U.
S. SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB
ANNUAL
REPORT UNDER SECTION 13 OR 15(D)
OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2006
Commission
file number: 0-29963
FINDEX.COM,
INC.
(Name
of
small business issuer in its charter)
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Nevada
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88-0379462
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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11204
Davenport Street, Suite 100, Omaha, Nebraska
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68154
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(Address
of principal executive offices)
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(Zip
Code)
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(402)
333-1900
(Issuer’s
telephone number)
Securities
registered under Section 12(b) of the Exchange Act: None
Securities
registered under Section 12(g) of the Exchange Act: Common
Stock, $.001 par value
Check
whether the issuer (1) filed all reports required to be filed by Section
13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter
period
that the registrant was required to file such reports), and (2) has been
subject
to such filing requirements for the past 90 days. Yes
[X] No [_]
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or
any
amendment to this Form 10-KSB. [_]
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule
12b-2 of the Exchange Act). Yes
[_] No [X]
Revenues
for the fiscal year ended December 31, 2006 totaled $3,742,751.
As
of
April 16, 2007, the aggregate market value of the voting and non-voting
common
equity held by non-affiliates computed by reference to the average of the
closing bid and asked prices on such date was approximately
$559,000.
At
April
16, 2007, the registrant had outstanding 49,788,317 shares of common stock,
of
which there is only a single class.
Transitional
Small Business Disclosure Format (check one): Yes __ No X
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SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
annual report on Form 10-KSB, press releases and certain information provided
periodically in writing or verbally by our officers or our agents contain
statements which constitute forward-looking statements. The words “may”,
“would”, “could”, “will”, “expect”, “estimate”, “anticipate”, “believe”,
“intend”, “plan”, “goal”, and similar expressions and variations thereof are
intended to specifically identify forward-looking statements. These statements
appear in a number of places in this Form 10-KSB and include all statements
that
are not statements of historical fact regarding the intent, belief or current
expectations of us, our directors or our officers, with respect to, among
other
things: (i) our liquidity and capital resources, (ii) our financing
opportunities and plans, (iii) our ability to attract customers to generate
revenues, (iv) competition in our business segment, (v) market and other
trends
affecting our future financial condition or results of operations, (vi) our
growth strategy and operating strategy, and (vii) the declaration and/or
payment
of dividends.
Investors
and prospective investors are cautioned that any such forward-looking statements
are not guarantees of future performance and involve risks and uncertainties,
and that actual results may differ materially from those projected in the
forward-looking statements as a result of various factors. Factors that might
cause such differences include, among others, those set forth in Part II,
Item 6
of this annual report on Form 10-KSB, entitled “Management’s Discussion and
Analysis or Plan of Operation”, and including without limitation the “Risk
Factors” section contained therein. Except as required by law, we undertake no
obligation to update any of the forward-looking statements in this annual
report
on Form 10-KSB after the date hereof.
OVERVIEW
We
develop, publish, market, and distribute and directly sell off-the-shelf
consumer and organizational software products for PC, Macintosh®
and PDA
platforms. We develop our software products through in-house initiatives
supplemented by outside developers. We market and distribute our software
products principally through direct marketing and Internet sales programs,
but
also through secular and non-secular wholesale retailers.
We
were
incorporated in the State of Nevada on November 7, 1997 as EJH Entertainment,
Inc. On December 4, 1997, a predecessor corporation with the same name as
our
own but domiciled in Idaho was merged with and into us. Although the predecessor
Idaho corporation was without material assets or operations as of the time
of
the merger, since being organized in 1968, it had historically been involved
in
mining and entertainment businesses unrelated to our current business.
