
|
%
|
||||||||||||||
|
Selected
expenses:
|
|||||||||||||||||||||
|
Commissions
|
$
|
814,623
|
14
|
%
|
$
|
570,381
|
12
|
%
|
$
|
244,242
|
43
|
%
|
|||||||||
|
Advertising
and direct marketing
|
455,238
|
8
|
%
|
240,062
|
5
|
%
|
$
|
215,176
|
90
|
%
|
|||||||||||
|
Marketing
and customer service
|
10,900
|
0
|
%
|
5,511
|
0
|
%
|
$
|
5,389
|
98
|
%
|
|||||||||||
|
Total
sales and marketing
|
1,280,761
|
22
|
%
|
815,954
|
17
|
%
|
$
|
464,807
|
57
|
%
|
|||||||||||
|
Research
and development
|
64,653
|
1
|
%
|
128,159
|
3
|
%
|
$
|
(63,506
|
)
|
-50
|
%
|
||||||||||
|
Personnel
costs
|
1,310,506
|
23
|
%
|
986,165
|
21
|
%
|
$
|
324,341
|
33
|
%
|
|||||||||||
|
Legal
|
71,003
|
1
|
%
|
77,037
|
2
|
%
|
$
|
(6,034
|
)
|
-8
|
%
|
||||||||||
|
Rent
|
75,555
|
1
|
%
|
51,039
|
1
|
%
|
$
|
24,516
|
48
|
%
|
|||||||||||
|
Telecommunications
|
149,443
|
3
|
%
|
79,558
|
2
|
%
|
$
|
69,885
|
88
|
%
|
|||||||||||
|
Corporate
services
|
94,000
|
2
|
%
|
0
|
0
|
%
|
$
|
94,000
|
0
|
%
|
|||||||||||
|
Other
general and administrative costs
|
544,678
|
9
|
%
|
429,276
|
9
|
%
|
$
|
115,402
|
27
|
%
|
|||||||||||
|
Total
general and administrative
|
2,309,838
|
40
|
%
|
1,751,234
|
37
|
%
|
$
|
558,604
|
32
|
%
|
Operating
expenses for 2004 include 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 a
settlement agreement compared with approximately $53,000 for 2003. With
gross
revenues increasing approximately $999,000 from 2003 to 2004, sales expenses
also increased approximately $465,000 from approximately $816,000 for
2003 to
approximately $1,281,000 for 2004. Included in sales expenses, commissions
to a
third-party telemarketing firm increased approximately $244,000 as our
sales
focus to the direct consumer increased along with the number of new and
enhanced
product releases during 2004 compared with that of 2003; advertising,
and direct
marketing increased approximately $215,000 as we launched a full-service
online
store, began marketing our products online through multiple sources,
attended
more retail conferences, and increased the number of new product upgrades
throughout the year; and marketing and customer service costs increased
approximately $5,000 as our sales efforts continue to be more focused
towards
the consumer instead of the retail store.
Research
and development costs include salaries and benefits of personnel and third
parties conducting research and development of software products. Software
development costs expensed as research and development (see table above)
amounted to approximately $65,000 for the twelve months ended December
31, 2004
compared to approximately $128,000 incurred for the twelve months ended
December
31, 2003. The decrease in 2004 reflects further development of existing
products
whereas in 2003 we had more research and development costs associated with
new
titles such as QuickVerse®
PDA for
both Pocket PC®
and Palm
OS®
operating systems. Research and development expenses are expected to increase
in
future periods as we add new products and versions to our product mix.
Personnel
costs increased approximately $325,000 from approximately $986,000 for
the
twelve months ended December 31, 2003 to approximately $1,311,000 for the
twelve
months ended December 31, 2004. This increase is primarily from the increase
in
our sales and marketing team and technical support staff and the associated
health care costs. We also recognized approximately $14,000 of expense
related
to 635,000 restricted shares of common stock issued to employees and
approximately $67,000 in expense for upper management year-end bonus accrual.
Furthermore, the capitalization of direct and indirect labor and related
overhead charges as software development costs and the cost of providing
free
technical support to our customers (see “Cost of Sales” above) decreased by
approximately $23,000 from approximately $557,000 for the twelve months
ended
December 31, 2003 to approximately $534,000 for the twelve months ended
December
31, 2004. This decrease is due to the shortened development time period
for the
new development projects that began during the year 2004. It is anticipated
that
personnel costs will continue to increase in future periods as operating
capital
is available to fund full staffing of our product development team and
expansion
of the direct marketing staff. In addition, interest and penalty fees related
to
back payroll taxes increased approximately $95,000 for the twelve months
ended
December 31, 2004.
Direct
legal costs increased approximately $38,000 for the twelve months ended
December
31, 2004 as the disputes with TLC and Zondervan were finalized in March
2004.
However, approximately $44,000 of legal costs were related to the stock
offering
costs incurred in July 2004 and the related preparation of a 14C information
statement and SB-2 registration statement; and therefore was recorded as
a
reduction to additional paid-in capital. It is anticipated that legal costs
will
increase as we hold our first annual meeting of stockholders later this
year and
pursue our business plan for growth by acquiring companies and software
title
properties that are synergistic with our current product line and customer
base.
Rent expense increased approximately $25,000 as we opened a new product
development facility located in Naperville, IL. The increase is also attributed
to the capitalization of related overhead charges as software development
costs.
See “Cost of Sales” above. Telecommunications costs increased approximately
$70,000 as the call volume increased in technical support and customer
service
due to the release of the three major product upgrades beginning late December
2003 through December 2004. Corporate service fees increased approximately
$94,000 for the twelve months ended December 31, 2004. These fees are related
to
the recent hire of an outside consultant, the expense for an issuance of
a
warrant to purchase 600,000 shares of common stock allocated over the term
of
the consulting contract, and the expense for a previous issuance of a warrant
to
purchase 250,000 shares of common stock.
We
recorded an adjustment to the balance of accrued royalties for the year ended
December 31, 2003 in the amount of approximately $584,000. This adjustment
was a
result of our having reached a settlement with TLC regarding the offset credit
to which we were entitled against the balance due on the 1999 license. The
offset credit was related to sales made to TLC that remained in dispute until
verified by an independent third-party audit of the sales and related royalty
calculations. The royalty liabilities had been accrued based on our sales
to TLC
as originally reported and were part of the calculation of the June 30, 2001
bad
debt provision totaling $2,391,000. This has been included in other
income.
We
also
reclassified as other income proceeds totaling $650,000, and the corresponding
accrued interest payable totaling approximately $217,000, that were previously
recorded as an unsecured note payable. The determination to reclassify the
obligation was made on the basis of the combined facts that (i) the obligation
exists, if at all, solely pursuant to an oral loan agreement made over three
years ago in the State of North Carolina with a representative of the party
to
whom the obligation was believed to have been owed, (ii) no party has ever
made
any demand for repayment thereof despite the fact that no payments have ever
been made on the obligation, (iii) the party believed to be owed the obligation,
upon inquiry, claims no record of any such obligation, and (iv) the State
of
North Carolina Statute of Limitations applicable to oral agreements, believed
to
govern the continued enforceability of the obligation, has expired.
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. 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)
|
||
Furthermore
during the year ended December 31, 2004, we 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.
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 until our registration
statement on
Form SB-2 originally filed on November 22, 2004 is declared
effective to be
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, the fair
value of the
derivative liability was approximately $1,969,000, and a fair
value adjustment
of approximately $292,000 has been included in other expenses
for the year then
ended.
Amortization
expense increased approximately $15,000 for the twelve months ended December
31,
2004. The software license acquired from TLC in July of 1999 is amortized
over a
10 year useful life. Amortization expense for 2004 reflects the continual
amortization of the software license along with the amortization for the
launch
of our new Website, www.quickverse.com, during the second quarter of 2004.
We
have
recognized a net deferred tax asset whose realization depends on generating
future taxable income. At December 31, 2003, 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 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
$7,648,000. The carryforwards are the result of income tax losses generated
in
2000 ($2,480,000 expiring in 2020) and 2001 ($5,168,000 expiring in 2021).
We
will need to achieve a minimum annual taxable income, before deduction of
operating loss carryforwards, of approximately $450,000 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.
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. We had a loss before
income
taxes of $51,806 and a net income after income taxes of $964,053 for
the year
ended December 31, 2004. 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 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. See “Results Of Operations” above.
|
Cash
Flows for Twelve Months Ended December 31
|
2004
|
2003
|
Change
|
|||||||
|
Cash
flows provided (used) by operating activities
|
$
|
(643,668
|
)
|
$
|
882,221
|
$
|
(1,525,889
|
)
|
||
|
Cash
flows (used) by investing activities
|
$
|
(746,932
|
)
|
$
|
(814,457
|
)
|
$
|
67,525
|
||
|
Cash
flows provided (used) by financing activities
|
$
|
1,690,291
|
$
|
(64,747
|
)
|
$
|
1,755,038
|
Net
cash
provided by operating activities was approximately $882,000 for the year
ended
December 31, 2003 and net cash used by operating activities was approximately
$644,000 for the year ended December 31, 2004. The increase in cash used
was
primarily due to an increase in the amounts paid to suppliers and employees
which would include all royalty payments to our content providers.
Net
cash
used in investing activities was approximately $814,000 and $747,000 for
the
years ended December 31, 2003 and 2004, respectively. The decrease in cash
used
for investing activities results from our merchant banker reserving cash
for a
potential increase in credit card chargebacks due to increased purchases
during
the year ended December 31, 2003 and then refunding or holding only half
of that
original reserve in cash during the year ended December 31, 2004.
Net
cash
used by financing activities was approximately $65,000 for the year ended
December 31, 2003 and net cash provided by financing activities was
approximately $1,690,000 for the year ended December 31, 2004. Cash used
by
financing activities reflects final settlement on our accounts receivable
line
of credit, payments made on debt obligations, and stock offering costs
associated with private placement equity financing. Cash provided by financing
activities reflects proceeds from issuance of stock and promissory notes.
On
March
19, 2001, we entered into an Accounts Receivable Financing Agreement with
Alliance Financial Capital, Inc. Pursuant to this agreement, Alliance agrees
to
purchase selected accounts receivable on a discounted basis, including,
without
limitation, full power to collect, compromise, sue for, assign, or in any
manner
enforce collection thereof. The agreement provides for advances of 60%
toward
the purchase of the invoices with a credit line of $250,000. The terms
call for
40% to be held in a reserve account from the collection of each invoice.
Invoices not paid by the customer within 90 days of shipment are required
to be
repurchased by us out of the reserve account. The agreement carries a 12
month
term with a minimum monthly fee equal to one half of one percent (.5%).
The term
renews automatically every 12-months unless a written request for termination
is
received by Alliance at least 30 days before the renewal date. During the
twelve
months ended December 31, 2004, we transferred accounts receivable totaling
$300,966 to Alliance for cash advances of $180,580. As accounts are paid,
the
collected funds (less the amount advanced and appropriate fees) are disbursed
to
us. The transfer agreement includes a repurchase requirement and, accordingly,
the proceeds were accounted for as a secured borrowing. At December 31,
2004,
the balance of receivables transferred and included in trade receivables
was $0.
The remaining secured borrowing balance included in accrued expenses was
$0. On
July 20, 2004, we terminated the Accounts Receivable Financing Agreement
with
Alliance.
On
July
19, 2004, we completed an equity financing in the amount of $1,750,000
through a
private placement with Barron Partners, LP. Under the terms of
the agreement,
Barron purchased 21,875,000 restricted shares of common stock at
a price of
$0.08 per share. In addition, according to the terms of the agreement,
Barron
received two warrants to purchase common stock. The first warrant
entitles
Barron to purchase up to 10,937,500 shares of common stock at a
price of $0.18
per share and the second warrant entitles Barron to purchase up
to 10,937,500
additional shares of common stock at a price of $0.60 per share;
each warrant is
subject to standard adjustment provisions. These warrants have
been accounted
for as a liability according to EITF 00-19. In accordance with
the accounting
mandate, the derivative liability associated with these 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 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, the fair value of the derivative liability was
approximately
$1,969,000, and a fair value adjustment of approximately $292,000
has been
included in other expenses for the year then ended. See Exhibits
10.10, 10.11,
10.12 and 10.13.
On
September 30, 2004, we issued promissory notes to each of two different
individuals. Each of these promissory notes was in the principal amount
of
$120,000 and, pursuant to a separate side letter agreement in each case,
was
convertible at the option of the holder into 1,000,000 restricted shares
of
common stock. On November 16, 2004, the holders of the promissory notes
converted those notes into a total of 2,000,000 shares of our common
stock.
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. Subsequent to the financing received in July
of 2004,
we paid all back payroll taxes that were due to the Internal Revenue Service.
In
July
2004, we made the final payment to Zondervan for $100,000 plus 5% simple
interest. This payment completed all of our obligations that were previously
outlined in the settlement with The Zondervan Corporation and TLC dated
October
2003. See Note 16 - Commitments and Contingencies. In addition, according
to the
settlement agreement, the term of the 1999 license has been effectively
extended
indefinitely. However, we continue to amortize the license using the original
10
year economic life.
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 review the outstanding accounts receivable quarterly, 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 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. At December 31, 2004, the fair value of the derivative
liability was approximately $1,969,000, and a fair value adjustment of
approximately $292,000 has been included in other expenses for the year then
ended. An increase in our stock price by 10% from the year ended December
31,
2004 would result in a fair value adjustment of approximately $197,000 as
other
expenses, and a decrease in our stock price by 10% from the year ended December
31, 2004 would result in a fair value adjustment of approximately $197,000
as
other income.
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.
We
develop, publish, market, distribute and directly sell off-the-shelf consumer
and organizational software products for PC 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 through
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
opportunities to acquire assets of other companies and establish wholly-owned
subsidiaries in various businesses or purchase existing businesses as
subsidiaries. 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.
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. We are also likely to incur significant legal and accounting costs
in
connection with our pursuit of such opportunities, 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
development time for a PC-based title or title version is between three
and
twelve months and the average development cost ranges from $8,000 to
$450,000. The development time for a PDA-based title or version is
between two and six months and the average development cost ranges
from $30,000 to $250,000. Gross margin percentages for PDA-based software
are
significantly lower than the gross margin percentages for PC-based software
and
the manufacturing time is significantly longer than that associated with
PC-based software, with lead time for PC-based software at approximately
one to
three weeks from the placement of an order, as opposed to four to six weeks
for
PDA-based software.
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 twelve months ended December 31,
2004, we
released a total of twenty-one titles and title versions for PC and PDA
platforms. In
the
twelve months ended December 31, 2005 we released a total of seventeen
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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As
of the
date of this prospectus, our financial statements for the fiscal year ended
December 31, 2005 have not yet been audited, however, and while there can
be no
assurance, our management anticipates that the fiscal year 2005 sales
percentages of our gross revenues for each of the six categories listed
above
will be approximately equivalent to those sales percentages achieved during
our
fiscal year ended December 31, 2004.
Bible
Study
For
the
fiscal year ended December 31, 2004, approximately 63% of our revenues
were
derived from sales of our flagship QuickVerse®,
an
industry-leading Bible-study software. During the fiscal year 2005,
QuickVerse®
entered
its 17th
year and
10th
version,
and 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 also enable users to search by
word,
phrase or verse across multiple books. QuickVerse®
2006,
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: the QuickVerse®
Starter
Edition (which includes 1 Bible and 3 reference titles), the
QuickVerse®
Essentials Edition (which includes 9 Bibles and 41 reference titles), the
QuickVerse®
Standard
Edition (which includes 13 Bibles and 62 reference titles), the
QuickVerse®
Expanded
Edition (which includes 15 Bibles and 100 reference titles), the
QuickVerse®
Deluxe
Edition (which includes 21 Bibles and 147 reference titles), and the
QuickVerse®
Platinum
Edition (which includes 23 Bibles and 261 reference titles. Each
QuickVerse®
purchase
includes access to additional books and content, which can be unlocked
or
downloaded and made accessible for an additional fee.
QuickVerse®
PDA, an
industry-leading PDA Bible-study software, is compatible on both Pocket
PC®
and
Palm®
OS
operating systems, and during the fiscal year 2005 entered its 4th
year and
3rd
version.
This program provides the same simplified access and many of the personal
Bible
study features found in the desktop QuickVerse®
versions. QuickVerse®
PDA is
currently available in four editions as a download and in CD-Rom. Each
edition
of QuickVerse®
PDA
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®
PDA
family of products includes: the Standard Edition (which includes 3 Bibles
and 5
reference titles), the Deluxe Edition (which includes 5 Bibles and 8
reference
titles), the Platinum Edition (which includes 7 Bibles and 13 reference
titles),
and the Life Application Study Bible (which includes 1 Bible and 8 reference
titles). Each edition contains 100 scripture reading plans and provides
the user
with the ability to create their own.
QuickVerse Left
Behind®
Series,
a New York Times®
Best-Selling book series and the newest addition to the QuickVerse®
PDA
Bible software family, is compatible on both Pocket PC®
and
Palm®
OS
operating systems and was released in 2004. This program provides a new
way to
read, reference, recall, retrieve, note, search, and study fiction and
non-fiction. QuickVerse Left
Behind®
Series
is currently available in four editions as a download and in CD-Rom. Each
edition contains three volumes from the Left Behind®
Series,
1 Bible translation, 4 reference titles and 36 scripture reading plans.
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 two 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 include the QuickVerse®
White
Box Edition (which includes 9 Bibles and 40 reference titles) and the
QuickVerse®
Black
Box Edition (which includes 12 Bibles and 56 reference titles). 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 Complete Bible Resource
Library®, the Book®, The Life Application
Bible®, A Walk in the Footsteps of Jesus®, Adam Clark’s
Commentary on the Bible®, and Dictionaries of the New
Testament®. Although our prices are subject to change from time to
time, these titles currently range in retail price from $9.95 to $99.95 per
unit.
Financial/Office
Management Products for Churches and other Christian Faith-Based
Ministries
For
the
fiscal year ended December 31, 2004, approximately 28% of our revenues
were
derived from sales of Membership Plus®,
an
industry-leading church management software. During the fiscal year 2005,
we
released the 10th
version
of Membership Plus®,
which
is available in each of a standard and a deluxe package at retail prices
of
$149.95 and $349.95 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 the 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 Christian
Ministry Resources, 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®
2005, 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.
Print
& Graphic Products
We
currently sell/distribute ClickArt Christian Publishing® Suite III,
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 Religious ClipArt®
and Christian Images®. Both of these products are CD-Rom Clipart
products that contain faith-based and Christian graphical images that can
be
used in the production of other content related projects. In
addition, we also distribute several titles produced and distributed by
International Microcomputer Software, Inc. “IMSI” a developer of software for
both professional and home users, including ClipArt & More 2.5 Million
and Print Studio Pro Deluxe and titles produced and distributed by SummitSoft
Corporation a publisher of productivity software for professional and home
users, including Logo Design Studio an Essential Office Font Pack.
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, 2004, 3% 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, 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, 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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Daily
Journal®,
which is a tool for entry and recordation of personal thoughts, important
family and business events.
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Although
our prices are subject to change from time to time, our pastoral products range
in price from $9.95 to $49.95 per unit. In the aggregate, and for the fiscal
year ended December 31, 2004, 2% 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®, Noah and the
Ark®, Daniel in the Lion’s Den®, The Story of
Creation®, Amazon Trail® (3rd Edition), and
Oregon Trail® (4th Edition). In addition, we also
distribute the Veggie Tales®, a popular line of children’s software
programs involving interactive adventures with biblical themes.
Although
our prices are subject to change from time to time, our children’s CD-Rom
products range in price from $5.95 to $22.98 per unit. In the aggregate,
and for
the fiscal year ended December 31, 2004, 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 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 to approximately $69.95 per
unit.
In the aggregate, and for the fiscal year ended December 31, 2004, 3% of our
revenues were derived from sales of these products.
Other
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 IMSI, Veggie Tales, 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 $5.99 to approximately $39.99 per unit. In the
aggregate, sales of these software products constituted approximately 2%
of our
2004 annual revenues.
According
to a Gallup poll released in March 2004, 49.4% of Americans identified
themselves as Protestant, while 23.7% identified themselves as Catholic, and
9.1% identified themselves as “Other Christian.” According to the same survey,
more than 60% of Americans say that religion is very important to them in their
own lives, and another 24% say that religion is fairly important in their
lives.
A
survey
released in July 2003 by the Christian Bookseller’s Association indicated that
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 3,500-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 65% of our 2004 fiscal year revenue. Over
the
past two 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®. While we market our products through these other Internet
Websites and search engines, we are not substantially dependent upon these
marketing relationships and have no written agreements with any one or more
of
them. The revenue generated from these Internet Websites and search engines,
excluding our own www.quickverse.com Internet Website, accounted for less than
approximately 1% of our 2004 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 35% of our 2004 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, and
OfficeMax, 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 2% of our 2004 fiscal year revenue. We
currently sell to distributors and retailers in Canada, New Zealand, Australia,
Philippines, Hong Kong, 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 years ended December 31, 2004 and 2003, 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 years ended December 31, 2004 and 2003, product and material purchases
from
IsoDisc accounted for 29% and 3%, respectively, Midlands Packaging Corporation
accounted for 18% and 14%, respectively, Frogs Copy and Graphics accounted
for
17% and 10%, respectively, MicroBytes, Inc. accounted for 12% and 39%,
respectively, and Cedar Graphics accounted for 7% and 17%, 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® products, we believe that we are
the market leader in our category. We currently compete with the following
companies and products, among others:
|
|
•
|
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 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 two 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 97% of our revenues in 2004, 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 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 around 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/A for
the year
ended December 31, 2004.
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. Given these developments, which have been made through
four
subsequent versions and seven new editions of QuickVerse ®, four
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 (through
contractual work-for-hire arrangements with our in-house developers and
third-party contractors) 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
makes 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 intellectual property 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 intellectual property 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 and editions 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 January 19, 2006, we had twenty-seven full-time employees. Of those
twenty-seven, four were part of the senior-level executive and financial
management team, five were in the product development team, nine were on
the sales team, and nine were in fulfillment, administration, and related
support positions. As
of the
date of this prospectus, our financial statements for the fiscal year
ended
December 31, 2005 have not yet been audited, however, we have estimated
that our
annual payroll was approximately $1,596,000, equivalent to approximately
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 $7,094.79 and, as
of January 19, 2006, there were approximately sixteen 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
twenty-four month lease agreement with Transwestern Commercial Services.
Our monthly rent is $1,320.00 and there are two months remaining under the
lease.
Three
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, generating only about 29% of
our
annual sales.
The
following persons are our current directors and executive officers:
Our
directors and executive officers and their ages as of January 19, 2006 were
as follows:
|
Name
|
|
Age
|
Position
|
||||||
|
Steven
Malone
|
|
39
|
|
Director,
Chairman of the Board and President
|
|||||
|
Henry
M. Washington, Ph.D
|
|
62
|
|
Director
|
|||||
|
John
A. Kuehne, CA
|
|
48
|
|
Director
|
|||||
|
Kirk
R. Rowland, CPA
|
|
45
|
|
Director
and Chief Financial Officer
|
|||||
|
William
Terrill
|
|
49
|
|
Chief
Technology Officer
|
|||||
|
Brittian
Edwards
|
|
42
|
|
Vice
President, CBA Sales and Licensing
|
|||||
|
Chad
Grosse-Rhode
|
|
35
|
|
Vice
President, Sales and Marketing
|
|||||
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 seventeen
years
of experience in the computer industry, with the last eleven 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 to 1999 for InfoUSA, he was responsible for sales and
marketing of InfoUSA’s products to retail, distribution, OEM and corporate
accounts.
Henry
M. Washington, Ph.D. - Director
Dr.
Washington has served as one of our directors since December 2000. He is
also presently President of Wren Enterprises Corporation, a position that he
has
held since January 2005. Wren Enterprises is a private manufacturing solutions
company working with automotive, non-automotive, Agricultural markets, utilities
and government agencies providing plastic, metal and fabrication. Prior to
his
position with Wren, Dr. Washington served as the interim President for Jamestown
Plastic Molders Corporation from January 2001 to April 2004. During the year
of
2000, Dr. Washington served as Managing Director of Rilas & Rogers, LLC, an
international consulting firm located in Detroit. Dr. Washington has held
short-term assignments with the U.S. Department of Commerce, where he was
Executive Director from 1995 to 1998 of the Department’s Minority
Business Opportunity Committee. He currently serves on several national
organizations including the American Association of Christian Counselors, The
Black Caucus International Think Tank, and the International Trade and
Development Organization dealing with global security issues. Dr. Washington
holds a Bachelor of Management and Metaphysics degree, a Masters of Metaphysics
and Theology degree, and a Doctorate degree in Metaphysical Counseling, in
each
case from the University of Metaphysics, and in each case which are accredited
by The International Metaphysical Ministry for use by its Ministry and for
membership in The American Metaphysical Doctors Association.
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 US $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 the company from July 1999 to July 2000. He has
over
25 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.
Brittian
Edwards - Vice President of CBA Sales and Licensing
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 (CBA) Sales from July
1999 to April 2002. Mr. Edwards has been in the Christian Booksellers
Association (CBA) marketplace for more than 17 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.
Chad
Grosse-Rhode - Vice President of Sales and Marketing
Mr.
Grosse-Rhode joined us in August 2004 as our Vice President of Sales and
Marketing. Mr. Grosse-Rhode was most recently with Summitsoft Corporation,
(www.summisoftcorp.com), from July 2003 to July 2004, where he served as the
Vice President of Sales and Marketing. Summitsoft produces a full line of small
business software products, which are available in both PC and
Macintosh®
platforms and are sold in most major secular retail outlets. Prior to
Summitsoft, Mr. Grosse-Rhode was General Manager of NewLeadsUSA from April
1995
to June 2003, which is a subsidiary of InfoUSA. In this role, Mr. Grosse-Rhode
managed the compilation, production, marketing and sales of multiple direct
marketing databases. Mr. Grosse-Rhode has over 10 years of senior management
experience in both sales and marketing.
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. The current members of
our
audit committee include John A. Kuehne and Dr. Henry M. Washington. We currently
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 and Dr. Washington both qualify as “independent” directors
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. The two current
members
of our compensation committee include Dr. Henry M. Washington and John
A.
Kuehne.
The
fact
that we currently have four members on our board of directors, and two members
on each of our board of directors’ audit and compensation committees, could
result in a tie vote on company matters, including those involving highly
material corporate governance issues. We do not currently have any duly adopted
resolution procedures in place that would provide a means for resolving any
stalemate that might occur in this regard, but are currently in the process
of
considering potential alternative procedures in order to be prepared for
having
to face such a potential situation.
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 paid to each of our
executive
officers who earned compensation of $100,000 or more during any such
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 salary
and bonus in excess of $100,000 during 2005
|
|
Long
Term Compensation Awards
|
||||||||||||||||||||||||
|
|
Annual
Compensation
|
Awards
|
Payouts
|
||||||||||||||||||||||
|
Name
and Principal Position
|
Year
|
Salary
|
Bonus
|
Other
Annual
Compensation
|
Restricted
Stock Awards
|
Securities
Underlying Options/SARs (#)
|
|
LTIP
Payouts
|
All
Other Compensation
|
||||||||||||||||
| Steven Malone, |
2005
|
$ | 150,000 | $ | --- | $ |
---
|
$ | --- | $ | --- | $ |
---
|
$ |
---
|
||||||||||
|
President
and Chief Executive Officer
|
2004
|
$
|
150,000
|
$
|
22,192
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
---
|
||||||||||
|
|
2003
|
$
|
150,000
|
$
|
18,079
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
---
|
||||||||||
|
|
2002
|
$
|
150,000
|
$
|
2,203
|
$
|
---
|
$
|
37,306
|
$
|
---
|
$
|
---
|
$
|
---
|
||||||||||
| William Terrill |
2005
|
$ | 150,000 | $ | --- | $ |
---
|
$ | --- | $ | --- | $ |
---
|
$ |
---
|
||||||||||
|
Chief
Technology Officer
|
2004
|
$
|
150,000
|
$
|
22,192
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
---
|
||||||||||
|
|
2003
|
$
|
150,000
|
$
|
18,079
|
$
|
---
|
$
|
14,536
|
$
|
500,000
|
$
|
---
|
$
|
---
|
||||||||||
|
|
2002
|
$
|
72,115
|
$
|
2,203
|
$
|
---
|
$
|
---
|
$
|
500,000
|
$
|
---
|
$
|
---
|
||||||||||
| Kirk R. Rowland |
2005
|
$ | 110,000 | $ | --- | $ |
---
|
$ | --- | $ | --- | $ |
---
|
$ |
---
|
||||||||||
|
Chief
Financial Officer
|
2004
|
$
|
108,846
|
$
|
22,192
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
---
|
||||||||||
|
|
2003
|
$
|
82,306
|
$
|
18,079
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
---
|
||||||||||
|
|
2002
|
$
|
80,000
|
$
|
---
|
$
|
---
|
$
|
31,807
|
$
|
---
|
$
|
---
|
$
|
---
|
||||||||||
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 ($.001).
We
did
not grant stock options during the fiscal year ended December 31, 2005. No
executive exercised any stock options during the fiscal year 2005.
Option/SAR
Grants in Last Fiscal Year
|
Name
|
Number
of Securities Underlying
Options/SARs Granted
(#)
|
|
Percent
of Total Options/SARs
Granted to Employees
in Fiscal Year
|
Exercise
or
Base Price($/Sh)
|
|
Expiration
Date
|
||||||||||
|
Steven
Malone
|
---
|
---
|
$
|
---
|
N/A
|
|||||||||||
|
William
Terrill
|
---
|
---
|
$
|
---
|
N/A
|
|||||||||||
|
Kirk
R. Rowland
|
---
|
---
|
$
|
---
|
N/A
|
|||||||||||
The
following table sets forth the number of stock options/SARs held by the
executive officers named in the Summary Compensation Table as of December
31,
2005 and the value of unexercised “in-the-money” options/SARs held which
represents the positive difference between the exercise price and the market
price at fiscal year end. No such executive exercised any options/SARs during
the fiscal year 2005.
Aggregated
Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
|
Name
|
Shares
Acquired
on Exercise
(#)
|
|
Value
Realized
($)
|
|
Number
of Unexercised
Options/SARs
at Fiscal
Year End
|
Value
of Unexercised “In-The-Money”Options/SARs
at Fiscal Year
End
|
|||||||
|
Steven
Malone
|
---
|
$
|
---
|
250,000
|
$
|
---
|
|||||||
|
William
Terrill
|
---
|
$
|
---
|
1,000,000
|
$
|
50,000
|
|||||||
|
Kirk
R. Rowland
|
---
|
$
|
---
|
150,000
|
$
|
---
|
Mr.
Malone is employed by us pursuant to a three-year employment agreement, which
commenced on July 25, 2003. The agreement provides 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 anything 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 was initially employed by us pursuant to a three-year employment
agreement, which commenced on June 7, 2002 and expired on June 7, 2005.
At
present, our board of directors is considering an amendment to extend the
term
of the original agreement from three to five years. 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 anything 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 was initially employed by us pursuant to a two-year employment
agreement, which commenced on July 25, 2003 and expired on July 25, 2005.
At
present, our board of directors is considering an amendment to extend the
term
of the original agreement from two to five years.. 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
anything
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 our 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 common shares 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 common shares valued at $.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. As
of the
date of this prospectus, our financial statements for the fiscal year ended
December 31, 2005 have not yet been audited, however, we have accrued
approximately $30,000 in director’s fees for our outside directors for the
period of September 1, 2004 through December 31,
2005.
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 January 19, 2006. 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 71,769,855 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 in 1998) and
23,150,000 additional shares potentially acquired within sixty days. 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
|
61.0
|
%
|
|
|
(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)
|
2,143,111
|
3
.0
|
%
|
||||
|
Henry
M. Washington (2)
|
1,583,025
|
2
.2
|
%
|
||||
|
John
A. Kuehne (3)
|
1,691,849
|
2
.4
|
%
|
||||
|
Kirk
R. Rowland (4)
|
1,819,111
|
2
.5
|
%
|
||||
|
William
Terrill (5)
|
1,751,127
|
2
.4
|
%
|
||||
|
All
officers and directors
|
8,988,223
|
12.5
|
%
|
||||
|
as
a group (5 persons)
|
|
|
(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 50,000 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 1,408,025 common shares directly
owned.
|
|
|
(3)
|
Consists
of stock options to acquire up to 175,000 shares of common stock,
all of
which are presently exercisable and 1,516,849 common shares directly
owned.
|
|
|
(4)
|
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.
|
|
|
(5)
|
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. Such 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 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 January 19, 2006 we have accrued $469,472 (272 days at $1,726 per day)
in
penalties under the Registration Rights 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 to Barron Partners, 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 continue to accrue
from June
21, 2005 until this registration statement is declared effective,
at which
time a negotiated reduction of such total amount is expected to be
reached, the
extent of which is as yet unknown, and terms of payment of which are
expected to
be agreed to which will allow us to reasonably meet our ongoing operating
needs.
We have
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. Although
there can be no assurance, management is hopeful that we will cause
the
registration statement to be declared effective in the near future.
The
amount paid by us to date to satisfy this obligation has, and any continued
delays in our ability to cause this registration statement to be declared
effective coupled with additional amounts which we are and may be required
to
pay, will 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.
As
of the
date hereof, Barron Partners, LP owns 45.0% 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 to purchase 150,000 shares of
common stock at an exercise price of $0.01 per share and 150,000 shares of
common stock at an exercise price of $0.022 per share. These warrants expire
between March 7, 2006, May 11, 2006, and April 7, 2009.
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
45.0% 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
|
|
•
|
1,275,000
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 | --- | * | |||||||||
|
|
|||||||||||||
|
Membrado
& Montell, LLP (7)
|
150,000
|
150,000
|
---
|
*
|
|||||||||
|
|
|||||||||||||
|
Michael
M. Membrado (8)
|
150,000
|
150,000
|
---
|
*
|
|||||||||
|
|
|||||||||||||
|
Ronald
Ardt (9)
|
1,891,599
|
716,666
|
1,174,933
|
1.60
|
% | ||||||||
|
|
|||||||||||||
|
Joseph
Abrams (10)
|
600,000
|
600,000
|
---
|
*
|
|||||||||
|
|
|||||||||||||
|
Total
|
48,666,659
|
47,491,666
|
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
two unregistered warrants to purchase a total of 150,000 common
shares at
a price of $0.01 per share issued as of March 7, 2001 and May
11, 2001,
respectively, and each issued 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
in consideration of the granting of extension of payment terms
on amounts
previously owed. The values attributable to the warrants were
$13,464, as
based on the value of our securities on the date of issuance.
Membrado
& Montell, LLP served as corporate legal counsel to us from early
2000
through 2003. Voting and/or investment power over these warrants
is held
by Michael M. Membrado and Scott Montell, formerly of Membrado
&
Montell, LLP, in equal portions. Membrado
& Montell, 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.
|
|
|
(8)
|
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.
|
|
|
(9)
|
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.
|
|
|
(10)
|
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 January 19, 2006, there were 48,619,855 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 January 19, 2006, 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 two
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
|
2003
|
High
|
Low
|
|||||
|
First
Quarter
|
$
|
0.024
|
$
|
0.022
|
|||
|
Second
Quarter
|
$
|
0.080
|
$
|
0.022
|
|||
|
Third
Quarter
|
$
|
0.070
|
$
|
0.010
|
|||
|
Fourth
Quarter
|
$
|
0.040
|
$
|
0.025
|
|||
|
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
|
|||
On January
18, 2006, the closing bid price of our common stock was $0.095 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 Chisholm, Bierwolf & Nilson, LLC, independent certified public
accountants, and are included herein in reliance upon the report of said firm
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.
-65-
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
||||||||||
|
|
(Unaudited)
|
(Unaudited)
|
|
|||||||
|
|
(Restated)
|
(Restated)
|
|
|||||||
|
|
September
30, 2005
|
September
30, 2004
|
||||||||
|
Assets
|
||||||||||
|
Current
assets:
|
||||||||||
|
Cash
and cash equivalents
|
$
|
39,838
|
$
|
539,399
|
||||||
|
Accounts
receivable, trade
|
465,383
|
296,850
|
||||||||
|
Inventory
|
211,769
|
162,800
|
||||||||
|
Other
current assets
|
308,956
|
139,495
|
||||||||
|
Total
current assets
|
1,025,946
|
1,138,544
|
||||||||
|
Property
and equipment, net
|
123,653
|
61,518
|
||||||||
|
Software
license, net
|
1,888,153
|
2,391,660
|
||||||||
|
Capitalized
software development costs, net
|
942,451
|
602,276
|
||||||||
|
Other
assets
|
432,124
|
136,655
|
||||||||
|
Total
assets
|
$
|
4,412,327
|
$
|
4,330,653
|
||||||
|
|
||||||||||
|
Liabilities
and stockholders’ equity
|
||||||||||
|
Current
liabilities:
|
||||||||||
|
Accounts
payable, trade
|
$
|
687,662
|
$
|
410,179
|
||||||
|
Accrued
royalties
|
328,345
|
236,949
|
||||||||
|
Notes
payable
|
---
|
240,000
|
||||||||
|
Derivatives
|
2,843,742
|
3,062,500
|
||||||||
|
Other
current liabilities
|
578,751
|
445,776
|
||||||||
|
Total
current liabilities
|
4,438,500
|
4,395,404
|
||||||||
|
Long-term
obligations
|
167,927
|
808,083
|
||||||||
|
Commitments
and contingencies
|
||||||||||
|
Stockholders’
equity:
|
||||||||||
|
Common
stock
|
48,620
|
46,153
|
||||||||
|
Paid-in
capital
|
7,521,339
|
7,260,469
|
||||||||
|
Retained
(deficit)
|
(7,764,059
|
)
|
(8,179,456
|
)
|
||||||
|
Total
stockholders’ equity
|
(194,100
|
)
|
(872,834
|
)
|
||||||
|
Total
liabilities and stockholders’ equity
|
$
|
4,412,327
|
$
|
4,330,653
|
||||||
|
|
||||||||||
|
See
accompanying notes.
|
||||||||||
F-1
Table
of Contents
|
Findex.com,
Inc.
|
|||||||||||||
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|||||||||||||
|
(Unaudited)
|
|||||||||||||
|
|
|||||||||||||
|
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||
|
|
September
30,
|
September
30,
|
|||||||||||
|
|
2005
|
2004
|
2005
|
2004
|
|||||||||
|
|
(Restated)
|
(Restated)
|
|
(Restated)
|
|
(Restated)
|
|
||||||
|
Revenues,
net of reserves and allowances
|
$
|
1,023,609
|
$
|
1,010,207
|
$
|
3,978,019
|
$
|
3,664,060
|
|||||
|
Cost
of sales
|
316,449
|
431,592
|
1,276,227
|
1,171,661
|
|||||||||
|
Gross
profit
|
707,160
|
578,615
|
2,701,792
|
2,492,399
|
|||||||||
|
Operating
expenses:
|
|||||||||||||
|
Sales
and marketing
|
295,902
|
287,909
|
1,030,870
|
798,410
|
|||||||||
|
General
and administrative
|
613,191
|
478,781
|
1,819,987
|
1,650,355
|
|||||||||
|
Bad
debt expense
|
6,981
|
8,566
|
29,650
|
11,066
|
|||||||||
|
Depreciation
and amortization
|
145,355
|
141,607
|
436,903
|
416,246
|
|||||||||
|
Total
operating expenses
|
1,061,429
|
916,863
|
3,317,410
|
2,876,077
|
|||||||||
|
Loss
from operations
|
(354,269
|
)
|
(338,248
|
)
|
(615,618
|
)
|
(383,678
|
)
|
|||||
|
Other
income
|
75
|
1,010,288
|
75
|
1,010,288
|
|||||||||
|
Loss
on valuation adjustment of derivatives
|
(328,121
|
)
|
(1,385,422
|
)
|
(874,992
|
)
|
(1,385,422
|
)
|
|||||
|
Other
expenses
|
(164,101
|
)
|
(162,826
|
)
|
(289,876
|
)
|
(193,344
|
)
|
|||||
|
Loss
before income taxes
|
(846,416
|
)
|
(876,208
|
)
|
(1,780,411
|
)
|
(952,156
|
)
|
|||||
|
Provision
for income taxes
|
(111,976
|
)
|
(31,095
|
)
|
187,182
|
(92,417
|
)
|
||||||
|
Net
loss
|
$
|
(958,392
|
)
|
$
|
(907,303
|
)
|
(1,593,229
|
)
|
(1,044,573
|
)
|
|||
|
Retained
deficit at beginning of year
|
(6,170,830
|
)
|
(7,130,758
|
)
|
|||||||||
|
Preferred
stock dividend
|
---
|
(4,125
|
)
|
||||||||||
|
Retained
deficit at end of period
|
$
|
(7,764,059
|
)
|
$
|
(8,179,456
|
)
|
|||||||
|
|
|||||||||||||
|
Net
loss per share:
|
|||||||||||||
|
Basic
|
$
|
(0.02
|
)
|
$
|
(0.02
|
)
|
$
|
(0.03
|
)
|
$
|
(0.03
|
)
|
|
|
Diluted
|
$
|
(0.02
|
)
|
$
|
(0.02
|
)
|
$
|
(0.03
|
)
|
$
|
(0.03
|
)
|
|
|
|
|||||||||||||
|
Weighted
average shares outstanding:
|
|||||||||||||
|
Basic
|
48,619,855
|
46,153,189
|
48,619,855
|
30,146,980
|
|||||||||
|
Diluted
|
48,619,855
|
46,153,189
|
48,619,855
|
30,146,980
|
|||||||||
|
|
|||||||||||||
|
See
accompanying notes.
|
|||||||||||||
F-2
Table
of Contents
|
Findex.com,
Inc.
|
|||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|||||||
|
(Unaudited)
|
|||||||
|
|
|||||||
|
Nine
Months Ended September 30,
|
2005
|
2004
|
|||||
|
|
(Restated)
|
(Restated)
|
|
||||
|
Cash
flows from operating activities:
|
|||||||
|
Cash
received from customers
|
$
|
4,049,153
|
$
|
3,607,255
|
|||
|
Cash
paid to suppliers and employees
|
(3,565,309
|
)
|
(4,368,409
|
)
|
|||
|
Other
operating activities, net
|
(3,910
|
)
|
(34,235
|
)
|
|||
|
Net
cash provided (used) by operating activities
|
479,934
|
(795,389
|
)
|
||||
|
Cash
flows from investing activities:
|
|||||||
|
Software
development costs
|
(766,151
|
)
|
(415,197
|
)
|
|||
|
Other
investing activities, net
|
15,300
|
(7,152
|
)
|
||||
|
Net
cash (used) by investing activities
|
(750,851
|
)
|
(422,349
|
)
|
|||
|
Cash
flows from financing activities:
|
|||||||
|
Payments
on line of credit, net
|
---
|
(20,933
|
)
|
||||
|
Payments
made on long-term notes payable
|
(30,604
|
)
|
(202,551
|
)
|
|||
|
Proceeds
from convertible notes payable
|
---
|
240,000
|
|||||
|
Stock
offering costs paid
|
---
|
(51,047
|
)
|
||||
|
Proceeds
from issuance of common stock and warrants
|
---
|
1,750,000
|
|||||
|
Net
cash (used) provided by financing activities
|
(30,604
|
)
|
1,715,469
|
||||
|
Net
(decrease) increase in cash and cash equivalents
|
(301,521
|
)
|
497,731
|
||||
|
Cash
and cash equivalents, beginning of year
|
341,359
|
41,668
|
|||||
|
Cash
and cash equivalents, end of period
|
$
|
39,838
|
$
|
539,399
|
|||
|
|
|||||||
|
Reconciliation
of net loss to cash flows from operating activities:
|
|||||||
|
Net
loss
|
$
|
(1,593,229
|
)
|
$
|
(1,044,573
|
)
|
|
|
Adjustments
to reconcile net loss to net cash
|
|||||||
|
provided
(used) by operating activities:
|
|||||||
|
Software
development costs amortized
|
524,989
|
397,627
|
|||||
|
Stock
and warrants issued for services
|
---
|
73,700
|
|||||
|
Loss
on valuation adjustment of derivatives
|
874,992
|
1,385,422
|
|||||
|
Debt
forgiveness
|
---
|
(1,000,662
|
)
|
||||
|
Provision
for bad debts
|
29,650
|
11,066
|
|||||
|
Depreciation
& amortization
|
436,903
|
416,245
|
|||||
|
Loss
on disposal of property, plant and equipment
|
1,869
|
141
|
|||||
|
Change
in assets and liabilities:
|
|||||||
|
Decrease
in accounts receivable
|
71,786
|
57,887
|
|||||
|
Decrease
in inventories
|
22,231
|
109,800
|
|||||
|
Decrease
(increase) in refundable taxes
|
7,164
|
(2,948
|
)
|
||||
|
Decrease
(increase) in prepaid expenses
|
55,509
|
(114,629
|
)
|
||||
|
Increase
(decrease) in accrued royalties
|
40,831
|
(381,677
|
)
|
||||
|
Increase
(decrease) in accounts payable
|
65,858
|
(407,683
|
)
|
||||
|
Increase
(decrease) in income taxes payable
|
180
|
(950
|
)
|
||||
|
(Decrease)
increase in deferred taxes
|
(187,362
|
)
|
90,931
|
||||
|
Increase
(decrease) in other liabilities
|
128,563
|
(385,086
|
)
|
||||
|
Net
cash provided (used) by operating activities
|
$
|
479,934
|
$
|
(795,389
|
)
|
||
|
|
|||||||
|
See
accompanying notes.
|
|||||||
F-3
Table
of Contents
Findex.com,
Inc.Notes
to Condensed Consolidated Financial Statements
September
30, 2005
(Unaudited)
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (Restated)
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/A
for the
fiscal year ended December 31, 2004.