Beginning
in 1997, and although we were not then a reporting company under the Securities
Exchange Act, our common stock was quoted on the OTC Bulletin Board (originally
under the symbol “TIXX”, which was later changed to “TIXXD”). On May 13, 1999,
we changed our name to FINdex.com, Inc. On March 7, 2000, in an effort to
satisfy a newly imposed NASD Rule eligibility requirement that companies
quoted
on the OTC Bulletin Board be fully reporting under the Securities Exchange
Act
(thereby requiring recently audited financial statements) and current in
their
filing obligations, we acquired, as part of a share exchange in which we
issued
150,000 shares of our common stock, all of the outstanding capital stock
of
Reagan Holdings, Inc., a Delaware corporation. At the time of this transaction,
Reagan Holdings was subject to the requirements of having to file reports
pursuant to Section 13 of the Securities Exchange Act, had recently audited
financial statements and was current in its reporting obligations. Having
no
operations, employees, revenues or other business plan at the time, however,
it
was a public shell company. As a result of this transaction, Reagan Holdings,
Inc. became our wholly owned subsidiary and we became the successor issuer
to
Reagan Holdings for reporting purposes pursuant to Rule 12g-3 of the Securities
Exchange Act. Shortly thereafter, we changed our stock symbol to “FIND”. Though
it does not currently have any operations, employees, or revenues, Reagan
Holdings remains our wholly owned subsidiary.
In
addition to Reagan Holdings, we also have one other wholly owned subsidiary,
Findex.com, Inc. (i.e.
the same
name as our own), a Delaware corporation. Like Reagan Holdings, this entity,
too, does not currently have any operations, employees, or revenues. This
subsidiary resulted from an acquisition on April 30, 1999 pursuant to which
we
acquired all of the issued and outstanding capital stock of FINdex Acquisition
Corp., a Delaware corporation, from its then stockholders in exchange for
4,700,000 shares of our common stock, which, immediately following the
transaction, represented 55% of our total outstanding common stock. Our purpose
for this acquisition was to broaden our then-existing stockholder base, an
important factor in our effort to develop a strong market for our common
stock.
On May 12, 1999, in exchange for the issuance of 457,625 shares of FINdex
Acquisition Corp. common stock, FINdex.com, Inc., another Delaware corporation
(originally incorporated in December 1995 as FinSource, Ltd.), was merged
with
and into FINdex Acquisition Corp., with FINdex Acquisition Corp. remaining
as
the surviving entity. Our purpose for this merger was to acquire a proprietary
financial information search engine for the Internet which was to serve as
the
cornerstone for a Web-based development-stage business, but which has since
been
abandoned. As part of the certificate of merger relating to this transaction,
FINdex Acquisition Corp. changed its name to FINdex.com, Inc. We currently
own
4,700,000 shares of FINdex.com, Inc. (the Delaware corporation), representing
100% of its total outstanding common stock.
STRATEGY
The
common thread among our current software products is their target constituency,
consumers that share a devotion to or interest in Christianity and faith-based
“inspirational” values. Our focus is to become the largest worldwide provider of
Bible study and related faith-based software products as well as to continue
our
sales growth across all distribution channels and our market share growth
in all
of our current product categories. We plan for the continued broadening of
our
product lines through marketing and sales initiatives, ongoing internal
development of new products, expansion and upgrade of existing products and
strategic product line and/or corporate acquisitions and licensing.
Specifically, our development strategy includes:
Creating
and Maintaining Diversity in Our Product Titles, Platforms and Market
Demographic
We
are
committed to creating and maintaining a diversified mix of titles and title
versions to mitigate our operating risks, and broaden market appeal within
our
demographic. Therefore, we strive to develop and publish titles and title
versions spanning a wide range of categories, including Bible study, financial
and church management, pastoral products, children’s software and language
tutorials. We may also design our software for use on multiple platforms
in
order to reach a greater potential audience. There are a number of factors
that
we take into consideration when determining the appropriate platform for
each of
our titles and title versions, including, among others, economic cost, the
platform’s user demographics and the competitive landscape at the time of a
title or title version’s release.