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.
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. The software license is amortized over
a 10 year
useful life.
F-4
Table
of Contents
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 $2,514,885, less accumulated
amortization of $1,572,434 at September 30, 2005.
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 $130,407 and $44,228 for the nine months ended September 30, 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 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.
|
F-5
Table
of Contents
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 $101,132, less accumulated amortization of $39,807 at September 30,
2005.
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 nine months ended September 30,
2005 and
2004 and maintain a reserve for rebate claims remaining unpaid from
2000.
F-6
Table
of Contents
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.
F-7
Table
of Contents
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 2004 financial statements have been reclassified for comparative
purposes to conform with the presentation in the 2005 financial
statements.
NOTE
2 - INVENTORIES, (Restated)
At
September 30, 2005 and 2004, inventories consisted of the
following:
|
|
(Restated)
|
||||||
|
2005
|
2004
|
||||||
|
Raw
materials
|
$
|
147,769
|
$
|
73,100
|
|||
|
Finished
goods
|
64,000
|
89,700
|
|||||
|
Inventories
|
$
|
211,769
|
$
|
162,800
|
During
the nine months ended September 30, 2004, we wrote-off obsolete inventory
with a
carried cost totaling $32,396. This has been included in cost of sales
for 2004.
NOTE
3 - LOSS ON VALUATION OF DERIVATIVES, (Restated)
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. These warrants are accounted for as a liability according to the
guidance
of EITF 00-19 and the fair value of each warrant was assessed at $1,421,871
($2,843,742 total) using the Black-Scholes valuation method at September
30,
2005 with the following assumptions:
F-8
Table
of Contents
|
|
Warrant
A
|
Warrant
B
|
||||||
|
Expected
term - years
|
3.80
|
3.80
|
||||||
|
Stock
price on September 30, 2005
|
$
|
0.13
|
$
|
0.13
|
||||
|
Exercise
price
|
$
|
0.18
|
$
|
0.60
|
||||
|
Expected
dividend yield
|
0
|
%
|
0
|
%
|
||||
|
Expected
stock price volatility
|
490
|
%
|
490
|
%
|
||||
|
Risk-free
interest rate
|
3.80
|
%
|
3.80
|
%
|
The
fair
value of each warrant was estimated on the date of commitment with the
following
assumptions:
|
|
Warrant
A
|
Warrant
B
|
||||||
|
Expected
term - years
|
5
|
5
|
||||||
|
Stock
price on date of commitment (July 19, 2004)
|
$
|
0.20
|
$
|
0.20
|
||||
|
Exercise
price
|
$
|
0.18
|
$
|
0.60
|
||||
|
Expected
dividend yield
|
0
|
%
|
0
|
%
|
||||
|
Expected
stock price volatility
|
490
|
%
|
490
|
%
|
||||
|
Risk-free
interest rate
|
3.80
|
%
|
3.80
|
%
|
We
recognized a loss of $2,697,922 on the commitment of the warrants determined
as
follows:
|
Fair
value of warrants on commitment date (July 19, 2004)
|
$
|
4,375,000
|
||||||
|
Less:
Net proceeds received
|
||||||||
|
Gross
proceeds received for stock and warrants
|
$
|
1,750,000
|
||||||
|
Par
value of common stock issued
|
(21,875
|
)
|
||||||
|
Stock
offering costs
|
(51,047
|
)
|
$
|
1,677,078
|
||||
|
Loss
on fair value adjustment of derivatives
|
$
|
2,697,922
|
The
warrants were valued at $1,531,250 each ($3,062,500 total) using the
Black-Scholes valuation method at September 30, 2004 with the following
assumptions:
|
|
Warrant
A
|
Warrant
B
|
||||||
|
Expected
term - years
|
4.80
|
4.80
|
||||||
|
Stock
price on September 30, 2004
|
$
|
0.14
|
$
|
0.14
|
||||
|
Exercise
price
|
$
|
0.18
|
$
|
0.60
|
||||
|
Expected
dividend yield
|
0
|
%
|
0
|
%
|
||||
|
Expected
stock price volatility
|
490
|
%
|
490
|
%
|
||||
|
Risk-free
interest rate
|
3.80
|
%
|
3.80
|
%
|
F-9
Table
of Contents
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 $328,121,
$1,385,422, $874,992, and $1,385,422 have been included in other expenses
on the
consolidated statements of operations for the three and nine months ended
September 30, 2005 and 2004, respectively.
NOTE 4
- INCOME TAXES, (Restated)
The
provision (benefit) for taxes on net income for the three and
nine months ended
September 30, 2005 and 2004 consisted of the following:
|
|
Three
months ended September 30
|
Nine
months ended September 30
|
|||||||||||
|
|
(Restated)
|
(Restated)
|
|
||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
Current:
|
|||||||||||||
|
Federal
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
---
|
|||||
|
State
|
---
|
784
|
180
|
1,484
|
|||||||||
|
|
---
|
784
|
180
|
1,484
|
|||||||||
|
Deferred:
|
|||||||||||||
|
Federal
|
116,472
|
25,001
|
(165,714
|
)
|
75,003
|
||||||||
|
State
|
(4,496
|
)
|
5,310
|
(21,648
|
)
|
15,930
|
|||||||
|
111,976
|
30,311
|
(187,362
|
)
|
90,933
|
|||||||||
|
Total
tax provision (benefit)
|
$
|
111,976
|
$
|
31,095
|
$
|
(187,182
|
)
|
$
|
92,417
|
||||
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:
|
|
|
|
(Restated)
|
(Restated)
|
|||
|
For
the Three Months Ended September 30
|
2005
|
2004
|
|||||
|
Net
loss
|
$ |
(958,392
|
)
|
$ |
(907,303
|
)
|
|
|
Preferred
stock dividends
|
---
|
(4,125
|
)
|
||||
|
Net
loss available to common shareholders
|
$ |
(958,392
|
)
|
$ |
(911,428
|
)
|
|
|
Basic
weighted average shares outstanding
|
48,619,855
|
46,153,189
|
|||||
|
Dilutive
effect of:
|
|||||||
|
Stock
options
|
---
|
---
|
|||||
|
Convertible
notes payable
|
---
|
---
|
|||||
|
Warrants
|
---
|
---
|
|||||
|
Diluted
weighted average shares outstanding
|
48,619,855
|
46,153,189
|
|||||
F-10
Table
of Contents
|
|
|
|
(Restated)
|
(Restated)
|
|||
|
For
the Nine Months Ended September 30
|
2005
|
2004
|
|||||
|
Net
loss
|
$ |
(1,593,229
|
)
|
$ |
(1,044,573
|
)
|
|
|
Preferred
stock dividends
|
---
|
(4,125
|
)
|
||||
|
Net
loss available to common shareholders
|
$ |
(1,593,229
|
)
|
$ |
(1,048,698
|
)
|
|
|
Basic
weighted average shares outstanding
|
48,619,855
|
30,146,980
|
|||||
|
Dilutive
effect of:
|
|||||||
|
Stock
options
|
---
|
---
|
|||||
|
Convertible
notes payable
|
---
|
---
|
|||||
|
Warrants
|
---
|
---
|
|||||
|
Diluted
weighted average shares outstanding
|
48,619,855
|
30,146,980
|
|||||
A
total
of 24,035,000 and 2,440,000 dilutive potential securities for the three
and nine
months ended September 30, 2005 and 2004, respectively, have been excluded
from
the computation of diluted earnings per common share, as their inclusion
would
be anti-dilutive.
NOTE 6
- 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 ($8,488 included in Other current liabilities at September 30,
2005),
bonuses ($-0- included in Other current liabilities at September 30,
2005), and
any vested deferred compensation ($32,044 included in Other current liabilities
at September 30, 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
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.
As
part
of a July 2004 financing transaction, we entered into a certain Registration
Rights Agreement with a New York based private investment partnership,
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 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. 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 Barron Partners in an amount equal
to $1,726 per day for the duration of any such delay. Through September
30,
2005, we have accrued a total of $278,000 in registration rights penalties,
inclusive of an adjustment made pursuant to a tentative verbal agreement
reached
with Barron Partners in April 2005, for failing to cause the registration
statement to be declared effective by the SEC by April 22, 2005. If
we are
unable to cause such registration statement to be declared effective
by December
31, 2005, we will incur total penalties of approximately $437,000 (April
23,
2005 through December 31, 2005), which will directly decrease our net
income and
possibly cause a net loss for the year then ending.
F-11
Table
of Contents
NOTE 7
- 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 8
- SUBSEQUENT EVENTS, (Restated)
As
of
September 30, 2005, the registration statement filed on November 22,
2004 on
Form SB-2 has not yet been declared effective, and we have accrued
$278,000 (161
days at $1,726 per day) in penalties under the terms of the Registration
Rights
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 continue to accrue from June 21, 2005 until the registration
statement is declared effective, at which time a negotiated reduction
of such
total amount is expected to be reached, the extent of which is as yet
unknown,
and terms of payment of which are expected to be agreed to so as to
allow us to
reasonably meet our ongoing operating needs. We have 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. Although there can be no assurance, management
is hopeful
that we will cause the registration statement to be declared effective
in the
near future. The amount paid by us to date to satisfy this obligation
has, and
any continued delays in our ability to cause the registration statement
to be
declared effective coupled with additional amounts which we are and
may be
required to pay, will 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.
NOTE 9
- RESTATEMENT AND RECLASSIFICATION, (Restated)
We
have
restated our financial statements for the three and nine months ended
September
30, 2004 to reflect issues identified during a regulatory review of
our
financial statements associated with a registration statement filing
on Form
SB-2 that is pending effectiveness as of the date of this 10-QSB filing..
Management and the board of directors concluded these restatements
were
necessary to reflect the changes described below. There was no net
effect on
cash used by operating activities, investing activities or cash provided
by
financing activities for the period then ending as a result of these
issues.
|
•
|
During
the quarter ended June 30, 2002, we
reached a tentative settlement agreement in our arbitration
with TLC. The
tentative settlement agreement forgave the final, unpaid
installment due
on the 1999 Software License Agreement (“SLA”) and extended the SLA term
from 10 years to 50 years. We originally recorded the final,
unpaid
installment ($1,051,785) of the SLA as an offset against
the recorded
historical cost of the SLA and recalculated the amortization
based on this
reduced amount and the extension of the useful life to 50
years.
Although
paragraph 6 of Statement of Financial Accounting Standards
(“SFAS”) No.
141, Business
Combinations,
which guides the recognition and measurement of intangible
assets,
provides that the measurement of assets in which the consideration
given
is cash are measured by the amount of cash paid, our management
has since
concluded that too much time had passed between the date
of the 1999
license (June 1999) and the date of the tentative settlement
agreement
(May 2002) for such an offset to be appropriate. Therefore,
we recognized
the extinguishment of the liability owed to TLC as income
($1,051,785) in
the consolidated statement of operations for the year ended
December 31,
2002. We have restated the retained deficit as of December
31, 2003 and
there was no net effect on the consolidated statements of
operations and
consolidated statements of cash flows for the three and nine
months ended
September 30, 2004 as a result of this correction.
|
|
F-12
Table
of Contents
|
•
|
During
the quarter ended December 31, 2003, we reached a final settlement
agreement in our dispute with Zondervan and TLC. This final
settlement
extended the life of the SLA, and the trademarks included
therein,
indefinitely. We originally reassessed the useful life of
the SLA to be
indefinite, based on the guidelines provided by paragraphs
11 and 53 of
SFAS No. 142, Goodwill
and Other Intangible Assets.
Our management has since concluded a 10 year life is appropriate
based on
our going concern opinion for 2002 and 2003. Therefore, we
restored the
estimated economic useful life to the original 10 years and
have
recalculated annual amortization accordingly. This adjustment
increased
the retained deficit at September 30, 2003 (for the prior
years’
amortization and related income tax effects). We have
restated the condensed consolidated statements of operations
($251,753)
and consolidated statements of cash flows for the three and
nine months
ended September 30, 2004.
|
|
|
•
|
During
the three months ended June 30, 2004, we erroneously included
rebates, and
adjustments to rebates, in sales and marketing expenses.
The more
appropriate presentation should have been, and is now, as
an adjustment to
revenue, in accordance with EITF 01-09, Accounting for Consideration
Given
by a Vendor to a Customer (Including a Reseller of the Vendor’s
Products).. During the three months ended June 30, 2004,
we originally
recorded an adjustment to the rebates reserve in the amount
of $266,301
and an adjustment to rebates payable in the amount of $12,599.
Upon
reassessment of the adequacy of our reserve at December 31,
2003, we have
allocated $124,262 of the total adjustment to fiscal year
2003 and
$142,039 to fiscal year 2004 with $66,575 allocated to the
three months
ended March 31, 2004 and $75,464 allocated to the three months
ended June
30, 2004. These adjustments resulted from a change in our
internal control
over financial reporting. Previously, when making our assessment
of the
adequacy of our reserve for rebates, we did not take into
consideration
the amount and number of outstanding checks, issued checks
that were
returned as undeliverable, or our ability to meet our recorded
financial
obligation. We have changed our internal control procedures
to include
review of each of these factors in our assessment of the
adequacy of our
reserve for rebates.
|
|
|
•
|
During
the three months ended March 31, 2004, and as a direct result
of the
settlement with Zondervan and TLC, we wrote-off obsolete inventory
with a
carried cost totaling $32,396. We originally recorded this
as a
non-recurring item in the “Other income (expense)” section of the
consolidated statement of operations. Our
revised condensed consolidated statement of operations for
the three and
nine months ended September 30, 2004 reflects this inventory
adjustment in
Cost of sales. There was no net effect on net income (loss)
from this
reclassification for the three and nine months ended September
30,
2004.
|
|
|
•
|
Rebates
payable to a third-party processor were overstated ($98,946)
on our
consolidated financial statements for the year ended December
31, 2000. We
discovered the error during the preparation of our condensed
consolidated
financial statements for the three months ended March 31,
2004. We
originally recorded the error correction as an adjustment
to the beginning
retained earnings of the year ended December 31, 2003 on
the 2004
quarterly and annual filings. Our revised consolidated statement
of
operations for the year ended December 31, 2000 reflects
an adjustment to
revenue and reported the correction on Form 10-KSB/A for
the year then
ended. This
revision had no net effect on the net loss for the three
and nine months
ended September 30, 2004 or retained deficit at September
30, 2004 or
December 31, 2003.
|
|
|
•
|
We
erroneously treated the warrants issued to a New York based
private
investment partnership in connection with a private placement
as equity.
The correct presentation is as a liability adjusted for changes
in fair
value, at each balance sheet date, through the consolidated
statements of
operations, as provided by EITF 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially
Settled
in, a Company’s Own Stock.
We
reclassified the initial fair value of the warrants ($4,375,000
at July
19, 2004) as a current liability ($2,843,742 at September 30,
2005) and
have included the net change in fair value through September
30, 2005
($874,992) and 2004 ($1,385,422) in Other Expenses on the consolidated
statements of operations.
|
|
| • |
We
have also reclassified various other expense items in the condensed
consolidated statements of operations for the three and nine
months ended
September 30, 2004 to conform to the presentation in the statements
of
operations for the year ended December 31, 2004. There was
no net effect
on net income (loss) from these reclassifications for the three
and nine
months ended September 30,
2004.
|
F-13
Table
of Contents
A
summary
of the effects of these changes is as follows:
|
Findex.com,
Inc.
|
||||||||||||||||
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
||||||||||||||||
|
September
30, 2005
|
||||||||||||||||
|
(Unaudited)
|
||||||||||||||||
|
|
||||||||||||||||
|
|
As
Originally Reported
|
As
Restated
|
Change
|
|||||||||||||
|
Assets
|
||||||||||||||||
|
Current
assets:
|
||||||||||||||||
|
Cash
and cash equivalents
|
$
|
39,838
|
$
|
39,838
|
$
|
---
|
||||||||||
|
Accounts
receivable, trade
|
465,383
|
465,383
|
---
|
|||||||||||||
|
Inventory
|
211,769
|
211,769
|
---
|
|||||||||||||
|
Other
current assets
|
308,956
|
308,956
|
---
|
|||||||||||||
|
Total
current assets
|
1,025,946
|
1,025,946
|
---
|
|||||||||||||
|
Property
and equipment, net
|
123,653
|
123,653
|
---
|
|||||||||||||
|
Software
license, net
|
1,888,153
|
1,888,153
|
---
|
|||||||||||||
|
Software
development, net
|
942,451
|
942,451
|
---
|
|||||||||||||
|
Other
assets
|
432,124
|
432,124
|
---
|
|||||||||||||
|
Total
assets
|
$
|
4,412,327
|
$
|
4,412,327
|
$
|
---
|
||||||||||
|
Liabilities
and stockholders’ equity
|
||||||||||||||||
|
Current
liabilities:
|
||||||||||||||||
|
Accounts
payable, trade
|
$
|
687,662
|
$
|
687,662
|
---
|
|||||||||||
|
Accrued
royalties
|
328,345
|
328,345
|
---
|
|||||||||||||
|
Derivatives
|
---
|
2,843,742
|
2,843,742
|
(a)
|
||||||||||||
|
Other
current liabilities
|
578,751
|
578,751
|
---
|
|||||||||||||
|
Total
current liabilities
|
1,594,758
|
4,438,500
|
2,843,742
|
|||||||||||||
|
Long-term
obligations
|
167,927
|
167,927
|
---
|
|||||||||||||
|
Commitments
and contingencies
|
||||||||||||||||
|
Stockholders’
equity:
|
||||||||||||||||
|
Common
stock
|
48,620
|
48,620
|
---
|
|||||||||||||
|
Paid-in
capital
|
9,198,417
|
7,521,339
|
(1,677,078
|
)
|
(b)
|
|||||||||||
|
Retained
(deficit)
|
(6,597,395
|
)
|
(7,764,059
|
)
|
(1,166,664
|
)
|
||||||||||
|
Total
stockholders’ equity
|
2,649,642
|
(194,100
|
)
|
(2,843,742
|
)
|
|||||||||||
|
Total
liabilities and stockholders’ equity
|
$
|
4,412,327
|
$
|
4,412,327
|
$
|
---
|
||||||||||
|
(a)
Fair
value of common stock warrants reclassified as derivatives
under EITF
00-19.
|
||||||||||||||||
|
(b)
Reclassification
of net proceeds from common stock
warrants.
|
||||||||||||||||
F-14
Table
of Contents
|
Findex.com,
Inc.