Creating,
Acquiring and Maintaining Strong Brands
We
attempt to focus our development and publishing activities principally around
software products that are, or have the potential to become, titles and title
versions possessing sustainable consumer appeal and brand recognition. To
that
end, we are continually in pursuit of intellectual property licensing
opportunities with respect to software titles and title versions that are
strategically aligned with our existing product line and focus. We have entered
into a number of such strategic relationships with the owners of various
forms
of intellectual property which have allowed us to acquire the rights to publish
content and develop titles and title versions based upon such intellectual
properties. In addition, we may acquire intellectual property licenses in
the
future for products outside of our current area of focus.
Our
development strategy further includes the pursuit of acquisition and related
strategic growth opportunities involving other companies that sell faith-based
merchandise and services. As part of this strategy, we may acquire businesses
that (i) only recently commenced operations, (ii) are development-stage
enterprises in need of additional funds to expand into new products or markets,
or (iii) are established businesses that may be experiencing financial or
operating difficulties and need additional capital. We may also pursue other
strategic growth opportunities, including, but not limited to, the acquisition
of new product lines, content licensing, proprietary technology licensing
or
acquisitions, asset acquisitions, or acquisitions of other operating businesses,
provided, however, that any such opportunities fit our corporate growth strategy
and provide immediate or near term added value and provide a measurable increase
in our existing customer base or a new, related customer base to which we
can
cross-market our products and produce greater revenues and/or earnings.
Furthermore, we have not ruled out the pursuit of transactional opportunities
in
areas outside the faith-based market demographic.
There
are
significant risks and complexities associated with any such growth opportunities
and/or acquisitions including but not limited to due diligence investigation,
comparative investigation, comparative analysis, financing, operational
transitions, and growth control or abatement. Because acquisition and related
opportunities may occur in relation to businesses at various stages of
development, the task of comparative investigation and analysis of such business
opportunities is likely to be extremely difficult and complex. In connection
with our pursuit of such opportunities, we are also likely to incur significant
transition and integration costs, ongoing operations costs, legal and accounting
costs, including the legal fees for preparing acquisition documentation,
due
diligence investigation costs and the costs of preparing reports and filings
with the SEC.
Disciplined
Product Selection and Development Processes
The
success of our business depends, in significant part, on our ability to develop
titles and title versions that will generate appreciable unit volume sales
while
simultaneously meeting our high quality standards. We use a formal control
process for the selection, development, production and quality assurance
of our
titles and title versions. We apply this process to products under development
with external, as well as internal, resources. This control process includes
upfront concept evaluation as well as in-depth reviews of each project on
numerous levels and at various intervals during the development process by
a
team that includes our senior management and a number of our key technical,
marketing and product development personnel.
Internal
and External Development Groups
We
develop our titles and title versions using a strategic combination of our
internal development group and external, independently contracted developers,
a
team of which are located in the Russian Federation and several others of
which
are located in the United States and India.
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, and
we
also maintain development and technical staff at our Omaha, Nebraska
headquarters.
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.
PRODUCT
DEVELOPMENT
We
are
committed to the ongoing development of our existing software as well as
the
development of new software titles and title versions. Our product development
methodology is modeled around elements of the consumer packaged goods and
software industry. Within this model, our management assesses the current
market
and establishes a direction for each of our products, while key personnel
monitor quality, delivery schedules, development milestones and budget. Prior
to
final approval, whether developed internally or externally by our third-party
developers, we test all new titles and title versions for bugs.
The
manufacturing time and gross margin percentages for each of our products
can
vary significantly from platform to platform. For each of our products we
establish and periodically review an individual product development timeline
and
expenditure budget, taking into consideration, among others, the following
business factors:
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prior
year or season selling rates for existing and competitive products;
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known
or estimated growth rates for existing and competitive
products;
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new
market opportunities for products, product categories, or product
platforms;
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competitive
products and known competitive strategies;
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general
consumer market and consumer economic sentiments including past,
present,
and projected future conditions and/or events;
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technological
changes, improvements, new platforms, and platform market share
shifts;
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general
distribution channels and customer feedback;
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current
and perceived corporate cash flow;
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availability
and limitations related to knowledgeable/expert talent and workforce;
and
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known
or projected risks associate with each of these
factors.
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Our
total
product development costs incurred during the years ended December 31, 2005
and
2006, were approximately $1,029,000 and approximately $682,000, respectively,
of
which capitalized costs accounted for approximately $812,000 and approximately
$491,000, respectively and expensed costs accounted for $217,000 and
approximately $191,000, respectively.
OUR
PRODUCTS
Our
focus
is to become the largest worldwide provider of Bible study and related
faith-based software products. To that end, we utilize a brand structure
and
market our largest selling titles and title versions under the distinct key
brand: QuickVerse®
and
Membership Plus®.
We
support this strategy through the regularly scheduled introduction of new
titles
and title versions featuring this brand. In the year ended December 31, 2006
we
released a total of approximately eleven titles and title versions for PC,
Macintosh®
and PDA
platforms. Through the remainder of the fiscal year 2007 we currently plan
on
releasing a total of approximately sixteen titles and title versions 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; and
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Language
Tutorial Products.
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Bible
Study
For
the
fiscal year ended December 31, 2006, approximately 65% of our revenues were
derived from sales of our flagship QuickVerse®,
an
industry-leading Bible-study software now in its 18th
year and
11th
version,
which is available in an array of content package variations ranging in retail
price from $9.95 to $799.95. Originally introduced into the market in 1989,
QuickVerse®
has sold
over one million copies since its introduction and is currently believed
by us
to be the market leader in its category.
QuickVerse®
simplifies biblical research, allowing users to view multiple reference
materials, including Bibles, dictionaries, commentaries and encyclopedias,
side-by-side on the computer screen. A built-in “QuickSearch” feature enables
the user to highlight a word or Bible verse and find all of its occurrences
in a
particular text. Advanced search options enable users to search by word,
phrase
or verse across multiple books, offering search options that locate all forms
of
a given search word without the need for embedded symbols. For example, a
search
for the word “rise”, will yield the words “arise”, “risen”, “rising”, and
“rise”. QuickVerse®
2007,
our latest version, is currently available in six CD-Rom editions for PC.
Each
edition of QuickVerse®
contains
several Bible translations (e.g.,
the
King James Version, the American Standard Version, etc.) along with numerous
reference titles (e.g.,
dictionaries, commentaries, encyclopedias, etc.).
The
QuickVerse®
family
of products for PC includes:
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QuickVerse®
Bible Suite (which contains 8 Bibles and 40 reference titles, retail
price: $39.95);
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QuickVerse®
Essentials Edition (which includes 10 Bibles and 44 reference titles,
retail price: $59.95);
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QuickVerse®
Standard Edition (which includes 15 Bibles and 63 reference titles,
retail
price: $129.95);
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QuickVerse®
Expanded Edition (which includes 17 Bibles and 100 reference titles,
retail price: $249.95);
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QuickVerse®
Deluxe Edition (which includes 23 Bibles and 154 reference titles,
retail
price: $349.95); and
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QuickVerse®
Platinum Edition (which includes 25 Bibles and 272 reference titles,
retail price: $799.95).
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Furthermore,
for QuickVerse®
2007 we
introduced the QuickVerse®
2007
Upgrade Download (retail price: $29.95), which is an update to the
QuickVerse®
engine
for those with prior QuickVerse®
versions
(QuickVerse®
8.0
Essentials or above). Each QuickVerse®
purchase
includes access to additional books and content, which can be unlocked or
downloaded and made accessible for an additional fee.
QuickVerse®
Mobile,
an industry-leading Mobile Bible-study software, is compatible on both Pocket
PC®
and
Palm®
OS
operating systems, and is currently in its 4th
year and
4th
version.
This program provides the same simplified access and many of the personal
Bible
study features found in the desktop QuickVerse®
versions. QuickVerse®
2007
Mobile is currently available in three editions as a download and in CD-Rom.