|
||||||||||||||||
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
||||||||||||||||
|
September
30, 2004
|
||||||||||||||||
|
(Unaudited)
|
||||||||||||||||
|
|
||||||||||||||||
|
|
As
Originally Reported
|
As
Restated
|
Change
|
|||||||||||||
|
Assets
|
||||||||||||||||
|
Current
assets:
|
||||||||||||||||
|
Cash
and cash equivalents
|
$
|
589,753
|
$
|
539,399
|
$
|
(50,354
|
)
|
(a)
|
||||||||
|
Accounts
receivable, trade
|
296,850
|
296,850
|
---
|
|||||||||||||
|
Inventory
|
162,800
|
162,800
|
---
|
|||||||||||||
|
Other
current assets
|
139,495
|
139,495
|
---
|
|||||||||||||
|
Total
current assets
|
1,188,898
|
1,138,544
|
(50,354
|
)
|
||||||||||||
|
Property
and equipment, net
|
61,518
|
61,518
|
---
|
|||||||||||||
|
Software
license, net
|
2,513,158
|
2,391,660
|
(121,498
|
)
|
(b)
|
|||||||||||
|
Software
development, net
|
602,276
|
602,276
|
---
|
|||||||||||||
|
Other
assets
|
86,301
|
136,655
|
50,354
|
(a)
|
||||||||||||
|
Total
assets
|
$
|
4,452,151
|
$
|
4,330,653
|
$
|
(121,498
|
)
|
|||||||||
|
Liabilities
and stockholders’ equity
|
||||||||||||||||
|
Current
liabilities:
|
||||||||||||||||
|
Accounts
payable, trade
|
$
|
410,179
|
$
|
410,179
|
$
|
---
|
||||||||||
|
Accrued
royalties
|
236,949
|
236,949
|
---
|
|||||||||||||
|
Notes
payable
|
240,000
|
240,000
|
|
---
|
||||||||||||
|
Derivatives
|
---
|
3,062,500
|
3,062,500
|
(c)
|
||||||||||||
|
Other
current liabilities
|
445,776
|
445,776
|
---
|
|||||||||||||
|
Total
current liabilities
|
1,332,904
|
4,395,404
|
3,062,500
|
|||||||||||||
|
Non-current
deferred taxes
|
1,271,643
|
808,083
|
(463,560
|
)
|
(d)
|
|||||||||||
|
Commitments
and contingencies
|
||||||||||||||||
|
Stockholders’
equity:
|
||||||||||||||||
|
Common
stock
|
46,153
|
46,153
|
---
|
|||||||||||||
|
Paid-in
capital
|
8,989,778
|
7,260,469
|
(1,729,309
|
)
|
(e)
|
|||||||||||
|
Retained
(deficit)
|
(7,188,327
|
)
|
(8,179,456
|
)
|
(991,129
|
)
|
||||||||||
|
Total
stockholders’ equity
|
1,847,604
|
(872,834
|
)
|
(2,720,438
|
)
|
|||||||||||
|
Total
liabilities and stockholders’ equity
|
$
|
4,452,151
|
$
|
4,330,653
|
$
|
(121,498
|
)
|
|||||||||
|
(a)
Reclassification
of restricted cash with merchant banker as non-current
asset.
|
||||||||||||||||
|
(b)
Net
change from reclassification of forgiveness of final installment
and
additional amortization from returning
the estimated economic useful life from indefinite to 10
years.
|
||||||||||||||||
|
(c)
Fair
value of common stock warrants reclassified as derivatives
under EITF
00-19.
|
||||||||||||||||
|
(d)
Decrease
from recalculation of deferred taxes resulting from changes
to software
license agreement.
|
||||||||||||||||
|
(e)
Reclassification
of net proceeds from common stock
warrants.
|
||||||||||||||||
F-15
Table
of Contents
|
Findex.com,
Inc.
|
||||||||||||||||
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
||||||||||||||||
|
Nine
Months Ended September 30, 2005
|
||||||||||||||||
|
(Unaudited)
|
||||||||||||||||
|
|
||||||||||||||||
|
|
As
Originally Reported
|
As
Restated
|
Change
|
|||||||||||||
|
Revenues,
net of reserves and allowances
|
$
|
3,978,019
|
$
|
3,978,019
|
$
|
---
|
||||||||||
|
Cost
of sales
|
1,276,227
|
1,276,227
|
---
|
|||||||||||||
|
Gross
profit
|
2,701,792
|
2,701,792
|
---
|
|||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Sales
and marketing
|
1,030,870
|
1,030,870
|
---
|
|||||||||||||
|
General
and administrative
|
1,819,987
|
1,819,987
|
---
|
|||||||||||||
|
Bad
debt provision
|
29,650
|
29,650
|
---
|
|||||||||||||
|
Depreciation
and amortization
|
436,903
|
436,903
|
---
|
|||||||||||||
|
Total
operating expenses
|
3,317,410
|
3,317,410
|
---
|
|||||||||||||
|
Loss
from operations
|
(615,618
|
)
|
(615,618
|
)
|
---
|
|||||||||||
|
Other
income
|
75
|
75
|
---
|
|||||||||||||
|
Loss
on valuation adjustment of derivatives
|
---
|
(874,992
|
)
|
(874,992
|
)
|
(a)
|
||||||||||
|
Other
expenses, net
|
(289,876
|
)
|
(289,876
|
)
|
---
|
|||||||||||
|
Loss
before income taxes
|
(905,419
|
)
|
(1,780,411
|
)
|
(874,992
|
)
|
||||||||||
|
Provision
for income taxes
|
187,182
|
187,182
|
---
|
|||||||||||||
|
Net
loss
|
$
|
(718,237
|
)
|
$
|
(1,593,229
|
)
|
$
|
(874,992
|
)
|
|||||||
|
|
||||||||||||||||
|
Net
loss per share:
|
||||||||||||||||
|
Basic
|
$
|
(0.02
|
)
|
$
|
(0.03
|
)
|
$
|
(0.01
|
)
|
(b)
|
||||||
|
Diluted
|
$
|
(0.02
|
)
|
$
|
(0.03
|
)
|
$
|
(0.01
|
)
|
(b)
|
||||||
|
|
||||||||||||||||
|
Weighted
average shares outstanding:
|
||||||||||||||||
|
Basic
|
48,619,855
|
48,619,855
|
---
|
|||||||||||||
|
Diluted
|
48,619,855
|
48,619,855
|
---
|
|||||||||||||
|
|
||||||||||||||||
|
(a)
Fair
value adjustment on common stock warrants treated as derivatives
under
EITF 00-19.
|
||||||||||||||||
|
(b)
Decrease
from effects of fair value adjustment of
derivatives.
|
||||||||||||||||
F-16
Table
of Contents
|
Findex.com,
Inc.
|
||||||||||||||||
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
||||||||||||||||
|
Three
Months Ended September 30, 2005
|
||||||||||||||||
|
(Unaudited)
|
||||||||||||||||
|
|
||||||||||||||||
|
|
As
Originally Reported
|
As
Restated
|
Change
|
|||||||||||||
|
Revenues,
net of reserves and allowances
|
$
|
1,023,609
|
$
|
1,023,609
|
$
|
---
|
||||||||||
|
Cost
of sales
|
316,449
|
316,449
|
---
|
|||||||||||||
|
Gross
profit
|
707,160
|
707,160
|
---
|
|||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Sales
and marketing
|
295,902
|
295,902
|
---
|
|||||||||||||
|
General
and administrative
|
613,191
|
613,191
|
---
|
|||||||||||||
|
Bad
debt provision
|
6,981
|
6,981
|
---
|
|||||||||||||
|
Depreciation
and amortization
|
145,355
|
145,355
|
---
|
|||||||||||||
|
Total
operating expenses
|
1,061,429
|
1,061,429
|
---
|
|||||||||||||
|
Loss
from operations
|
(354,269
|
)
|
(354,269
|
)
|
---
|
|||||||||||
|
Other
income
|
75
|
75
|
---
|
|||||||||||||
|
Loss
on valuation adjustment of derivatives
|
---
|
(328,121
|
)
|
(328,121
|
)
|
(a)
|
||||||||||
|
Other
expenses, net
|
(164,101
|
)
|
(164,101
|
)
|
---
|
|||||||||||
|
Loss
before income taxes
|
(518,295
|
)
|
(846,416
|
)
|
(328,121
|
)
|
||||||||||
|
Provision
for income taxes
|
(111,976
|
)
|
(111,976
|
)
|
---
|
|||||||||||
|
Net
loss
|
$
|
(630,271
|
)
|
$
|
(958,392
|
)
|
$
|
(328,121
|
)
|
|||||||
|
Net
loss per share:
|
||||||||||||||||
|
Basic
|
$
|
(0.01
|
)
|
$
|
(0.02
|
)
|
$
|
(0.01
|
)
|
(b)
|
||||||
|
Diluted
|
$
|
(0.01
|
)
|
$
|
(0.02
|
)
|
$
|
(0.01
|
)
|
(b)
|
||||||
|
|
||||||||||||||||
|
Weighted
average shares outstanding:
|
||||||||||||||||
|
Basic
|
48,619,855
|
48,619,855
|
---
|
|||||||||||||
|
Diluted
|
48,619,855
|
48,619,855
|
---
|
|||||||||||||
|
|
||||||||||||||||
|
(a)
Fair
value adjustment on common stock warrants treated as derivatives
under
EITF 00-19.
|
||||||||||||||||
|
(b)
Decrease
from effects of fair value adjustment of
derivatives.
|
||||||||||||||||
F-17
Table
of Contents
|
Findex.com,
Inc.
|
||||||||||||||
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
||||||||||||||
|
Nine
Months Ended September 30, 2004
|
||||||||||||||
|
(Unaudited)
|
||||||||||||||
|
|
||||||||||||||
|
|
As
Originally Reported
|
As
Restated
|
Change
|
|||||||||||
|
Revenues,
net of reserves and allowances
|
$
|
3,526,492
|
$
|
3,664,060
|
$
|
137,568
|
(a)
|
|||||||
|
Cost
of sales
|
999,770
|
1,171,661
|
171,891
|
(b)
|
||||||||||
|
Gross
profit
|
2,526,722
|
2,492,399
|
(34,323
|
)
|
||||||||||
|
Operating
expenses:
|
|
|||||||||||||
|
Sales
and marketing
|
791,249
|
798,410
|
7,161
|
(c)
|
||||||||||
|
General
and administrative
|
1,801,483
|
1,650,355
|
(151,128
|
)
|
(d)
|
|||||||||
|
Nonrecurring
items
|
186,965
|
---
|
(186,965
|
)
|
(e)
|
|||||||||
|
Rebate
reserve adjustment
|
(266,301
|
)
|
---
|
266,301
|
(f)
|
|||||||||
|
Bad
debt provision
|
11,066
|
11,066
|
---
|
|||||||||||
|
Depreciation
and amortization
|
38,615
|
416,246
|
377,631
|
(g)
|
||||||||||
|
Total
operating expenses
|
2,563,077
|
2,876,077
|
313,000
|
|||||||||||
|
Loss
from operations
|
(36,355
|
)
|
(383,678
|
)
|
(347,323
|
)
|
||||||||
|
Other
income
|
9,135
|
1,010,288
|
1,001,153
|
(h)
|
||||||||||
|
Loss
on valuation adjustment of derivatives
|
---
|
(1,385,422
|
)
|
(1,385,422
|
)
|
(k)
|
||||||||
|
Other
expenses, net
|
(38,285
|
)
|
(193,344
|
)
|
(155,059
|
)
|
(l)
|
|||||||
|
Loss
before income taxes
|
(65,505
|
)
|
(952,156
|
)
|
(886,651
|
)
|
||||||||
|
Provision
for income taxes
|
15,700
|
(92,417
|
)
|
(108,117
|
)
|
(i)
|
||||||||
|
Loss
before extraordinary item
|
(49,805
|
)
|
(1,044,573
|
)
|
(994,768
|
)
|
||||||||
|
Extraordinary
item
|
763,162
|
---
|
(763,162
|
)
|
(h)
|
|||||||||
|
Net
income (loss)
|
$
|
713,357
|
$
|
(1,044,573
|
)
|
$
|
(1,757,930
|
)
|
||||||
|
|
||||||||||||||
|
Net
earnings (loss) per share:
|
||||||||||||||
|
Basic
|
$
|
0.03
|
$
|
(0.03
|
)
|
$
|
(0.06
|
)
|
||||||
|
Diluted
|
$
|
0.02
|
$
|
(0.03
|
)
|
$
|
(0.05
|
)
|
||||||
|
|
||||||||||||||
|
Weighted
average shares outstanding:
|
||||||||||||||
|
Basic
|
30,146,980
|
30,146,980
|
---
|
|||||||||||
|
Diluted
|
32,880,085
|
30,146,980
|
(2,733,105
|
)
|
(j)
|
|||||||||
|
|
||||||||||||||
|
(a)
Increase
from reclassification of rebate reserve adjustment from Sales
and
marketing expenses and reclassify
cost of estimated returns to Cost of sales.
|
||||||||||||||
|
(b)
Increase
from reclassification of non-capitalized technical support
wages from
General and administrative
expenses, reclassification of fulfillment costs from Sales
and marketing
expenses, reclassification
of Inventory write down expense from operating expenses,
and
reclassification of cost
of estimated returns from net
revenues.
|
||||||||||||||
|
(c)
Increase
from reclassification of rebate reserve adjustment to Revenues
and
reclassification of fulfillment
costs to Cost of sales.
|
||||||||||||||
|
(d)
Decrease
from reclassification of non-capitalized technical support
wages to Cost
of sales and costs
of withdrawn public offering to Other expenses,
net.
|
||||||||||||||
|
(e)
Decrease
from reclassification of inventory write-down to Cost of
sales.
|
||||||||||||||
|
(f)
Increase
from reclassification as an adjustment to revenue.
|
||||||||||||||
|
(g)
Increase
from effects of additional amortization of the software license
agreement.
|
||||||||||||||
|
(h)
Reclassification
of debt forgiveness as other income from net extraordinary
item.
|
||||||||||||||
|
(i)
Income
tax effects of additional software license
amortization.
|
||||||||||||||
|
(j)
Decrease
due to correction of error in calculation of potentially
dilutive common
stock warrants.
|
||||||||||||||
|
(k)
Fair
value adjustment on common stock warrants treated as derivatives
under
EITF 00-19.
|
||||||||||||||
|
(l)
Reclassification
of costs of withdrawn public offering from General and
administrative.
|
||||||||||||||
F-18
Table
of Contents
|
Findex.com,
Inc.
|
||||||||||||||
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
||||||||||||||
|
Three
Months Ended September 30, 2004
|
||||||||||||||
|
(Unaudited)
|
||||||||||||||
|
|
||||||||||||||
|
|
As
Originally Reported
|
As
Restated
|
Change
|
|||||||||||
|
Revenues,
net of reserves and allowances
|
$
|
1,027,277
|
$
|
1,010,207
|
$
|
(17,070
|
)
|
(a)
|
||||||
|
Cost
of sales
|
368,979
|
431,592
|
62,613
|
(b)
|
||||||||||
|
Gross
profit
|
658,298
|
578,615
|
(79,683
|
)
|
||||||||||
|
Operating
expenses:
|
||||||||||||||
|
Sales
and marketing
|
294,200
|
287,909
|
(6,291
|
)
|
(c)
|
|||||||||
|
General
and administrative
|
552,177
|
478,781
|
(73,396
|
)
|
(d)
|
|||||||||
|
Nonrecurring
items
|
154,569
|
---
|
(154,569
|
)
|
(e)
|
|||||||||
|
Bad
debt provision
|
8,566
|
8,566
|
---
|
|
||||||||||
|
Depreciation
and amortization
|
15,729
|
141,607
|
125,878
|
(f)
|
||||||||||
|
Total
operating expenses
|
1,025,241
|
916,863
|
(108,378
|
)
|
||||||||||
|
Loss
from operations
|
(366,943
|
)
|
(338,248
|
)
|
28,695
|
|||||||||
|
Other
income
|
8,019
|
1,010,288
|
1,002,269
|
(g)
|
||||||||||
|
Loss
on valuation adjustment of derivatives
|
---
|
(1,385,422
|
)
|
(1,385,422
|
)
|
(h)
|
||||||||
|
Other
expenses, net
|
(6,651
|
)
|
(162,826
|
)
|
(156,175
|
)
|
(e)
|
|||||||
|
Loss
before income taxes
|
(365,575
|
)
|
(876,208
|
)
|
(510,633
|
)
|
||||||||
|
Provision
for income taxes
|
18,005
|
(31,095
|
)
|
(49,100
|
)
|
(i)
|
||||||||
|
Loss
before extraordinary item
|
(347,570
|
)
|
(907,303
|
)
|
(559,733
|
)
|
||||||||
|
Extraordinary
item
|
763,162
|
---
|
(763,162
|
)
|
(g)
|
|||||||||
|
Net
income (loss)
|
$
|
415,592
|
$
|
(907,303
|
)
|
$
|
(1,322,895
|
)
|
||||||
|
|
||||||||||||||
|
Net
earnings (loss) per share:
|
||||||||||||||
|
Basic
|
$
|
0.01
|
|
$
|
(0.02
|
)
|
$
|
(0.03
|
)
|
|||||
|
Diluted
|
$
|
0.01
|
|
$
|
(0.02
|
)
|
$
|
(0.03
|
)
|
|||||
|
|
||||||||||||||
|
Weighted
average shares outstanding:
|
||||||||||||||
|
Basic
|
46,153,189
|
46,153,189
|
---
|
|||||||||||
|
Diluted
|
48,886,294
|
46,153,189
|
(2,733,105
|
)
|
(j)
|
|||||||||
|
|
||||||||||||||
|
(a)
Increase
from reclassification of rebate reserve adjustment from Sales
and
marketing expenses and reclassify
cost of estimated returns to Cost of sales.
|
||||||||||||||
|
(b)
Increase
from reclassification of non-capitalized technical support
wages from
General and administrative
expenses, reclassification of fulfillment costs from Sales
and marketing
expenses, reclassification
of Inventory write down expense from operating expenses,
and
reclassification of cost
of estimated returns from net
revenues.
|
||||||||||||||
|
(c)
Decrease
from reclassification of fulfillment costs to Cost of
sales.
|
||||||||||||||
|
(d)
Decrease
from reclassification of non-capitalized technical support
wages to Cost
of sales.
|
||||||||||||||
|
(e)
Reclassification
of expenses incurred in a withdrawn public offering to Other
expenses,
net.
|
||||||||||||||
|
(f)
Increase
from effects of additional amortization of the software license
agreement.
|
||||||||||||||
|
(g)
Reclassification
of debt forgiveness as other income from net extraordinary
item.
|
||||||||||||||
|
(h)
Fair
value adjustment on common stock warrants treated as derivatives
under
EITF 00-19.
|
||||||||||||||
|
(i)
Income
tax effects of additional software license
amortization.
|
||||||||||||||
|
(j)
Decrease
due to correction of error in calculation of potentially
dilutive common
stock warrants.
|
||||||||||||||
F-19
Table
of Contents
|
Findex.com,
Inc.
|
||||||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||||||
|
For
the Nine Months Ended September 30, 2005
|
||||||||||||||
|
(Unaudited)
|
||||||||||||||
|
|
||||||||||||||
|
|
As
Originally Reported
|
As
Restated
|
Change
|
|||||||||||
|
Cash
flows from operating activities:
|
||||||||||||||
|
Cash
received from customers
|
$
|
4,049,153
|
$
|
4,049,153
|
$
|
---
|
||||||||
|
Cash
paid to suppliers and employees
|
(3,565,309
|
)
|
(3,565,309
|
)
|
---
|
|||||||||
|
Other
operating activities, net
|
(3,910
|
)
|
(3,910
|
)
|
---
|
|||||||||
|
Net
cash provided by operating activities
|
479,934
|
479,934
|
---
|
|||||||||||
|
Cash
flows from investing activities:
|
||||||||||||||
|
Software
development costs
|
(766,151
|
)
|
(766,151
|
)
|
---
|
|||||||||
|
Other
investing activities, net
|
15,300
|
15,300
|
---
|
|||||||||||
|
Net
cash (used) by investing activities
|
(750,851
|
)
|
(750,851
|
)
|
---
|
|||||||||
|
Cash
flows from financing activities:
|
||||||||||||||
|
Payments
made on long-term notes payable
|
(30,604
|
)
|
(30,604
|
)
|
--- | |||||||||
|
Net
cash (used) by financing activities
|
(30,604
|
)
|
(30,604
|
)
|
---
|
|||||||||
|
Net
(decrease) in cash and cash equivalents
|
(301,521
|
)
|
(301,521
|
)
|
---
|
|||||||||
|
Cash
and cash equivalents, beginning of year
|
341,359
|
341,359
|
---
|
|||||||||||
|
Cash
and cash equivalents, end of period
|
$
|
39,838
|
$
|
39,838
|
$
|
---
|
||||||||
|
|
||||||||||||||
|
Reconciliation
of net loss to cash flows from operating activities:
|
||||||||||||||
|
Net
loss
|
$
|
(718,237
|
)
|
$
|
(1,593,229
|
)
|
$
|
(874,992
|
)
|
(a)
|
||||
|
Adjustments
to reconcile net loss to net cash
|
||||||||||||||
|
provided
(used) by operating activities:
|
||||||||||||||
|
Software
development costs amortized
|
524,989
|
524,989
|
---
|
|||||||||||
|
Loss
on valuation adjustment of derivatives
|
---
|
874,992
|
874,992
|
(a)
|
||||||||||
|
Provision
for bad debts
|
29,650
|
29,650
|
---
|
|||||||||||
|
Depreciation
and amortization
|
436,903
|
436,903
|
---
|
|||||||||||
|
Loss
on disposal of property and equipment
|
1,869
|
1,869
|
---
|
|||||||||||
|
Change
in assets and liabilities:
|
||||||||||||||
|
Decrease
in accounts receivable
|
71,786
|
71,786
|
---
|
|||||||||||
|
Decrease
in inventories
|
22,231
|
22,231
|
---
|
|||||||||||
|
Decrease
in refundable income taxes
|
7,164
|
7,164
|
---
|
|||||||||||
|
Decrease
in prepaid expenses
|
55,509
|
55,509
|
---
|
|||||||||||
|
Increase
in accrued royalties
|
40,831
|
40,831
|
---
|
|||||||||||
|
Increase
in accounts payable
|
65,858
|
65,858
|
---
|
|||||||||||
|
Increase
in income taxes payable
|
180
|
180
|
---
|
|||||||||||
|
(Decrease)
in deferred taxes
|
(187,362
|
)
|
(187,362
|
)
|
---
|
|||||||||
|
Increase
in other liabilities
|
128,563
|
128,563
|
---
|
|||||||||||
|
Net
cash provided by operating activities
|
$
|
479,934
|
$
|
479,934
|
$
|
---
|
||||||||
|
|
||||||||||||||
|
(a)
Loss
increase from fair value adjustment of
derivatives.
|
||||||||||||||
F-20
Table
of Contents
|
Findex.com,
Inc.
|
||||||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||||||
|
For
the Nine Months Ended September 30, 2004
|
||||||||||||||
|
(Unaudited)
|
||||||||||||||
|
|
||||||||||||||
|
|
As
Originally Reported
|
As
Restated
|
Change
|
|||||||||||
|
Cash
flows from operating activities:
|
||||||||||||||
|
Cash
received from customers
|
$
|
3,607,255
|
$
|
3,607,255
|
$
|
---
|
||||||||
|
Cash
paid to suppliers and employees
|
(4,368,409
|
)
|
(4,368,409
|
)
|
---
|
|||||||||
|
Other
operating activities, net
|
(34,235
|
)
|
(34,235
|
)
|
---
|
|||||||||
|
Net
cash (used) by operating activities
|
(795,389
|
)
|
(795,389
|
)
|
---
|
|||||||||
|
Cash
flows from investing activities:
|
||||||||||||||
|
Software
development costs
|
(415,197
|
)
|
(415,197
|
)
|
---
|
|||||||||
|
Other
investing activities, net
|
(57,152
|
)
|
(7,152
|
)
|
50,000
|
(a)
|
||||||||
|
Net
cash (used) by investing activities
|
(472,349
|
)
|
(422,349
|
)
|
50,000
|
|||||||||
|
Cash
flows from financing activities:
|
||||||||||||||
|
Proceeds
from (payments on) line of credit, net
|
(20,933
|
)
|
(20,933
|
)
|
---
|
|||||||||
|
Payments
made on long-term notes payable
|
(202,551
|
)
|
(202,551
|
)
|
---
|
|||||||||
|
Proceeds
from convertible notes payable
|
240,000
|
240,000
|
---
|
|||||||||||
|
Stock
offering costs paid
|
(51,047
|
)
|
(51,047
|
)
|
---
|
|||||||||
|
Proceeds
from issuance of common stock and warrants
|
1,750,000
|
1,750,000
|
---
|
|||||||||||
|
Net
cash provided by financing activities
|
1,715,469
|
1,715,469
|
---
|
|||||||||||
|
Net
increase in cash and cash equivalents
|
447,731
|
497,731
|
50,000
|
|||||||||||
|
Cash
and cash equivalents, beginning of year
|
142,022
|
41,668
|
(100,354
|
)
|
(a)
|
|||||||||
|
Cash
and cash equivalents, end of period
|
$
|
589,753
|
$
|
539,399
|
$
|
(50,354
|
)
|
|||||||
|
|
||||||||||||||
|
Reconciliation
of net income (loss) to cash flows from operating
activities:
|
||||||||||||||
|
Net
income (loss)
|
$
|
713,357
|
$
|
(1,044,573
|
)
|
$
|
(1,757,930
|
)
|
||||||
|
Adjustments
to reconcile net income (loss)to net cash
|
||||||||||||||
|
provided
(used) by operating activities:
|
||||||||||||||
|
Software
development costs amortized
|
397,627
|
397,627
|
---
|
|||||||||||
|
Provision
for bad debts
|
11,066
|
11,066
|
---
|
|||||||||||
|
Common
stock and warrants issued for services
|
73,700
|
73,700
|
---
|
|||||||||||
|
Loss
on valuation adjustment of derivatives
|
---
|
1,385,422
|
1,385,422
|
(d)
|
||||||||||
|
Rebate
reserve adjustment
|
(266,301
|
)
|
---
|
266,301
|
(c)
|
|||||||||
|
Depreciation
and amortization
|
38,615
|
416,245
|
377,630
|
(b)
|
||||||||||
|
Extraordinary
item
|
(1,000,662
|
)
|
---
|
1,000,662
|
(e)
|
|||||||||
|
Debt
forgiveness
|
---
|
(1,000,662
|
)
|
(1,000,662
|
)
|
(e)
|
||||||||
|
Loss
on disposal of property and equipment
|
141
|
141
|
---
|
|||||||||||
|
Change
in assets and liabilities:
|
||||||||||||||
|
Decrease
in accounts receivable
|
57,887
|
57,887
|
---
|
|||||||||||
|
Decrease
in inventories
|
109,800
|
109,800
|
---
|
|||||||||||
|
(Increase)
in refundable income taxes payable
|
(2,948
|
)
|
(2,948
|
)
|
---
|
|||||||||
|
(Increase)
in prepaid expenses
|
(114,629
|
)
|
(114,629
|
)
|
---
|
|||||||||
|
(Decrease)
in accrued royalties
|
(381,677
|
)
|
(381,677
|
)
|
---
|
|||||||||
|
(Decrease)
in accounts payable
|
(407,683
|
)
|
(407,683
|
)
|
---
|
|||||||||
|
(Decrease)
in income taxes payable
|
(950
|
)
|
(950
|
)
|
--- | |||||||||
|
Increase
in deferred taxes
|
220,316
|
90,931
|
(129,385
|
)
|
(f)
|
|||||||||
|
(Decrease)
in other liabilities
|
(243,048
|
)
|
(385,086
|
)
|
(142,038
|
)
|
(c)
|
|||||||
|
Net
cash used by operating activities
|
$
|
(795,389
|
)
|
$
|
(795,389
|
)
|
$
|
---
|
||||||
|
|
||||||||||||||
|
(a)
Reclassification
of restricted cash held by merchant banker as other
asset.
|
||||||||||||||
|
(b)
Increase
from additional software license amortization.
|
||||||||||||||
|
(c)
Reclassification
of Rebate reserve adjustment as decrease in other
liabilities.
|
||||||||||||||
|
(d)
Fair
value adjustment on common stock warrants treated as
derivatives under
EITF 00-19.
|
||||||||||||||
|
(e)
Reclassify
extraordinary item as debt forgiveness.
|
||||||||||||||
|
(f)
Net
income tax effects of additional software
amortization.
|
||||||||||||||
F-21
Table
of Contents
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
F-22
Table
of Contents
|
CONSOLIDATED
BALANCE SHEETS
|
|||||||
|
December
31, 2004 and 2003
|
|||||||
|
|
|||||||
|
|
2004
|
2003
|
|||||
|
|
(Restated)
|
(Restated)
|
|
||||
|
Assets
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
341,359
|
$
|
41,668
|
|||
|
Accounts
receivable, trade (Note 2)
|
566,819
|
365,803
|
|||||
|
Inventories
(Note 3)
|
234,000
|
272,600
|
|||||
|
Deferred
income taxes, net (Note 8)
|
300,191
|
---
|
|||||
|
Other
current assets
|
109,078
|
21,920
|
|||||
|
Total
current assets
|
1,551,447
|
701,991
|
|||||
|
Property
and equipment, net (Note 4)
|
131,019
|
65,603
|
|||||
|
Software
license, net (Note 5)
|
2,265,783
|
2,769,291
|
|||||
|
Capitalized
software development costs, net (Note 1)
|
701,289
|
584,706
|
|||||
|
Deferred
income taxes, net (Note 8)
|
157,840
|
---
|
|||||
|
Restricted
cash
|
50,354
|
100,354
|
|||||
|
Other
assets
|
94,101
|
63,818
|
|||||
|
Total
assets
|
$
|
4,951,833
|
$
|
4,285,763
|
|||
|
|
|||||||
|
Liabilities
and stockholders’ equity
|
|||||||
|
Current
liabilities:
|
|||||||
|
Notes
payable (Note 6)
|
$
|
---
|
$
|
89,999
|
|||
|
Current
maturities of long-term debt (Note 7)
|
35,495
|
126,876
|
|||||
|
Accrued
royalties
|
287,514
|
1,499,006
|
|||||
|
Accounts
payable, trade
|
621,804
|
989,354
|
|||||
|
Accrued
payroll
|
209,984
|
216,767
|
|||||
|
Reserve
for sales returns
|
100,180
|
57,572
|
|||||
|
Rebates
payable
|
29,561
|
233,189
|
|||||
|
Payroll
taxes payable
|
8,235
|
221,600
|
|||||
|
Derivatives (Notes
1 and 9)
|
1,968,750 | --- | |||||
|
Other
current liabilities
|
90,370
|
89,554
|
|||||
|
Total
current liabilities
|
3,351,893
|
3,523,917
|
|||||
|
Long-term
debt (Note 7)
|
42,972
|
73,763
|
|||||
|
Deferred
income taxes, net (Note 8)
|
157,840
|
717,151
|
|||||
|
Commitments
and contingencies (Note 18)
|
|||||||
|
Stockholders’
equity (Note 9):
|
|||||||
|
Preferred
stock, $.001 par value
|
|||||||
|
5,000,000
shares authorized
|
|||||||
|
Series
A: -0- and 11,400 shares issued and outstanding,
respectively
|
---
|
11
|
|||||
|
Series
B: -0- and 40,000 shares issued and outstanding,
respectively
|
---
|
40
|
|||||
|
Common
stock, $.001 par value
|
|||||||
|
120,000,000
and 50,000,000 shares authorized, respectively
|
|||||||
|
48,619,855
and 21,011,438 shares issued and outstanding, respectively
|
48,620
|
21,011
|
|||||
|
Paid-in
capital
|
7,521,339
|
7,080,629
|
|||||
|
Retained
(deficit)
|
(6,170,831
|
)
|
(7,130,759
|
)
|
|||
|
Total
stockholders’ equity
|
1,399,128
|
(29,068
|
)
|
||||
|
Total
liabilities and stockholders’ equity
|
$
|
4,951,833
|
$
|
4,285,763
|
|||
|
|
|||||||
|
See
accompanying notes.
|
|||||||
F-23
Table
of Contents
|
Findex.com,
Inc.
|
|||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|||||||
|
|
|||||||
|
Year
Ended December 31
|
2004
|
2003
|
|||||
|
|
(Restated)
|
(Restated)
|
|
||||
|
Revenues,
net of reserves and allowances (Notes 11 and 19)
|
$
|
5,422,097
|
$
|
4,560,911
|
|||
|
Cost
of sales (Note 19)
|
1,820,553
|
1,327,983
|
|||||
|
Gross
profit
|
3,601,544
|
3,232,928
|
|||||
|
Operating
expenses:
|
|||||||
|
Sales
and marketing
|
1,280,761
|
815,954
|
|||||
|
General
and administrative
|
2,309,838
|
1,751,234
|
|||||
|
Bad
debt expense
|
22,778
|
23,208
|
|||||
|
Amortization
expense
|
519,850
|
504,427
|
|||||
|
Depreciation
expense
|
44,478
|
43,224
|
|||||
|
Total
operating expenses
|
4,177,705
|
3,138,047
|
|||||
|
Earnings
(loss) from operations
|
(576,161
|
)
|
(94,881
|
)
|
|||
|
Interest
income
|
1,378
|
9,727
|
|||||
|
Other
income (Note 10)
|
1,011,366
|
1,458,121
|
|||||
|
Other
adjustments (Note 10 )
|
(154,569
|
)
|
---
|
||||
| (Loss) on fair value adjustment of derivatives (Note 9) | (291,672 | ) | --- | ||||
|
(Loss)
on disposition of assets
|
(141
|
)
|
(2,659
|
)
|
|||
|
Interest
expense
|
(42,007
|
)
|
(87,144
|
)
|
|||
|
Income
(loss) before income taxes
|
(51,806
|
) |
1,472,926
|
||||
|
Provision
for income taxes (Note 8)
|
1,015,859
|
226,461
|
|||||
|
Net
income
|
$
|
964,053
|
$
|
1,699,387
|
|||
|
|
|||||||
|
Basic
earnings per share (Note 12):
|
|||||||
|
Basic
|
$
|
0.03
|
$
|
0.08
|
|||
|
Diluted
|
$
|
0.03
|
$
|
0.08
|
|||
|
|
|||||||
|
Weighted
average shares outstanding (Note 12):
|
|||||||
|
Basic
|
34,520,754
|
20,411,438
|
|||||
|
Diluted
|
35,195,840
|
22,365,438
|
|||||
|
|
|||||||
|
See
accompanying notes.
|
|||||||
F-24
Table
of Contents
|
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, 2002 (Restated)
|
$
|
11
|
$
|
40
|
19,811,438
|
$
|
19,811
|
$
|
7,029,079
|
$
|
(8,830,146
|
)
|
$
|
(1,781,205
|
)
|
|||||||
|
Common
stock issued for services
|
---
|
---
|
1,200,000
|
1,200
|
51,550
|
---
|
52,750
|
|||||||||||||||
|
Net
income, December 31, 2003 (Restated)
|
---
|
---
|
---
|
---
|
---
|
1,699,387
|
1,699,387
|
|||||||||||||||
|
Balance,
December 31, 2003 (Restated)
|
$
|
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 (Restated)
|
---
|
---
|
---
|
---
|
---
|
964,053
|
964,053
|
|||||||||||||||
|
Balance,
December 31, 2004 (Restated)
|
$
|
---
|
$
|
---
|
48,619,855
|
$
|
48,620
|
$
|
7,521,339
|
$
|
(6,170,831
|
)
|
$
|
1,399,128
|
||||||||
|
|
||||||||||||||||||||||
|
See
accompanying notes.
|
||||||||||||||||||||||
F-25
Table
of Contents
|
Findex.com,
Inc.
|
|||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|||||||
|
|
|||||||
|
Year
Ended December 31
|
2004
|
2003
|
|||||
|
|
(Restated)
|
(Restated)
|
|
||||
|
Cash
flows from operating activities:
|
|||||||
|
Cash
received from customers
|
$
|
5,062,396
|
$
|
4,228,649
|
|||
|
Cash
paid to suppliers and employees
|
(5,673,088
|
)
|
(3,364,838
|
)
|
|||
|
Other
operating receipts
|
9,276
|
7,977
|
|||||
|
Interest
paid
|
(37,928
|
)
|
(43,203
|
)
|
|||
|
Interest
received
|
1,378
|
9,727
|
|||||
|
Income
taxes (paid) refunded
|
(5,702
|
)
|
43,909
|
||||
|
Net
cash provided (used) by operating activities
|
(643,668
|
)
|
882,221
|
||||
|
Cash
flows from investing activities:
|
|||||||
|
Acquisition
of property, plant and equipment
|
(58,247
|
)
|
(18,433
|
)
|
|||
|
Software
development costs
|
(692,063
|
)
|
(659,486
|
)
|
|||
|
Website
development costs
|
(31,838
|
)
|
(35,684
|
)
|
|||
|
Deposits
refunded (paid)
|
35,216
|
(100,854
|
)
|
||||
|
Net
cash (used) by investing activities
|
(746,932
|
)
|
(814,457
|
)
|
|||
|
Cash
flows from financing activities:
|
|||||||
|
Proceeds
from (payments on) line of credit, net
|
(20,935
|
)
|
14,657
|
||||
|
Payments
made on long-term notes payable
|
(227,727
|
)
|
(79,404
|
)
|
|||
|
Proceeds
from convertible notes payable
|
240,000
|
---
|
|||||
|
Proceeds
from issuance of stock and warrants
|
1,750,000
|
---
|
|||||
|
Stock
offering costs paid
|
(51,047
|
)
|
---
|
||||
|
Net
cash provided (used) by financing activities
|
1,690,291
|
(64,747
|
)
|
||||
|
Net
increase in cash and cash equivalents
|
299,691
|
3,017
|
|||||
|
Cash
and cash equivalents, beginning of year
|
41,668
|
38,651
|
|||||
|
Cash
and cash equivalents, end of year
|
$
|
341,359
|
$
|
41,668
|
|||
|
|
|||||||
|
Reconciliation
of net income to cash flows from operating activities:
|
|||||||
|
Net
income
|
$
|
964,053
|
$
|
1,699,387
|
|||
|
Adjustments
to reconcile net income to net cash
|
|||||||
|
provided
(used) by operating activities:
|
|||||||
|
Software
development costs amortized
|
575,481
|
355,282
|
|||||
|
Stock
and warrants issued for services
|
178,929
|
52,750
|
|||||
|
Rebate
reserve adjustment
|
(142,039
|
)
|
(124,262
|
) | |||
|
Provision
for bad debts
|
22,778
|
23,208
|
|||||
|
Depreciation
& amortization
|
564,328
|
547,651
|
|||||
|
Debt
forgiveness
|
(1,002,090
|
)
|
(650,000
|
)
|
|||
|
Loss
on fair value adjustment of derivative
|
291,672 | --- | |||||
|
Loss
on disposal of property, plant and equipment
|
141
|
2,659
|
|||||
|
Change
in assets and liabilities:
|
|||||||
|
(Increase)
in accounts receivable
|
(223,794
|
)
|
(160,770
|
)
|
|||
|
Decrease
in inventories
|
38,600
|
144,100
|
|||||
|
(Increase)
decrease in refundable income taxes
|
(2,948
|
)
|
43,909
|
||||
|
(Increase)
decrease in prepaid expenses
|
(84,211
|
)
|
20,869
|
||||
|
(Decrease)
in accrued royalties
|
(324,360
|
)
|
(631,607
|
)
|
|||
|
Increase
(decrease) in accounts payable
|
(271,198
|
)
|
81,793
|
||||
|
(Decrease)
in income taxes payable
|
(1,270
|
)
|
---
|
||||
|
(Decrease)
in deferred taxes
|
(1,017,343
|
)
|
(226,463
|
)
|
|||
|
(Decrease)
in other liabilities
|
(210,397
|
)
|
(296,285
|
)
|
|||
|
Net
cash provided (used) by operating activities
|
$
|
(643,668
|
)
|
$
|
882,221
|
||
|
|
|||||||
|
See
accompanying notes.
|
|||||||
F-26
Table
of Contents
Findex.com,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2004 and 2003
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
(Restated)
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.
F-27
Table
of Contents
CONCENTRATIONS
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, 2004, our uninsured cash balance totaled
$268,380.
We
sell a
majority of our products to end-users through distributors, Christian
bookstores, Internet and direct marketing efforts. Although we attempt
to
prudently manage and control accounts receivable and performs ongoing
credit
evaluations in the normal course of business, we generally require
no collateral
on our product sales. During the years ended December 31, 2004 and
2003, we had
no major customers that individually accounted for 10% or more of the
annual
sales.
During
the year ended December 31, 2004, we derived 63% of our total revenue
from sales
of QuickVerse®, 28% from sales of Membership Plus®, and 9%
from sales of other software titles.
During
the years ended December 31, 2004 and 2003, five vendors provided purchases
individually of 10% or more of the total product and material purchases
as
follows: Vendor A accounted for 29% and 3%, respectively, Vendor B accounted
for
18% and 14%, respectively, Vendor C accounted for 17% and 10%, respectively,
Vendor D accounted for 12% and 39%, respectively, and Vendor E accounted
for 7%
and 17%, respectively. Accounts payable relating to Vendors A, B, C,
D, and E
were $40,234 and $20, $18,426 and $14,379, $34,931 and $26,194, $-0-
and
$39,431, and $2,020 and $-0-, as of December 31, 2004 and 2003 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.
The cash held in reserve by our merchant banker will be unrestricted
when
consumer sales and chargeback volumes stabilize.
ACCOUNTS
RECEIVABLE
Accounts
receivable arise in the normal course of business. It is the policy of
management to review the outstanding accounts receivable quarterly, 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.
F-28
Table
of Contents
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 $1,748,735 and $1,056,672,
less
accumulated amortization of $1,047,446 and $471,966 at December 31, 2004
and
2003, 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 $64,653 and $128,159 for the years ended December 31, 2004 and 2003,
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.
F-29
Table
of Contents
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
$86,500
and
$54,662,
less
accumulated amortization of $18,795
and
$2,452
at
December
31, 2004
and
2003,
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).
F-30
Table
of Contents
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.
F-31
Table
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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,
2004 and
2003 were approximately, $448,000 and $240,000, 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 13) and, accordingly, does
not
recognize compensation cost when employee stock-option grants are made
at
fair-market value.
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. 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 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.
F-32
Table
of Contents
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 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 2003 financial statements have been reclassified for
comparative
purposes to conform with the presentation in the 2004 financial statements.