Each edition of QuickVerse®
2007
Mobile 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®
2007
Mobile family of products includes:
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Standard
Edition (which includes 3 Bibles and 6 reference titles, retail
price:
$29.95);
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Deluxe
Edition (which includes 6 Bibles and 9 reference titles, retail
price:
$39.95); and
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Platinum
Edition (which includes 8 Bibles and 13 reference titles, retail
price:
$69.95).
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Each
edition contains 125 scripture reading plans and provides the user with the
ability to create their own.
During
the fiscal year 2005, we introduced QuickVerse®
Macintosh, which is compatible with Macintosh®
OS X
10.3 or higher operating systems, and is currently in its 2nd
year and
2nd
version.
QuickVerse®
2007
Macintosh is available in three editions and provides access to several Bible
translations (e.g.,
the
King James Version, the American Standard Version, etc.) along with numerous
reference titles (e.g.,
dictionaries, commentaries, encyclopedias, etc.).
The
QuickVerse®
2007
Macintosh family of products includes:
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QuickVerse®
White Box Edition (which includes 10 Bibles and 45 reference titles,
retail price: $59.95);
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QuickVerse®
Black Box Edition (which includes 15 Bibles and 66 reference titles,
retail price: $129.95); and
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QuickVerse®
Gold Box Edition (which includes 22 Bibles and 158 reference titles,
retail price: $349.95).
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Each
QuickVerse®
Macintosh product contains numerous “Search Panel” features, including
user-defined book categorization, desktop books, download books, interactive
workbooks and daily reading plans, as well as an exclusive “Preview Drawer”,
allowing users to have an unlimited number of books open at any
time.
QuickVerse®
customers include (i) individuals devoted to or otherwise interested in studying
Christianity and (ii) religious and other spiritual organizations including
schools, churches and other faith-based ministries.
In
addition to QuickVerse®,
we also
develop and market certain other Bible study software packages. These include
the Vine’s®
Complete
Collection, the Nelson’s®
Reference Collection, the Warren Wiersbe®
Collection, the John MacArthur®
Collection, the Life Application Bible Commentary®
Collection, the Willmington Guide to the Bible®
Collection, and the Fisherman Study Guide®
Collection. Although our prices are subject to change from time to time,
these
titles currently range in retail price from $9.95 to $249.95 per unit.
Financial/Office
Management Products for Churches and other Christian Faith-Based
Ministries
For
the
fiscal year ended December 31, 2006, approximately 27% of our revenues were
derived from sales of Membership Plus®,
an
industry-leading church management software now in its 11th
version.
Membership Plus®
2007 is
available in each of a standard and a deluxe package at retail prices of
$199.95
and $399.95 respectively. Each of these product packages provides church
database, financial management and church productivity tools, including those
designed to streamline church office accounting, tasks and scheduling, track
membership and contributions, organize membership databases, and provide
efficiency in producing targeted mailings, attendance reports and IRS-compliant
contribution receipts. The deluxe package is equipped with a broader
functionality and range of features, including, for example, a number of
templates for legal agreements frequently used by these types of organizations
and a fund based accounting function.
Membership
Plus®
is
designed to serve the unique needs of churches, “para-church” organizations and
ministries, and non-profit entities. The term “para-church” has been developed
by the religious community to refer to religious organizations which have
some
of the characteristics of a church, but which are not what most people would
generally consider to constitute a church, including a defined congregation.
Some “para-church” organizations are treated as churches for some reasons, and
as religious organizations which are not churches for others. A few examples
of
“para-church” organizations are Campus Crusade for Christ, Promise
Keepers®,
and
Josh McDowell Ministry.
Over
80,000 churches and faith-based organizations have purchased Membership
Plus®
since
its introduction in 1990. Membership Plus®
2007,
our latest version, is currently available in two CD-Rom editions: Membership
Plus®
Standard
and Membership Plus®
Deluxe.