NOTE
2 - ACCOUNTS RECEIVABLE
At
December 31, 2004 and 2003, accounts receivable consisted of the following
(see
Note 1 - Concentrations):
|
2004
|
2003
|
||||||
|
Trade
receivables
|
$
|
584,819
|
$
|
384,803
|
|||
|
Less:
Allowance for doubtful accounts
|
18,000
|
19,000
|
|||||
|
Accounts
receivable, trade
|
$
|
566,819
|
$
|
365,803
|
During
the years ended December 31, 2004 and 2003, we transferred accounts receivable
totaling $300,966 and $320,533 to Alliance for cash advances of $180,580
and
$192,320, respectively. As accounts are paid, the collected funds (less
the
amount advanced and appropriate fees) are disbursed to us. The transfer
agreement includes a repurchase requirement and, accordingly, the proceeds
were
accounted for as a secured borrowing. The agreement was terminated in
July 2004.
At December 31, 2004 and 2003, the balance of receivables transferred
and
included in trade receivables was $-0- and $34,893, respectively. The
remaining
secured borrowing balances of $-0- and $20,936 are included in accrued
expenses
at December 31, 2004 and 2003, respectively.
F-33
Table
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NOTE
3 - INVENTORIES
At
December 31, 2004 and 2003, inventories consisted of the following:
|
2004
|
2003
|
||||||
|
Raw
materials
|
$
|
111,300
|
$
|
75,000
|
|||
|
Finished
goods
|
122,700
|
197,600
|
|||||
|
Inventories
|
$
|
234,000
|
$
|
272,600
|
During
the years ended December 31, 2004 and 2003, we wrote-off distinctly different
categories of obsolete inventory with a carried cost totaling $32,396
and
$60,792, respectively. These have been recognized in cost of sales.
NOTE
4 - PROPERTY AND EQUIPMENT, NET
At
December 31, 2004 and 2003, property and equipment consisted of the following:
|
2004
|
2003
|
||||||
|
Computer
equipment
|
$
|
84,009
|
$
|
61,905
|
|||
|
Computer
software
|
62,861
|
41,297
|
|||||
|
Office
equipment
|
77,947
|
24,099
|
|||||
|
Office
furniture and fixtures
|
62,594
|
51,119
|
|||||
|
Warehouse
equipment
|
23,150
|
23,150
|
|||||
|
|
310,561
|
201,570
|
|||||
|
Less:
Accumulated depreciation
|
179,542
|
135,967
|
|||||
|
Property
and equipment, net
|
$
|
131,019
|
$
|
65,603
|
At
December 31, 2004, Office equipment contained telephone equipment under
a
capital lease obligation with a cost basis of $51,788. See Notes 7 and
14.
NOTE
5 - SOFTWARE LICENSE AGREEMENT, NET (Restated)
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.
F-34
Table
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At
December 31, 2004 and 2003, the software license consisted of the
following:
|
2004
|
2003
|
||||||
|
Software
license cost
|
$
|
5,135,574
|
$
|
5,135,574
|
|||
|
Less:
Accumulated amortization
|
2,869,791
|
2,366,283
|
|||||
|
Software
license, net
|
$
|
2,265,783
|
$
|
2,769,291
|
|||
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. See Note 19 - Restatement
and
Reclassification.
NOTE
6 - NOTES PAYABLE
At
December 31, 2004 and 2003, notes payable consisted of the following:
|
2004
|
2003
|
||||||
|
Note
payable to a corporation, due May 31, 2003, with interest
compounded
monthly at 1.5%. Unsecured. Convertible at the option of
the holder into
666,667 restricted shares of common stock.
|
$
|
---
|
$
|
33,333
|
|||
|
Note
payable to a corporation, due May 31, 2003, with interest
compounded
monthly at 1.5%. Unsecured. Convertible at the option of
the holder into
666,667 restricted shares of common stock.
|
---
|
33,333
|
|||||
|
Note
payable to a corporation, due May 31, 2003, with interest
compounded
monthly at 1.5%. Unsecured. Convertible at the option of
the holder into
466,666 restricted shares of common stock. See Notes 15 and
18.
|
---
|
23,333
|
|||||
|
Notes
payable
|
$
|
---
|
$
|
89,999
|
|||
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 9 and 15.
During
the year ended December 31, 2003, we reclassified as other income (see
Note 10)
proceeds totaling $650,000, and the corresponding accrued interest payable,
received in late 1999 and early 2000 that were previously recorded as
an
unsecured note payable.
F-35
Table
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NOTE
7 - LONG-TERM DEBT
At
December 31, 2004 and 2003, long-term debt consisted of the following:
|
2004
|
2003
|
||||||
|
Unsecured
term note payable to a corporation due October 2004 in monthly
installments of $5,285, including interest at 8%
|
$
|
26,679
|
$
|
53,975
|
|||
|
Term
note payable to a corporation due December 2005 in monthly
installments of
$6,833, including interest at 8%. Secured by inventory. See
Notes 3 and
10.
|
---
|
146,664
|
|||||
|
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.
|
51,788
|
---
|
|||||
|
|
78,467
|
200,639
|
|||||
|
Less:
Current maturities
|
35,495
|
126,876
|
|||||
|
Long-term
debt
|
$
|
42,972
|
$
|
73,763
|
Principal
maturities at December 31, 2004 are as follows:
|
2005
|
$
|
35,495
|
||
|
2006
|
9,186
|
|||
|
2007
|
10,318
|
|||
|
2008
|
11,591
|
|||
|
2009
|
11,877
|
|||
|
Total
|
$
|
78,467
|
NOTE
8 - INCOME TAXES (Restated)
The
provision (benefit) for taxes on income from continuing operations for
the years
ended December 31, 2004 and 2003 consisted of the following:
|
2004
|
2003
|
||||||
|
Current:
|
|||||||
|
Federal
|
$
|
---
|
$
|
---
|
|||
|
State
|
1,484
|
---
|
|||||
|
1,484
|
---
|
||||||
|
Deferred:
|
|||||||
|
Federal
|
(1,009,939
|
)
|
(185,213
|
)
|
|||
|
State
|
(7,404
|
)
|
(41,248
|
)
|
|||
|
(1,017,343
|
)
|
(226,461
|
)
|
||||
|
Total
tax provision (benefit)
|
$
|
(1,015,859
|
)
|
$
|
(226,461
|
)
|
|
F-36
Table
of Contents
The
reconciliation of income tax computed at statutory rates of income tax
benefits
is as follows:
|
2004
|
2003
|
||||||
|
(Benefit)
Expense at Federal statutory rate - 25% and 34%
|
$
|
(12,952
|
) |
$
|
458,546
|
||
|
State
tax effects, net of Federal taxes
|
(4,069
|
)
|
(27,224
|
)
|
|||
|
Nondeductible
expenses
|
236,009
|
1,764
|
|||||
|
Taxable
temporary differences
|
(73,533
|
)
|
185,213
|
||||
|
Deductible
temporary differences
|
356,278
|
(4,449
|
)
|
||||
|
Deferred
tax asset valuation allowance
|
(1,517,592
|
)
|
(840,311
|
)
|
|||
|
Income
tax benefit
|
$
|
(1,015,859
|
)
|
$
|
(226,461
|
)
|
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, 2004 and 2003 are as follows:
|
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
|
(32,726
|
)
|
---
|
(32,726
|
)
|
|||||
|
Deferred
income tax liability
|
(680,557
|
)
|
(157,840
|
)
|
$
|
(838,397
|
)
|
|||
|
Deferred
income tax asset, net
|
$
|
157,840
|
||||||||
|
Deferred
income tax liability, net
|
$
|
(157,840
|
)
|
|||||||
F-37
Table
of Contents
|
For
the year ended December 31, 2003
|
Federal
|
State
|
Total
|
|||||||
|
Current
Deferred Income Taxes
|
||||||||||
|
Reserve
for sales returns
|
$
|
19,574
|
$
|
4,606
|
$
|
24,180
|
||||
|
Reserve
for technical support costs
|
12,580
|
2,960
|
15,540
|
|||||||
|
Accrued
compensation costs
|
60,781
|
14,301
|
75,082
|
|||||||
|
Reserve
for bad debts
|
6,460
|
1,520
|
7,980
|
|||||||
|
Operating
loss carryforwards
|
102,000
|
24,000
|
126,000
|
|||||||
|
201,395
|
47,387
|
248,782
|
||||||||
|
Less:
Valuation allowance
|
201,395
|
47,387
|
248,782
|
|||||||
|
Deferred
income tax asset, net
|
$
|
---
|
$
|
---
|
$
|
---
|
||||
|
Non-current
Deferred Income Taxes
|
||||||||||
|
Property
and equipment, net
|
$
|
614
|
$
|
144
|
$
|
758
|
||||
|
Reorganization
costs
|
11,900
|
2,800
|
14,700
|
|||||||
|
State
deferred tax liabilities
|
46,444
|
---
|
46,444
|
|||||||
|
Operating
loss carryforwards
|
2,435,074
|
684,932
|
3,120,006
|
|||||||
|
2,494,032
|
687,876
|
3,181,908
|
||||||||
|
Less:
Valuation allowance
|
2,494,032
|
687,876
|
3,181,908
|
|||||||
|
Deferred
income tax asset, net
|
$
|
---
|
$
|
---
|
---
|
|||||
|
Software
license fees
|
$
|
(580,551
|
)
|
$
|
(136,600
|
)
|
(717,151
|
)
|
||
|
Deferred
income tax liability
|
$
|
(580,551
|
)
|
$
|
(136,600
|
)
|
(717,151
|
)
|
||
|
Deferred
income tax liability, net
|
$
|
(717,151
|
)
|
|||||||
F-38
Table
of Contents
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 decreased by $1,602,090 during
the year
ended December 31, 2004 and decreased by $231,911 during the year ended
December
31, 2003.
At
December 31, 2004, we had available net operating loss carryforwards
of
approximately $7,648,000 for federal income tax purposes that expire
in 2021.
The federal carryforwards resulted from losses generated in 1996 through
2002.
We also had net operating loss carryforwards available from various
state
jurisdictions ranging from approximately $39,000 to approximately $841,000
that
expire in 2021.
See
Note
19 - Restatement and Reclassification.
NOTE
9 - STOCKHOLDERS’ EQUITY (Restated)
COMMON
STOCK
In
July
2003, we issued 250,000 shares of common stock to an employee as settlement
of a
2002 signing bonus. These shares were valued at $0.04 per share, the
value on
the date the settlement was accepted by the employee.
In
July
2003, we issued a total of 600,000 shares of common stock to the
external board
of directors in lieu of cash and meeting fees for the period April
2002 through
June 2003. These shares were valued at $0.045 per share.
In
July
2003, we issued a total of 150,000 shares of common stock to three
independent
contractors as a bonus for their performance on our software development
projects. These shares were valued at $0.045 per share.
In
July
2003, we issued a total of 200,000 shares of common stock to an independent
contractor for past and future performance on preparing written corporate
materials. These shares were valued at $0.045 per share.
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.
F-39
Table
of Contents
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 10.
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 addition, according to the terms of the agreement,
the
investor received two warrants to purchase shares of common stock.
The first
warrant entitles the holder to purchase up to 10,937,500 shares
of 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 common stock at
a price of $0.60
per share; each warrant is subject to standard adjustment provisions.
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
June
2003, we granted an employee 500,000, fully vested stock options with
an
exercise price of $0.05 per share. These options expire in June 2013.
In
addition, 667 unvested stock options with an exercise price of $1.00
and 6,250
unvested stock options with an exercise price of $0.11 were forfeited
upon
termination and 16,250 vested stock options with an exercise price of
$1.00 and
30,000 vested stock options with an exercise price of $0.11 expired after
termination. There was no effect on the financial statements resulting
from
these transactions. See Note 13.
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 13. 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.
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
$63,215 using the Black-Scholes method and recorded as an expense.
F-40
Table
of Contents
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 10.
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 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 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 was initially assessed
at
$2,187,500 ($4,375,000 total) using the Black-Scholes valuation method.
The fair
value of each warrant was estimated on the date of commitment with
the following
assumptions:
|
|
Warrant
A
|
Warrant
B
|
|||||
|
Expected
term - years
|
5
|
5
|
|||||
| Stock price on date of commitment (July 19, 2004) | $ | 0.20 | $ | 0.20 | |||
|
Expected
dividend yield
|
0
|
%
|
0
|
%
|
|||
|
Expected
stock price volatility
|
490
|
%
|
490
|
%
|
|||
|
Risk-free
interest rate
|
3.80
|
%
|
3.80
|
%
|
We
recognized a loss of $2,697,922 on the commitment of the warrants
determined as
follows:
|
Fair
value of warrants on commitment date (July 19, 2004)
|
$
|
4,375,000
|
||||||
|
Less:
Net proceeds received
|
||||||||
|
Gross
proceeds received for stock and warrants
|
$
|
1,750,000
|
||||||
|
Par
value of common stock issued
|
(21,875
|
)
|
||||||
|
Stock
offering costs
|
(51,047
|
)
|
$
|
1,677,078
|
||||
|
Loss
on fair value adjustment of derivatives
|
$
|
2,697,922
|
The
warrants are revalued at each balance sheet date by using the parameters
above,
reducing the expected term to reflect the passing of time (4.55 years
at
December 31, 2004), and using the stock price at the balance sheet
date ($0.09
at December 31, 2004). A net fair value adjustment of $291,672 ($1,968,750,
December 31, 2004 fair value, less $1,677,078, net proceeds received)
has been
included in other expenses on the consolidated statements of operations
for the
year ended December 31, 2004.
F-41
Table
of Contents
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 was payable as determined by our board
of
directors. As of December 31, 2004, no dividends had been declared.
Series A
Preferred Stock dividends, however, were paid to a stockholder as a
conversion incentive.
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:
F-42
Table
of Contents
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, 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
10 - OTHER INCOME AND ADJUSTMENTS
(Restated)
We
recorded an adjustment to the balance of accrued royalties for the year
ended
December 31, 2003 in the amount of $583,628. This adjustment was a result
of our
having reached a settlement with TLC regarding the offset credit to which
we
were entitled against the balance due on the 1999 license. The offset
credit was
related to sales made to TLC that remained in dispute until verified
by an
independent third-party audit of the sales and related royalty calculations.
The
royalty liabilities had been accrued based on our sales to TLC as originally
reported and were part of the calculation of the June 30, 2001 bad debt
provision totaling $2,391,000. This has been included in other income.
During
the year ended December 31, 2003, we reclassified as other income -
proceeds
totaling $650,000, and the corresponding accrued interest payable totaling
$216,516, that were previously recorded as an unsecured note payable.
The
proceeds were originally recorded as an unsecured note payable based
upon an
oral understanding with an employee of a third-party consultant in
1999. We had
historically accrued interest on the outstanding balance at 9%, the
rate deemed
reasonable by management at the time of the oral agreement. We continued
to
accrue interest on the proceeds until we made the determination to
reclassify
the proceeds and accumulated accrued interest (from December 1999 through
September 2003). The determination to reclassify the obligation, and
related
accrued interest, was made on the basis of the combined facts that
(i) the
obligation exists, if at all, solely pursuant to an oral loan agreement
made
over three years ago (in 1999) in the State of North Carolina with
a
representative of the party to whom the obligation was believed to
have been
owed, (ii) no party has ever made any demand for repayment thereof
despite the
fact that no payments have ever been made on the obligation, (iii)
the party
believed to be owed the obligation, upon inquiry, claims no record
of any such
obligation, and (iv) the State of North Carolina Statute of Limitations
applicable to oral agreements, believed to govern the continued enforceability
of the obligation, has expired. This transaction has been reflected
in the
Consolidated Statements of Cash Flows as “Debt forgiveness” and “(Decrease) in
other current liabilities”.
F-43
Table
of Contents
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 Swartz
Private
Equity, 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 9. This
has been
included in other adjustments.
See
Note
19 - Restatement and Reclassification.
NOTE
11 - REBATE RESERVE ADJUSTMENT (Restated)
During
the years ended December 31, 2004 and 2003, we recorded adjustments
to our
rebates reserve in the amounts of $142,039 and $124,262, respectively;
$266,301
in the aggregate. 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.
See
Note
19 - Restatement and Reclassification.
NOTE
12 - EARNINGS PER COMMON SHARE (Restated)
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 13), 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
|
2004
|
2003
|
|||||
|
Net
Income
|
$
|
964,053
|
$
|
1,699,387
|
|||
|
Common
stock dividend on Preferred Series A
|
(4,125
|
)
|
---
|
||||
|
Net
income available to common shareholders
|
$
|
959,928
|
$
|
1,699,387
|
|||
|
Basic
weighted average shares outstanding
|
34,520,754
|
20,411,438
|
|||||
|
Dilutive
effect of:
|
|||||||
|
Stock
options
|
429,824
|
---
|
|||||
|
Convertible
notes payable
|
---
|
1,800,000
|
|||||
|
Convertible
Preferred Series A
|
---
|
114,000
|
|||||
|
Convertible
Preferred Series B
|
---
|
40,000
|
|||||
|
Warrants
|
245,262
|
---
|
|||||
|
Diluted
weighted average shares outstanding
|
35,195,840
|
22,365,438
|
|||||
A
total
of 24,315,000 and 4,075,273 dilutive potential securities for the years
ended
December 31, 2004 and 2003, respectively, have been excluded from the
computation of diluted earnings per common share, as their inclusion
would be
anti-dilutive.
See
Note
19 - Restatement and Reclassification.
F-44
Table
of Contents
NOTE
13 - STOCK-BASED COMPENSATION (Restated)
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 2004 or 2003.
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
2004 and granted 500,000 nonqualified, fully vested stock options
outside of the
plan to an officer during 2003.
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 and primary and diluted earnings per share would
have
differed as reflected by the pro forma amounts indicated below:
|
2004
|
2003
|
||||||
|
Net
income, as reported
|
$
|
964,053
|
$
|
1,699,387
|
|||
|
Pro
Forma compensation charge under SFAS No. 123
|
---
|
(59,722
|
)
|
||||
|
Pro
Forma net income
|
$
|
964,053
|
$
|
1,639,665
|
|||
|
Earnings
per share:
|
|||||||
|
Basic
- as reported
|
$
|
0.03
|
$
|
0.08
|
|||
|
Basic
- pro forma
|
$
|
0.03
|
$
|
0.08
|
|||
|
Diluted
- as reported
|
$
|
0.03
|
$
|
0.08
|
|||
|
Diluted
- pro forma
|
$
|
0.03
|
$
|
0.07
|
|||
F-45
Table
of Contents
The
fair
value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
|
Expected
dividend yield
|
0
|
%
|
||
|
Expected
stock price volatility
|
490
|
%
|
||
|
Risk-free
interest rate
|
3.80
|
%
|
Activity
under our stock option plans is summarized as follows:
|
|
Outstanding
Options
|
||||||||||||
|
|
Number
of Shares
|
Weighted-Average
Exercise
Price
|
|||||||||||
|
Balance
at December 31, 2002
|
2,843,450
|
$
|
0.33
|
||||||||||
|
Granted
|
500,000
|
$
|
0.05
|
||||||||||
|
Exercised
|
---
|
---
|
|||||||||||
|
Expired
or forfeited
|
(53,167
|
)
|
$
|
0.39
|
|||||||||
|
Canceled
|
---
|
---
|
|||||||||||
|
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
|
||||||||||
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, 2004:
|
Outstanding
Options
|
Exercisable
Options
|
|||||||||||||||
|
Range
of Exercise Prices
|
Outstanding
at December
31, 2004
|
Weighted-Average
Remaining
Contractual
Life (Years)
|
|
Weighted
Average Exercise
Price
|
Exercisable
at
December 31,
2004
|
Weighted
Average Exercise
Price
|
||||||||||
|
$0.00
to $0.11
|
2,435,000
|
7.1
|
$
|
0.0854
|
2,435,000
|
$
|
0.0854
|
|||||||||
The
following table summarizes other equity instruments issued during 2004
to
acquire goods and services (see Note 9):
|
Number
of Shares
|
Weighted-Average
Exercise
Price
|
||||||
|
Common
stock
|
2,774,115
|
$
|
0.0372
|
||||
|
Common
stock warrants
|
750,000
|
$
|
0.1244
|
F-46
Table
of Contents
NOTE
14 - 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 September 2005. We are responsible for all
insurance expenses associated with this lease.
Rental
expense for the years ended December 31, 2004 and 2003 amounted to $75,555
and
$51,039, respectively. Rental expenses are included in capitalized software
development costs. See Note 1 - Software Development Costs.
At
December 31, 2004, the future minimum rental payments required under
these
leases are as follows:
|
2005
|
|
$
|
77,261
|
|
|
2006
|
|
|
65,491
|
|
|
2007
|
|
|
27,288
|
|
|
Total
future minimum rental payments
|
|
$
|
170,040
|
|
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 2004.
The
following table summarizes property held under capital leases at December
31,
2004:
|
Office
equipment
|
$
|
51,788
|
||
|
Less:
Accumulated depreciation
|
1,726
|
|||
|
Net
property and equipment under capital lease
|
$
|
50,062
|
Minimum
future lease payments under capital leases as of December 31, 2004 for
each of
the next five years and in the aggregate are:
|
2005
|
$
|
14,870
|
||
|
2006
|
13,726
|
|||
|
2007
|
13,726
|
|||
|
2008
|
13,726
|
|||
|
2009
|
12,582
|
|||
|
Total
minimum lease payments
|
68,630
|
|||
|
Less:
Amount representing interest
|
16,842
|
|||
|
Total
obligations under capital lease
|
51,788
|
|||
|
Less:
Current installments of obligations under capital lease
|
8,816
|
|||
|
Long-term
obligation under capital lease
|
$
|
42,972
|
F-47
Table
of Contents
NOTE
15 - SUPPLEMENTAL CASH FLOW INFORMATION (Restated)
We
incurred the following non-cash investing and financing activities during
the
years ended December 31, 2004 and 2003, respectively:
|
2004
|
2003
|
||||||
|
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
|
$
|
52,750
|
See
Note
19 - Restatement and Reclassification.
NOTE
16 - COMMITMENTS AND CONTINGENCIES (Restated)
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,
bonuses
($66,575 included in Other current liabilities at December 31, 2004),
and any
vested deferred compensation ($30,349 included in Other current liabilities
at
December 31, 2004) 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.
F-48
Table
of Contents
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.
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 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 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 Barron, as well as the shares
underlying the
warrants issued to Barron. 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 Barron in an amount equal to $1,726 per day
for the duration of any such delay. We continue to accrue $1,726
($630,000 per
year/365 days) per day in penalties until this registration statement
is
declared effective.
If we
are unable to cause the registration statement to be declared effective
by
December 31, 2005, we will incur total penalties of approximately
$437,000
(April 23, 2005 through December 31, 2005) which will directly
decrease our net
income and possibly cause a net loss for the December 31, 2005
year then
ending.
See
Note
19 - Restatement and Reclassification.
NOTE
17 - 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 18
- SUBSEQUENT EVENTS
Subsequent
to December 31, 2004, we restored a stale check (outstanding more than
six
months) in the amount of $23,333 to unrestricted cash. The stale check
was
issued to a corporation as payment in full of a note payable (see Note
6).
Communication with the payee resulted in conversion of the note into
466,666
shares of common stock. The transaction has been reflected in unrestricted
cash,
common stock and paid-in capital at December 31, 2004. We have stopped
payment
on the check.
As
of the
date of this filing, the registration statement filed on November 22,
2004 had
not yet been declared effective. Pursuant to an agreement reached with
the New
York based private investment partnership in relation to the associated
accruing
penalties, we have agreed to pay the New York based private investment
partnership an amount in cash equal to $100,000 in two equal installments
of
$50,000 between April 22, 2005 and May 22, 2005 (paid April 22, 2005
and July 8,
2005), with no additional penalty obligations accruing for at least
60 days from
April 22, 2005. Although there can be no assurance, management believes
that the
prospects of our being able to cause the registration statement to
be declared
effective by June 21, 2005 are good. If we are unsuccessful in causing
the
registration statement to be declared effective by the SEC by June
21, 2005,
however, and depending on how long any such delay in causing effectiveness
to be
declared by the SEC continues thereafter, it is likely to have a very
material
adverse effect on our business, our
financial condition, including liquidity and profitability, and our
results of
operations.
F-49
Table
of Contents
NOTE 19
- RESTATEMENT AND
RECLASSIFICATION
We
have
restated our financial statements for the year ended December 31, 2004
to
reflect issues identified during a regulatory review of our financial
statements
associated with a certain registration statement filed with the SEC on
November
22, 2004 on Form SB-2. Management and the board of directors concluded
these
restatements were necessary to reflect the changes described below.
Revisions
affecting the consolidated statements of operations:
| § |
During
the quarter ended June 30, 2002, we reached a tentative
settlement
agreement in our arbitration with TLC. The tentative
settlement agreement
forgave the final, unpaid installment due on a certain
software license we
originally acquired in July 1999 and extended the 1999
license term from
10 years to 50 years. We originally recorded the final,
unpaid installment
of $1,051,785 under the 1999 license as an offset against
the recorded
historical cost of that 1999 license and recalculated
the amortization
based on this reduced amount and the extension of the
useful life to 50
years. Although paragraph 6 of SFAS No. 141, Business
Combinations,
which guides the recognition and measurement of intangible
assets,
provides that the measurement of assets in which the
consideration given
is cash are measured by the amount of cash paid, management
has concluded
that too much time had passed between the date of the
agreement (June
1999) and the date of the tentative settlement (May
2002) for such an
offset to be proper. Therefore,
we recognized the extinguishment of the liability owed
to TLC as income
($1,051,785) in the statement of operations for the
year ended December
31, 2002. This adjustment reduced the retained deficit
by $856,685, net of
additional amortization and related income taxes, at
December 31, 2003 and
2004 from that originally reported and had no effect
on the consolidated
statements of operations or consolidated statements
of cash flows for the
years then ended.
|
| § |
During
the quarter ended December 31, 2003, we reached a final
settlement
agreement in our dispute with Zondervan and TLC. This
final settlement
extended the life of the 1999 license, and the trademarks
included
therein, indefinitely. We originally reassessed the
useful life of the
1999 license to be indefinite, based on the guidelines
provided by
paragraphs 53 and 11 of SFAS No. 142, Goodwill
and Other Intangible Assets.
Management has now concluded a 10 year life is appropriate
based on our
going concern opinion for 2002 and 2003. Therefore,
we restored the
estimated economic useful life to the original 10 years
and have
recalculated annual amortization accordingly. This
adjustment increased the retained deficit at December
31, 2003 (for the
prior years’ amortization and related income tax effects) and decreased
net income by $856,685, net of additional amortization
and related income
taxes, for the year ended December 31, 2004. There
was no net effect on
the consolidated statements of cash flows for the years
ended December 31,
2003 and 2004,
respectively.
|
| § |
We
erroneously
treated the 2004 rebates reserve adjustment of $266,301
as an expense
recovery in operating expenses. The correct presentation
is as an
adjustment to revenue, as provided by EITF Issue
No. 01-09, Accounting
for Consideration Given by a Vendor to a Customer
(Including a Reseller of
the Vendor’s Products).
In addition, we reassessed the adequacy of our rebates reserve at
December 31, 2003 and allocated $124,262 of the total
adjustment to fiscal
year 2003 with the remaining $142,039 allocated to
fiscal year 2004. See
Note 11 - Rebate Reserve
Adjustment.
|
| § |
We
erroneously treated the warrants issued to
a New York based private
investment partnership in connection with a
private placement as equity.
The correct presentation is as a liability
adjusted for changes in fair
value, at each balance sheet date, through
the consolidated statements of
operations, as provided by EITF 00-19, Accounting
for Derivative Financial Instruments Indexed
to, and Potentially Settled
in, a Company’s Own Stock.
We
reclassified the initial fair value of the
warrants ($4,375,000 at July
19, 2004) as a current liability ($1,968,750
at December 31, 2004) and
have included the net change in fair value
through December 31, 2004
($291,672) in Other Expenses on the consolidated
statements of operations.
See Note 9 - Stockholders’
Equity.
|
F-50
Table
of Contents
Revisions
resulting in reclassifications or clarification with no net effect
on the
consolidated statements of operations:
| § |
During
the year ended December 31, 2003, we made the decision
to no longer
provide support for certain of our products and destroyed
all remaining
inventory of those products. We originally recorded
this as a
non-recurring item in the “Other income (expense)” section of the
consolidated statements of operations. We revised the
consolidated
statement of operations for the year ended December
31, 2003 to reflect
this obsolete inventory ($60,792) in cost of
sales.
|
| § |
During
the year ended December 31, 2003, we reached a final
settlement agreement
in our dispute with Zondervan and TLC. As part of
the settlement process,
we conducted an internal audit (verified by an independent
auditor
provided by TLC) of the accrued royalties owed Zondervan.
The audit
provided that accrued royalties were overstated due
to the 2001 bad debt
recognition of the trade accounts receivable balance
of TLC, which had
been accumulated since July 1999. The amount overstated
had remained part
of the dispute with Zondervan and remained in our
liabilities until the
final settlement was reached in 2003 due to the uncertainty
of the settled
amount. We
originally reported the adjustment of $583,628 as
a non-recurring item in
the “Other income (expense)” section of the consolidated statement of
operations. The revised consolidated statement of
operations for the year
ended December 31, 2003 reflects the adjustment as
“Other income” in the
“Other income (expense)”
section.
|
| § |
During
the year ended December 31, 2003, we reclassified
loan proceeds, and the
corresponding accrued interest payable, that were
previously recorded as
an unsecured note payable. The proceeds were initially
recorded as an
unsecured note payable based on an oral understanding
with an employee of
a third-party consultant in 1999. We had historically
accrued interest on
the outstanding balance at 9%, the rate deemed
reasonable by management at
the time of the oral agreement. We continued to
accrue interest on the
proceeds until we made the determination to reclassify
the proceeds and
accumulated accrued interest. The determination
to reclassify the
obligation, and related accrued interest, was made
on the basis of the
combined facts that (i) the obligation exists,
if at all, solely pursuant
to an oral loan agreement made in 1999 in the State
of North Carolina with
a representative of the party to whom the obligation
was believed to have
been owed, (ii) no party has ever made any demand
for repayment thereof
despite the fact that no payments have ever been
made on the obligation,
(iii) the party believed to be owed the obligation,
upon inquiry, claims
no record of any such obligation, and (iv) the
State of North Carolina
Statute of Limitations applicable to oral agreements,
believed to govern
the continued enforceability of the obligation,
had expired. We
originally reported the reclassification as a non-recurring
item of
$866,516 in the “Other income (expense)” section of the consolidated
statement of operations. The revised consolidated
statement of operations
for the year ended December 31, 2003 reflects the
adjustment as “Other
income” in the “Other income (expense)”
section.
|
| § |
During
the three months ended March 31, 2004, and as
a direct result of the
settlement with Zondervan and TLC, we wrote-off
inventory containing
content from Zondervan. Though not technologically
obsolete, we were
unable to sell the inventory under the terms
of the settlement. We
originally recorded the $32,396 as a non-recurring
item in the “Other
income (expense)” section of the consolidated statement of operations.
The
revised condensed consolidated statement of operations
for the year ended
December 31, 2004 reflects this inventory adjustment
in cost of
sales.
|
| § |
During
the three months ended September 30, 2004,
we settled an agreement with
Swartz Private Equity for early termination.
In connection therewith, we
issued 295,692 shares of common stock valued
at $0.10 per share and paid a
cash lump sum of $125,000. We originally recorded
this transaction as
expenses incurred in a withdrawn public offering
and reflected it as a
non-recurring item of $154,569 in the consolidated
statement of
operations. The revised condensed consolidated
statement of operations for
the year ended December 31, 2004 reflects this
transaction as “Other
expenses” in the “Other income (expense)”
section.
|
| § | During the three months ended September 30, 2004, we negotiated settlement with several of our creditors. The debt extinguishment ($1,002,090 total) was originally reported as an extraordinary item, net of income tax effects ($601,216), on the consolidated statement of operations. The revised condensed consolidated statement of operations for the year ended December 31, 2004 includes this transaction in “Other income”. |
We
also
expanded footnote disclosures for stockholders’ equity (major assumptions used
in valuation of the warrants using the Black-Scholes valuation
method),
supplemental cash flow information (property and equipment acquired
under
capital lease) and commitments and contingencies (employment agreements
and
potential additional rebate liability).
F-51
Table
of Contents
A
summary
of the effects of these changes is as follows:
|
CONSOLIDATED
BALANCE SHEETS
|
||||||||||||||||
|
December
31, 2004
|
||||||||||||||||
|
|
||||||||||||||||
|
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||||||||||
|
Assets
|
||||||||||||||||
|
Current
assets:
|
||||||||||||||||
|
Cash
and cash equivalents
|
$
|
341,359
|
$
|
341,359
|
$
|
---
|
||||||||||
|
Accounts
receivable, trade
|
566,819
|
566,819
|
---
|
|||||||||||||
|
Inventories
|
234,000
|
234,000
|
---
|
|||||||||||||
|
Deferred
income taxes, net
|
300,191
|
300,191
|
---
|
|||||||||||||
|
Other
current assets
|
109,078
|
109,078
|
---
|
|||||||||||||
|
Total
current assets
|
1,551,447
|
1,551,447
|
---
|
|||||||||||||
|
Property
and equipment, net
|
131,019
|
131,019
|
---
|
|||||||||||||
|
Software
license, net
|
2,513,158
|
2,265,783
|
(247,375
|
)
|
(a)
|
|||||||||||
|
Capitalized
software development costs, net
|
701,289
|
701,289
|
---
|
|||||||||||||
|
Deferred
income taxes, net
|
253,968
|
157,840
|
(96,128
|
)
|
(b)
|
|||||||||||
|
Restricted
cash
|
50,354
|
50,354
|
---
|
|||||||||||||
|
Other
assets
|
94,101
|
94,101
|
---
|
|||||||||||||
|
Total
assets
|
$
|
5,295,336
|
$
|
4,951,833
|
$
|
(343,503
|
)
|
|||||||||
|
|
||||||||||||||||
|
Liabilities
and stockholders’ equity
|
||||||||||||||||
|
Current
liabilities:
|
||||||||||||||||
|
Current
maturities of long-term debt
|
$
|
35,495
|
$
|
35,495
|
$
|
---
|
||||||||||
|
Accrued
royalties
|
287,514
|
287,514
|
---
|
|||||||||||||
|
Accounts
payable, trade
|
621,804
|
621,804
|
---
|
|||||||||||||
|
Accrued
payroll
|
209,984
|
209,984
|
---
|
|||||||||||||
|
Reserve
for sales returns
|
100,180
|
100,180
|
---
|
|||||||||||||
|
Rebates
payable
|
29,561
|
29,561
|
---
|
|||||||||||||
|
Payroll
taxes payable
|
8,235
|
8,235
|
---
|
|||||||||||||
|
Derivatives
|
--- | 1,968,750 | 1,968,750 |
(d)
|
||||||||||||
|
Other
current liabilities
|
90,373
|
90,370
|
(3
|
)
|
(c)
|
|||||||||||
|
Total
current liabilities
|
1,383,146
|
3,351,893
|
1,968,747
|
|
||||||||||||
|
Long-term
debt
|
42,972
|
42,972
|
---
|
|||||||||||||
|
Deferred
income taxes, net
|
253,968
|
157,840
|
(96,128
|
)
|
(b)
|
|||||||||||
|
Stockholders’
equity (Note 9):
|
||||||||||||||||
|
Common
stock
|
48,620
|
48,620
|
---
|
|||||||||||||
|
Paid-in
capital
|
9,198,417
|
7,521,339
|
(1,677,078
|
) |
(d)
|
|||||||||||
|
Retained
(deficit)
|
(5,631,787
|
)
|
(6,170,831
|
)
|
(539,044
|
)
|
(a)
|
|||||||||
|
Total
stockholders’ equity
|
3,615,250
|
1,399,128
|
(2,216,122
|
)
|
||||||||||||
|
Total
liabilities and stockholders’ equity
|
$
|
5,295,336
|
$
|
4,951,833
|
$
|
(343,503
|
)
|
|||||||||
|
|
||||||||||||||||
|
(a)
Decrease
from reclassification of 2002 debt forgiveness and
additional accumulated
amortization.
|
||||||||||||||||
|
(b)
Decrease
from effects of recognizing additional
amortization.
|
||||||||||||||||
|
(c)
Rounding
difference.
|
||||||||||||||||
| (d) Reclassification of common stock warrants as a derivative under EITF 00-19. Liability adjusted to fair value. | ||||||||||||||||
F-52
Table
of Contents
|
Findex.com,
Inc.
|
||||||||||||||||
|
CONSOLIDATED
BALANCE SHEETS
|
||||||||||||||||
|
December
31, 2003
|
||||||||||||||||
|
|
||||||||||||||||
|
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||||||||||
|
Assets
|
||||||||||||||||
|
Current
assets:
|
||||||||||||||||
|
Cash
and cash equivalents
|
$
|
36,339
|
$
|
41,668
|
$
|
5,329
|
(a)
|
|||||||||
|
Accounts
receivable, trade
|
365,803
|
365,803
|
---
|
|||||||||||||
|
Inventories
|
272,600
|
272,600
|
---
|
|||||||||||||
|
Other
current assets
|
21,920
|
21,920
|
---
|
|||||||||||||
|
Total
current assets
|
696,662
|
701,991
|
5,329
|
|||||||||||||
|
Property
and equipment, net
|
65,603
|
65,603
|
---
|
|||||||||||||
|
Software
license, net
|
2,513,158
|
2,769,291
|
256,133
|
(b)
|
||||||||||||
|
Capitalized
software development costs, net
|
584,706
|
584,706
|
---
|
|||||||||||||
|
Restricted
cash
|
105,683
|
100,354
|
(5,329
|
)
|
(a)
|
|||||||||||
|
Other
assets
|
63,818
|
63,818
|
---
|
|||||||||||||
|
Total
assets
|
$
|
4,029,630
|
$
|
4,285,763
|
$
|
256,133
|
||||||||||
|
|
||||||||||||||||
|
Liabilities
and stockholders’ equity
|
||||||||||||||||
|
Current
liabilities:
|
||||||||||||||||
|
Notes
payable (Note 6)
|
$
|
89,999
|
$
|
89,999
|
$
|
---
|
||||||||||
|
Current
maturities of long-term debt
|
126,876
|
126,876
|
---
|
|||||||||||||
|
Accrued
royalties
|
1,499,006
|
1,499,006
|
---
|
|||||||||||||
|
Accounts
payable, trade
|
989,354
|
989,354
|
---
|
|||||||||||||
|
Accrued
payroll
|
216,767
|
216,767
|
---
|
|||||||||||||
|
Reserve
for sales returns
|
57,572
|
57,572
|
---
|
|||||||||||||
|
Reserve
for rebates payable
|
357,451
|
233,189
|
(124,262
|
) |
(e)
|
|||||||||||
|
Payroll
taxes payable
|
221,600
|
221,600
|
---
|
|||||||||||||
|
Other
current liabilities
|
89,554
|
89,554
|
---
|
|||||||||||||
|
Total
current liabilities
|
3,648,179
|
3,523,917
|
(124,262
|
) | ||||||||||||
|
Long-term
debt (Note 7)
|
73,764
|
73,763
|
(1
|
)
|
(c)
|
|||||||||||
|
Deferred
income taxes, net (Note 8)
|
1,051,327
|
717,151
|
(334,176
|
)
|
(d)
|
|||||||||||
|
Commitments
and contingencies (Note 18)
|
||||||||||||||||
|
Stockholders’
equity (Note 9):
|
||||||||||||||||
|
Preferred
stock
|
51
|
51
|
---
|
|||||||||||||
|
Common
stock
|
21,011
|
21,011
|
---
|
|||||||||||||
|
Paid-in
capital
|
7,080,629
|
7,080,629
|
---
|
|||||||||||||
|
Retained
(deficit)
|
(7,845,331
|
)
|
(7,130,759
|
)
|
714,572
|
|||||||||||
|
Total
stockholders’ equity
|
(743,640
|
)
|
(29,068
|
)
|
714,572
|
|||||||||||
|
Total
liabilities and stockholders’ equity
|
$
|
4,029,630
|
$
|
4,285,763
|
$
|
256,133
|
||||||||||
|
|
||||||||||||||||
|
(a)
Reclassify
cash held for repurchase of invoices assigned to factor
as corresponding
liability classified
as current liability.
|
||||||||||||||||
|
(b)
Decrease
from reclassification of 2002 debt forgiveness and additional
accumulated
amortization.
|
||||||||||||||||
|
(c)
Rounding
difference.
|
||||||||||||||||
|
(d)
Decrease
from effects of recognizing additional
amortization.
|
||||||||||||||||
| (e) Decrease from reassessment of reserve balance. | ||||||||||||||||
F-53
Table
of Contents
|
Findex.com,
Inc.
|
||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||||||||||
|
Year
Ended December 31, 2004
|
||||||||||||||||
|
|
||||||||||||||||
|
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||||||||||
|
Revenues,
net of reserves and allowances
|
$
|
5,218,784
|
$
|
5,422,097
|
$
|
203,313
|
(a)
|
|||||||||
|
Cost
of sales
|
1,745,664
|
1,820,553
|
74,889
|
(b)
|
||||||||||||
|
Gross
profit
|
3,473,120
|
3,601,544
|
128,424
|
|||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Sales
and marketing
|
1,294,377
|
1,280,761
|
(13,616
|
)
|
(c)
|
|||||||||||
|
General
and administrative
|
2,309,837
|
2,309,838
|
1
|
(d)
|
||||||||||||
|
Rebate
reserve adjustment
|
(266,301
|
)
|
---
|
266,301
|
(a)
|
|||||||||||
|
Bad
debt expense
|
22,778
|
22,778
|
---
|
|||||||||||||
|
Amortization
expense
|
16,343
|
519,850
|
503,507
|
(e)
|
||||||||||||
|
Depreciation
expense
|
44,478
|
44,478
|
---
|
|||||||||||||
|
Total
operating expenses
|
3,421,512
|
4,177,705
|
756,193
|
|||||||||||||
|
Earnings
(loss) from operations
|
51,608
|
(576,161
|
)
|
(627,769
|
)
|
|||||||||||
|
Interest
income
|
1,378
|
1,378
|
---
|
|||||||||||||
|
Other
income
|
9,276
|
1,011,366
|
1,002,090
|
(f)
|
||||||||||||
|
Nonrecurring
items
|
(154,569
|
)
|
---
|
154,569
|
(g)
|
|||||||||||
|
Other
adjustments
|
---
|
(154,569
|
)
|
(154,569
|
)
|
(g)
|
||||||||||
| Loss on fair value adjustment of derivatives | --- | (291,672 | ) | (291,672 | ) |
(k)
|
||||||||||
|
Loss
on disposition of assets
|
(141
|
)
|
(141
|
)
|
---
|
|||||||||||
|
Interest
expense
|
(42,007
|
)
|
(42,007
|
)
|
---
|
|||||||||||
|
Loss
before income taxes
|
(134,455
|
)
|
(51,806
|
) |
82,649
|
|||||||||||
|
Provision
for income taxes
|
1,750,908
|
1,015,859
|
(735,049
|
)
|
(h)
|
|||||||||||
|
Income
before extraordinary item
|
1,616,453
|
964,053
|
(652,400
|
)
|
||||||||||||
|
Extraordinary
item, net of applicable taxes
|
601,216
|
---
|
(601,216
|
)
|
(i)
|
|||||||||||
|
Net
income
|
$
|
2,217,669
|
$
|
964,053
|
$
|
(1,253,616
|
)
|
|||||||||
|
Basic
earnings per share:
|
||||||||||||||||
|
Basic
|
$
|
0.06
|
$
|
0.03
|
$
|
(0.03
|
)
|
(j)
|
||||||||
|
Diluted
|
$
|
0.06
|
$
|
0.03
|
$
|
(0.03
|
)
|
(j)
|
||||||||
|
Weighted
average shares outstanding:
|
||||||||||||||||
|
Basic
|
34,520,754
|
34,520,754
|
---
|
|||||||||||||
|
Diluted
|
35,195,840
|
35,195,840
|
---
|
|||||||||||||
|
(a)
Reclassification
of adjustment to reserve for rebates from sales and
marketing and other
operating expenses.