Print
& Graphic Products
We
currently sell/distribute ClickArt Christian Publishing®
Suite
III (retail price: $39.95), which is a full desktop publishing package
containing over 13,000 Christian images, icons, maps, Catholic and Jewish
imagery and ethnically diverse, family-oriented illustrations to be used
in the
creation of a wide range of printed materials including newsletters, bulletins,
posters, fliers, mailings, calendars, and reports. We also publish/distribute
ClickArt Christian Graphics Deluxe®
(retail
price: $29.95), which contains faith-based and Christian graphical images
that
can be used in the production of other content related projects. We also
distribute several titles produced and distributed by SummitSoft Corporation
a
publisher of productivity software for professional and home users, including
Logo Design Studio®
(retail
price: $29.95), Essential Office Font Pack®
(retail
price: $19.99), 2500 True Type Fonts®
(retail
price: $19.99) and the Wedding Planner®
(retail
price: $39.95).
Although
our prices are subject to change from time to time, our print and graphic
products range in price from $9.99 to $39.99 per unit. In the aggregate,
and for
the fiscal year ended December 31, 2006, approximately 2% of our revenues
were
derived from sales of these products.
Pastoral
Products
We
currently produce and distribute/sell a line of pastoral products designed
to
assist faith-based ministries in streamlining sermon development and research
tasks and in organizing responsibilities. These titles include the following:
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Sermon
Builder®
4.0 Deluxe (retail price: $69.95), which is a database compilation
of
illustrations, anecdotes, quotations, proverbs and bits of humor
from
general topics like children and angels to specific Bible passages,
which
users can use to bring messages to a congregation or classroom.
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Ministry
Notebook®
2.0 (retail price: $29.95), which is an organizational tool for
users to
keep better track of ministry-related paperwork including sermons,
prayer
requests, personal libraries, telephone contacts, and expense reports.
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Today’s
Best Sermons®
(retail price: $99.95), which is a three volume collection of the
best
sermons from the Preaching
Today
monthly audiotape series, which users can use to gain spiritual
refreshment and strengthen their
preaching.
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Although
our prices are subject to change from time to time, our pastoral products
range
in price from $29.95 to $99.95 per unit. In the aggregate, and for the fiscal
year ended December 31, 2006, approximately 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®
(retail
price: $5.97), Noah and the Ark®
(retail
price: $5.97), Daniel in the Lion’s Den®
(retail
price: $5.97), The Story of Creation®
(retail
price: $5.97), and American History Explorer®
(retail
price: $29.95). In addition, we also distribute the DVD video Junior’s
Giants®
(retail
price: $12.95) produced by Divine Comedy Productions.
Although
our prices are subject to change from time to time, our children’s products
range in price from $5.97 to $39.97 per unit. In the aggregate, and for the
fiscal year ended December 31, 2006, less than 1% of our revenues were derived
from sales of these products.
Language
Tutorial Products
We
currently produce tutorial software programs for learning Greek and Hebrew
languages frequently studied in conjunction with a Bible-study curriculum
or by
biblical scholars. Each of these two programs, Greek Tutor®
and
Hebrew Tutor®
(retail
price: $49.95 each), covers all of the essential language development skills,
including letters, vocabulary and grammar. Although our prices are subject
to
change from time to time, our language tutorial products range in price from
approximately $10.00 to $69.95 per unit. In the aggregate, and for the fiscal
year ended December 31, 2006, approximately 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 SummitSoft, Divine Comedy Productions and Webroot®.
These
are non-exclusive, purchase-order only type arrangements in connection with
which we carry only limited inventory. Sales from these titles are derived
exclusively online through our Website and, apart from on our Website, we
do not
promote these products. Although prices are subject to change from time to
time,
these software products range in price from approximately $5.97 to $39.99
per
unit. In the aggregate, and for the fiscal year ended December 31, 2006,
less
than 1% of our revenues were derived from sales of these products.
OUR
MARKET
According
to a Gallup poll released in January 2006, 50% of Americans identified
themselves as Protestant, while 25% identified themselves as Catholic, and
13%
identified themselves as “Other Christian”. According to the same survey, 59% of
Americans say that religion is “very” important to them in their own lives, and
another 25% say that religion is “fairly” important in their lives.