|
||||||||||||||||
|
(b)
Reclassification
of fulfillment expenses from sales and marketing
expenses.
|
||||||||||||||||
|
(c) Reclassification
of fulfillment expenses and rebates expense to sales
and cost of
sales.
|
||||||||||||||||
|
(d)
Rounding
difference.
|
||||||||||||||||
|
(e)
Increase
from changing software license agreement from indefinite
life to 10 year
life.
|
||||||||||||||||
|
(f)
Increase
from reclassification of debt forgiveness from Extraordinary
item.
|
||||||||||||||||
|
(g)
Reclassification
of Non-recurring items as Other adjustments.
|
||||||||||||||||
|
(h)
Deferred
tax effects of changes to software license
agreement.
|
||||||||||||||||
|
(i)
Reclassification
of debt forgiveness as other income and the related
income tax
effects.
|
||||||||||||||||
|
(j)
Reduction
in EPS from net effect of above revisions.
|
||||||||||||||||
| (k) Adjustment to fair value of derivatives per EITF 00-19. | ||||||||||||||||
F-54
Table
of Contents
|
Findex.com,
Inc.
|
||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||||||||||
|
Year
Ended December 31, 2003
|
||||||||||||||||
|
|
||||||||||||||||
|
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||||||||||
|
Revenues,
net of reserves and allowances
|
$
|
4,390,757
|
$
|
4,560,911
|
$
|
170,154
|
(a)
|
|||||||||
|
Cost
of sales
|
1,284,608
|
1,327,983
|
43,375
|
(b)
|
||||||||||||
|
Gross
profit
|
3,106,149
|
3,232,928
|
126,779
|
|||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Sales
and marketing
|
813,438
|
815,954
|
2,516
|
(c)
|
||||||||||||
|
General
and administrative
|
1,751,235
|
1,751,234
|
(1
|
)
|
(d)
|
|||||||||||
|
Nonrecurring
items
|
(583,628
|
)
|
---
|
583,628
|
(e)
|
|||||||||||
|
Bad
debt expense
|
23,208
|
23,208
|
---
|
|||||||||||||
|
Amortization
expense
|
45,157
|
504,427
|
459,270
|
(f)
|
||||||||||||
|
Depreciation
expense
|
43,224
|
43,224
|
---
|
|||||||||||||
|
Total
operating expenses
|
2,092,634
|
3,138,047
|
1,045,413
|
|||||||||||||
|
Earnings
from operations
|
1,013,515
|
94,881
|
|
(918,634
|
)
|
|||||||||||
|
Interest
income
|
9,727
|
9,727
|
---
|
|||||||||||||
|
Other
income
|
7,977
|
1,458,121
|
1,450,144
|
(e)
|
||||||||||||
|
Nonrecurring
items
|
866,516
|
---
|
(866,516
|
)
|
(e)
|
|||||||||||
|
Loss
on disposition of assets
|
(2,659
|
)
|
(2,659
|
)
|
---
|
|||||||||||
|
Interest
expense
|
(87,144
|
)
|
(87,144
|
)
|
---
|
|||||||||||
|
Income
before income taxes
|
1,807,932
|
1,472,926
|
(335,006
|
)
|
||||||||||||
|
Provision
for income taxes
|
33,567
|
226,461
|
192,894
|
(g)
|
||||||||||||
|
Net
income
|
$
|
1,841,499
|
$
|
1,699,387
|
$
|
(142,112
|
)
|
|||||||||
|
Basic
earnings per share:
|
||||||||||||||||
|
Basic
|
$
|
0.09
|
$
|
0.08
|
$
|
(0.01
|
)
|
(h)
|
||||||||
|
Diluted
|
$
|
0.08
|
$
|
0.08
|
$
|
---
|
|
|
||||||||
|
Weighted
average shares outstanding:
|
||||||||||||||||
|
Basic
|
20,411,438
|
20,411,438
|
---
|
|||||||||||||
|
Diluted
|
22,365,438
|
22,365,438
|
---
|
|||||||||||||
|
(a)
Reclassification
of adjustment to reserve for rebates from sales and marketing
expenses.
|
||||||||||||||||
|
(b)
Reclassification
of fulfillment expense from sales and marketing
expenses.
|
||||||||||||||||
|
(c) Reclassification
of adjustment to reserve for rebates to revenues and
fulfillment expense
to cost of sales.
|
||||||||||||||||
|
(d)
Rounding
difference.
|
||||||||||||||||
|
(e)
Reclassification
of Nonrecurring items as Other income.
|
||||||||||||||||
|
(f)
Increase
from changing software license agreement from indefinite
life to 10 year
life.
|
||||||||||||||||
|
(g)
Deferred
tax effects of changes to software license agreement.
|
||||||||||||||||
|
(h)
Reduction
in EPS from net effect of above
revisions.
|
||||||||||||||||
F-55
Table
of Contents
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||||||||
|
Year
Ended December 31, 2004
|
||||||||||||||||
|
|
||||||||||||||||
|
|
|
As
Previously Reported
|
As
Restated
|
Change
|
||||||||||||
|
Cash
flows from operating activities:
|
||||||||||||||||
|
Cash
received from customers
|
$
|
5,062,396
|
$
|
5,062,396
|
$
|
---
|
||||||||||
|
Cash
paid to suppliers and employees
|
(5,673,088
|
)
|
(5,673,088
|
)
|
---
|
|||||||||||
|
Other
operating receipts
|
9,276
|
9,276
|
---
|
|||||||||||||
|
Interest
paid
|
(37,928
|
)
|
(37,928
|
)
|
---
|
|||||||||||
|
Interest
received
|
1,378
|
1,378
|
---
|
|||||||||||||
|
Income
taxes paid
|
(5,702
|
)
|
(5,702
|
)
|
---
|
|||||||||||
|
Net
cash (used) by operating activities
|
(643,668
|
)
|
(643,668
|
)
|
---
|
|||||||||||
|
Cash
flows from investing activities:
|
||||||||||||||||
|
Acquisition
of property, plant and equipment
|
(58,247
|
)
|
(58,247
|
)
|
---
|
|||||||||||
|
Software
development costs
|
(692,063
|
)
|
(692,063
|
)
|
---
|
|||||||||||
|
Website
development costs
|
(31,838
|
)
|
(31,838
|
)
|
---
|
|||||||||||
|
Deposits
refunded
|
40,545
|
35,216
|
(5,329
|
)
|
(a)
|
|||||||||||
|
Net
cash (used) by investing activities
|
(741,603
|
)
|
(746,932
|
)
|
(5,329
|
)
|
||||||||||
|
Cash
flows from financing activities:
|
||||||||||||||||
|
Payments
made on line of credit, net
|
(20,935
|
)
|
(20,935
|
)
|
---
|
|||||||||||
|
Payments
made on long-term notes payable
|
(227,727
|
)
|
(227,727
|
)
|
---
|
|||||||||||
|
Proceeds
from convertible notes payable
|
240,000
|
240,000
|
---
|
|||||||||||||
|
Proceeds
from issuance of stock and warrants
|
1,750,000
|
1,750,000
|
---
|
|||||||||||||
|
Stock
offering costs paid
|
(51,047
|
)
|
(51,047
|
)
|
---
|
|||||||||||
|
Net
cash provided by financing activities
|
1,690,291
|
1,690,291
|
---
|
|||||||||||||
|
Net
increase in cash and cash equivalents
|
305,020
|
299,691
|
(5,329
|
)
|
||||||||||||
|
Cash
and cash equivalents, beginning of year
|
36,339
|
41,668
|
5,329
|
(a)
|
||||||||||||
|
Cash
and cash equivalents, end of year
|
$
|
341,359
|
$
|
341,359
|
$
|
---
|
||||||||||
|
Reconciliation
of net income to cash flows from operating activities:
|
||||||||||||||||
|
Net
income
|
$
|
2,217,669
|
$
|
964,053
|
$
|
(1,253,616
|
)
|
(b)
|
||||||||
|
Adjustments
to reconcile net income to net cash
|
||||||||||||||||
|
(used)
by operating activities:
|
||||||||||||||||
|
Software
development costs amortized
|
575,481
|
575,481
|
---
|
|||||||||||||
|
Stock
and warrants issued for services
|
178,929
|
178,929
|
---
|
|||||||||||||
|
Rebate
reserve adjustment
|
266,301
|
(142,039
|
)
|
(408,340
|
)
|
(c)
|
||||||||||
|
Provision
for bad debts
|
22,778
|
22,778
|
---
|
|||||||||||||
|
Depreciation
& amortization
|
60,821
|
564,328
|
503,507
|
(d)
|
||||||||||||
|
Loss
on disposal of property, plant and equipment
|
141
|
141
|
---
|
|||||||||||||
|
Loss
on fair value adjustment of derivative
|
--- | 291,672 | 291,672 |
(g)
|
||||||||||||
|
Debt
forgiveness
|
---
|
(1,002,090
|
)
|
(1,002,090
|
)
|
(e)
|
||||||||||
|
Extraordinary
item
|
(1,002,090
|
)
|
---
|
1,002,090
|
(e)
|
|||||||||||
|
Change
in assets and liabilities:
|
||||||||||||||||
|
(Increase)
in accounts receivable
|
(223,794
|
)
|
(223,794
|
)
|
---
|
|||||||||||
|
Decrease
in inventories
|
38,600
|
38,600
|
---
|
|||||||||||||
|
(Increase)
in refundable income taxes
|
(2,948
|
)
|
(2,948
|
)
|
---
|
|||||||||||
|
(Increase)
in prepaid expenses
|
(84,211
|
)
|
(84,211
|
)
|
---
|
|||||||||||
|
(Decrease)
in accrued royalties
|
(324,360
|
)
|
(324,360
|
)
|
---
|
|||||||||||
|
(Decrease)
increase in accounts payable
|
(271,198
|
)
|
(271,198
|
)
|
---
|
|||||||||||
|
(Decrease)
in income taxes payable
|
(1,270
|
)
|
(1,270
|
)
|
---
|
|||||||||||
|
(Decrease)
in deferred taxes
|
(1,351,518
|
)
|
(1,017,343
|
)
|
334,175
|
(f)
|
||||||||||
|
(Decrease)
in other liabilities
|
(742,999
|
)
|
(210,397
|
)
|
532,602
|
(c)
|
||||||||||
|
Net
cash (used) by operating activities
|
$
|
(643,668
|
)
|
$
|
(643,668
|
)
|
$
|
---
|
||||||||
|
(a)
Reclassify
cash held for repurchase of invoices assigned to factor
as corresponding
liability classified as current liability.
|
||||||||||||||||
|
(b)
Net
changes made to net income.
|
||||||||||||||||
|
(c)
Correction
in classification of adjustment to reserve for rebates
from adjustment to
operating expense to adjustment to revenue.
|
||||||||||||||||
|
(d)
Additional
amortization from change to economic life of software
license
agreement.
|
||||||||||||||||
|
(e)
Reclassification
from Extraordinary item to Debt forgiveness.
|
||||||||||||||||
|
(f)
Decrease
from tax effects of recognizing additional
amortization.
|
||||||||||||||||
| (g) Adjustment to fair value of derivatives per EITF 00-19. | ||||||||||||||||
F-56
Table
of Contents
|
Findex.com,
Inc.
|
||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||||||||
|
Year
Ended December 31, 2003
|
||||||||||||||||
|
|
||||||||||||||||
|
|
As
Previously Reported
|
As
Restated
|
Change
|
|||||||||||||
|
Cash
flows from operating activities:
|
||||||||||||||||
|
Cash
received from customers
|
$
|
4,228,649
|
$
|
4,228,649
|
$
|
---
|
||||||||||
|
Cash
paid to suppliers and employees
|
(3,364,838
|
)
|
(3,364,838
|
)
|
---
|
|||||||||||
|
Other
operating receipts
|
7,977
|
7,977
|
---
|
|||||||||||||
|
Interest
paid
|
(43,203
|
)
|
(43,203
|
)
|
---
|
|||||||||||
|
Interest
received
|
9,727
|
9,727
|
---
|
|||||||||||||
|
Income
taxes refunded
|
43,909
|
43,909
|
---
|
|||||||||||||
|
Net
cash provided by operating activities
|
882,221
|
882,221
|
---
|
|||||||||||||
|
Cash
flows from investing activities:
|
||||||||||||||||
|
Acquisition
of property, plant and equipment
|
(18,433
|
)
|
(18,433
|
)
|
---
|
|||||||||||
|
Software
development costs
|
(659,486
|
)
|
(659,486
|
)
|
---
|
|||||||||||
|
Website
development costs
|
(35,684
|
)
|
(35,684
|
)
|
---
|
|||||||||||
|
Deposits
paid
|
(500
|
)
|
(100,854
|
)
|
(100,354
|
)
|
(a)
|
|||||||||
|
Net
cash (used) by investing activities
|
(714,103
|
)
|
(814,457
|
)
|
(100,354
|
)
|
||||||||||
|
Cash
flows from financing activities:
|
||||||||||||||||
|
Proceeds
from line of credit, net
|
14,657
|
14,657
|
---
|
|||||||||||||
|
Payments
made on long-term notes payable
|
(79,404
|
)
|
(79,404
|
)
|
---
|
|||||||||||
|
Net
cash (used) by financing activities
|
(64,747
|
)
|
(64,747
|
)
|
---
|
|||||||||||
|
Net
increase in cash and cash equivalents
|
103,371
|
3,017
|
(100,354
|
)
|
(a)
|
|||||||||||
|
Cash
and cash equivalents, beginning of year
|
(67,032
|
)
|
38,651
|
105,683
|
(c)
|
|||||||||||
|
Cash
and cash equivalents, end of year
|
$
|
36,339
|
$
|
41,668
|
$
|
5,329
|
(b)
|
|||||||||
|
Reconciliation
of net income to cash flows from operating activities:
|
||||||||||||||||
|
Net
income
|
$
|
1,841,499
|
$
|
1,699,387
|
$
|
(142,112
|
)
|
|||||||||
|
Adjustments
to reconcile net income to net cash
|
||||||||||||||||
|
provided
by operating activities:
|
||||||||||||||||
|
Software
development costs amortized
|
355,282
|
355,282
|
---
|
|||||||||||||
|
Stock
and warrants issued for services
|
52,750
|
52,750
|
---
|
|||||||||||||
|
Rebate
reserve adjustment
|
--- | (124,262 | ) | (124,262 | ) |
(g)
|
||||||||||
|
Provision
for bad debts
|
23,208
|
23,208
|
---
|
|||||||||||||
|
Depreciation
& amortization
|
88,381
|
547,651
|
459,270
|
(d)
|
||||||||||||
|
Loss
on disposal of property, plant and equipment
|
2,659
|
2,659
|
---
|
|||||||||||||
|
Debt
forgiveness
|
---
|
(650,000
|
)
|
(650,000
|
)
|
(e)
|
||||||||||
|
Non-cash
non-recurring item
|
(650,000
|
)
|
---
|
650,000
|
(e)
|
|||||||||||
|
Change
in assets and liabilities:
|
||||||||||||||||
|
(Increase)
in accounts receivable
|
(160,770
|
)
|
(160,770
|
)
|
---
|
|||||||||||
|
Decrease
in inventories
|
144,100
|
144,100
|
---
|
|||||||||||||
|
Decrease
in refundable income taxes
|
43,909
|
43,909
|
---
|
|||||||||||||
|
Decrease
in prepaid expenses
|
20,869
|
20,869
|
---
|
|||||||||||||
|
(Decrease)
in accrued royalties
|
(631,607
|
)
|
(631,607
|
)
|
---
|
|||||||||||
|
Increase
in accounts payable
|
81,793
|
81,793
|
---
|
|||||||||||||
|
(Decrease)
in deferred taxes
|
(33,567
|
)
|
(226,463
|
)
|
(192,896
|
)
|
(f)
|
|||||||||
|
(Decrease)
in other liabilities
|
(296,285
|
)
|
(296,285
|
)
|
---
|
|||||||||||
|
Net
cash provided by operating activities
|
$
|
882,221
|
$
|
882,221
|
$
|
---
|
||||||||||
|
(a)
Reclassify
cash held by merchant banker as a deposit from restricted
cash.
|
||||||||||||||||
|
(b)
Reclassify
cash held for repurchase of invoices assigned to factor
as corresponding
liability classified as current liability.
|
||||||||||||||||
|
(c)
Net
cash reclassification.
|
||||||||||||||||
|
(d)
Additional
amortization from change to economic life of software
license
agreement.
|
||||||||||||||||
|
(e)
Reclassification
of non-cash non-recurring item as debt forgiveness.
|
||||||||||||||||
|
(f)
Decrease
from tax effects of recognizing additional
amortization.
|
||||||||||||||||
|
(g)
Adjustment from reassessment of rebate reserve
adequacy.
|
||||||||||||||||
F-57
Table
of Contents
TABLE
OF CONTENTS
|
|
|
|
|
Page
|
|
|
|
|
|
1
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
51
|
|
|
|
|
|
|
56
|
|
|
|
|
|
|
57
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
62
|
|
|
|
|
|
|
63
|
|
|
|
|
|
|
63
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
F-1
|
|
|
F-58
Table
of Contents
47,491,666
Shares
FINDEX.COM,
INC.
Common
Stock
_________________
PROSPECTUS
_________________
January 19,
2006
_________________
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
|
||||||||||||||||
|
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
|
||||||||||||||||
|
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.
|
||||||||||||||||
|
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
|
||||||||||||||||
|
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.
|
||||||||||||||||
|
Common
Stock Option Issuances
|
||||||||||||||||
|
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.
We did not recognize consideration upon issuance of the
options as
provided by APB Opinion No. 25 and
allowed under SFAS No. 123. Consideration will be recognized
when the
options are exercised.
|
||||||||||||||||
|
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
|
||||||||||||||||
|
3/15/2004
|
Note
Payable
|
American
Bible Society
|
NA
|
$
|
90,700
|
(A)
|
|
|||||||||
|
9/25/2003
|
Note
Payable
|
Ivy
Hill/Warner Media
|
NA
|
$
|
164,000
|
(A)
|
|
|||||||||
|
The
two promissory notes listed above were 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:
|
|
|
(i)
|
to
include any prospectus required by Section 10(a)(3) of the Securities
Act
of 1933;
|
|
|
(ii)
|
to
reflect in the prospectus any facts or events arising after the effective
date of this Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent
a
fundamental change in the information in this registration statement;
and
|
|
|
(iii)
|
to
include any material information with respect to the plan of distribution
not previously disclosed in this registration statement, or any material
change to such information in the registration statement.
|
|
(2)
|
That,
for the purpose of determining any liability under the Securities
Act of
1933, each such post-effective amendment shall be deemed to be a
new
registration statement relating to the securities offered therein,
and the
offering of such securities at that time shall be deemed to be the
initial
bona fide offering thereof.
|
|
(3)
|
To
remove from registration by means of a post-effective amendment to
this
registration statement any of the securities being registered which
remain
unsold at the termination of this offering.
|
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may
be permitted to directors, officers or persons controlling the registrant
pursuant to the General Corporation Law of Nevada, the articles of
incorporation, or otherwise, the registrant has been advised that, in the
opinion of the SEC, such indemnification is against public policy as expressed
in such Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or person
controlling the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or person controlling the
registrant in connection with any securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in such Act and 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: January
19, 2006
|
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
|
|
|
January 19,
2006
|
|
|
|
|
Steven
Malone
|
|
and
Chief Executive Officer (principal
|
|
|
||||
|
|
|
executive
officer)
|
|
|
||||
|
|
|
|
|
|||||
|
/s/
Kirk R. Rowland
|
|
Chief
Financial Officer
|
|
|
January 19,
2006
|
|
|
|
|
Kirk
R. Rowland
|
|
(principal
financial and accounting
|
|
|
||||
|
|
|
officer)
|
|
|
||||
|
|
|
|
|
|||||
|
/s/
John Kuehne
|
|
Director
|
|
|
January 19,
2006
|
|
|
|
|
John
A. Kuehne
|
|
|||||||
|
|
|
|
|
|||||
|
/s/
Henry M. Washington
|
|
Director
|
|
|
January 19,
2006
|
|
|
|
|
Henry
M. Washington
|
|
|||||||
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
|
|
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 January 19, 2006. 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.
|
|
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.
|
|
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.
|
|
23.1
|
Consent
of Chisholm, Bierwolf & Nilson, LLC, Independent Certified Public
Accountants dated January 17, 2006. FILED HEREWITH.
|
|
23.2
|
Consent
of M.M. Membrado, PLLC (contained in Exhibit 5.1 to this registration
statement).
|
|
24.1
|
Powers
of Attorney (included on the signature page to this registration
statement).
|