Additionally, 41% describe themselves as “born-again” or “evangelical
Christian”.
According
to the most recent survey released in July 2006 by the Christian Bookseller’s
Association (“CBA”), Christian-product sales for the year 2004 were $4.34
billion. The survey also revealed that $2.3 billion of the $4.34 billion
total
was sold through Christian retail, with $1.3 billion sold through general
retail, and $694 million sold direct-to-consumer, and through ministry sales
channels. The 2,055-store CBA segment includes several different chains,
Family
Christian Stores being the largest with over 300 stores. As faith-based
retailing increases, secular stores are offering more faith-based products
as
evidenced by the $1.3 billion sales figure in 2004 as reported by the CBA.
It is
this faith-based demographic that we seek to target.
MARKETING
AND ADVERTISING
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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affiliate
merchants;
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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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SALES
Direct
Marketing / Online Sales
Direct
sales accounted for approximately 53% of our 2006 fiscal year revenue. Over
the
past four 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. Furthermore, we are making
technological advancements to our Website in order to provide more downloadable
products and/or content. We are currently marketing our products online through
multiple sources including our own www.quickverse.com Internet Website, other
Internet Websites such as www.amazon.com, as well as several widely used
search
engines such as Google®
and
Yahoo®.
Furthermore, in October of 2005 we joined an affiliate network through
www.shareasale.com and have gained approximately 100 affiliate merchants
that
market our products through their Websites. Despite these growing initiatives,
online sales through any origination points other than our own
www.quickverse.com Website accounted for less than 1% of our 2006 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 47% of our 2006 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
CBA. These stores vary from small, family-owned Christian bookstores to large
chain bookstores such as LifeWay Christian Stores, Family Christian
Stores®
and
Berean Christian Stores. We face the continuing challenge of reaching these
stores on a consistent basis to keep them informed of new releases, promotional
offers, etc. In addition to advertising in trade publications and maintaining
visibility at CBA trade shows and events, we believe that it is critical
to be
in direct personal contact with each customer routinely, in order to maintain
or
increase our market position. Towards that end, our sales representatives
are
expected to contact each of our customers as well as each of the independent
stores that are not yet our customers regularly and present them with the
latest
in our products and promotions. We believe our personalized approach to
marketing provides us with an edge over our competition, which we believe
rely
predominantly on advertising to maintain and develop their relations with
CBA
customers.
In
the
secular retail market, which includes chains such as Best Buy™,
CompUSA®,
OfficeMax™ and Apple®
Stores,
we believe that we continue to be a top seller of Bible study software and
we
are developing additional promotions to grow our market share.
International
Sales
International
sales accounted for approximately 2% of our 2006 fiscal year revenue. We
currently sell to distributors and retailers in Africa, Australia, Canada,
Faroe
Island, Korea, New Zealand, Philippines, Singapore, and the United Kingdom.
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.
MANUFACTURING
AND FULFILLMENT
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.
SIGNIFICANT
CUSTOMERS AND SUPPLIERS
During
the fiscal year ended December 31, 2006, we had one major customer, Lifeway
Christian Resources, that individually accounted for 10% or more of annual
sales, whereas during the fiscal year ended December 31, 2005, 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 and increase our
focus on direct sales, we anticipate our sales to a single customer, as a
percentage of gross consolidated revenue, will remain below 10%.
Also
for
the fiscal years ended December 31, 2006 and 2005, product and material
purchases from Midlands Packaging Corporation accounted for 20% and 19%,
respectively, IsoDisc accounted for 19% and 24%, respectively, Frogs Copy
and
Graphics accounted for 19% and 23%, respectively, and GP Direct, LLC accounted
for 17% and 5%, 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.
REGULATION
We
are
not currently subject to direct regulation by any government agency, other
than
regulations applicable to businesses generally.
COMPETITION
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:
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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,
CBA, direct and online sales.
Specifically,
and in relation to our QuickVerse®
family
of products, we believe we are the market leader in our category. We currently
compete with the following companies and products, among others, in the PC
category:
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Logos
Research Systems, Inc. - Logos Bible Software®
3
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Biblesoft,
Inc. - PC Study Bible®
Version 5
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Thomas
Nelson, Inc. - Nelson eBible®
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WordSearch
Bible Publishers - WordSearch®
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Zondervan
- Zondervan Bible Study Library®
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Although
each of these companies publishes software packages in several different
variations, generally in a range that includes a standard package, an expanded
package, and a deluxe package (the same way that we do), in each of these
respective categories we believe that we tend to be the least expensive but
the
most comprehensive in terms of the number of Bibles and reference titles
included. We believe QuickVerse’s®
reputation to be among the most well-respected in its category.
In
relation to our QuickVerse®
Mobile
products, we currently compete with the following companies and products,
among
others:
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Laridian
- PocketBible®
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Thomas
Nelson, Inc. - Nelson eBible®
for PDA
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Zondervan
- NIV Bible Study Suite PDA®
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WordSearch
Bible Publishers - Life Application Bible Pocket Library®
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Olive
Tree Bible Publishers - Olive Tree Bible Software®
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We
believe that QuickVerse®
Mobile
is the market leader in CBA retail and a top performer in overall sales in
the
PDA Bible Software market. We believe QuickVerse®
Mobile
offers a high quality product along with a substantial amount of content
at an
affordable price.
Furthermore,
we currently compete with the following companies and comparable products,
among
others, in relation to our QuickVerse®
Macintosh products:
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Zondervan
- Zondervan Bible Study Suite®
for Macintosh®
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Oak
Tree Software, Inc. - Accordance Bible Software®
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QuickVerse®
Macintosh was released in June 2005, and we believe that it is the market
leader
in CBA retail. QuickVerse®
Macintosh was developed from the ground up to be a truly native OS-X
application. As with the other QuickVerse®
family
of products, we believe QuickVerse®
Macintosh tends to be the least expensive product in its category given its
features and extensive collection of Bibles and Bible reference content.
In
relation to our Membership Plus®
products, we currently compete with the following companies and comparable
products, among others:
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ACS
Technologies®
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CCIS
Church Software®
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Church
Data Master Plus®
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Church
Windows/Computer Helper®
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Church
Office®
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Logos
Management Software®
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Power
Church Software®
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Servant
PC®
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Shelby
Systems®
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Shepherd’s
Staff®
(Concordia Publishing House)
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Specialty
Software®
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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. Our Membership
Plus®
packages
are also among the least expensive products in the category.
We
rely
upon our product quality, marketing and sales abilities, proprietary technology
and product development capability, the depth of our retail distribution
channels and management experience to compete in the software industry. Although
we believe that we are among the market leaders in each of our primary product
categories, some of our competitors have longer operating histories, larger
customer bases and greater financial, marketing, service, support, technical
and
other resources than we do. Due to these greater resources, certain of our
competitors have the ability to undertake more extensive marketing campaigns,
adopt more aggressive pricing policies, pay higher fees to licensors and
pay
more to third-party software developers than we can. Moreover, we believe
that
competition from new entrants will increase as the market for faith-based
products and services expands.
INTELLECTUAL
PROPERTY
Overview
We
rely
for our business on a combination of copyrights, trademarks, and trade secrets
to protect our intellectual property. Our copyrighted software content and
the
brand recognition associated with our related product trademarks are among
the
most important assets that we possess in our present ability to generate
revenues and profits, and we rely very significantly on these intellectual
property assets in being able to effectively compete in our market. Our
intellectual property rights derive from a combination of licenses from third
parties, internal development and confidentiality and non-disclosure
agreements.
We
cannot
be certain that the precautions we have taken will provide meaningful protection
from unauthorized use by others. If we must pursue litigation in the future
to
enforce or otherwise protect our intellectual property rights, or to determine
the validity and scope of the proprietary rights of others, we may not prevail
and will likely have to make substantial expenditures and divert valuable
resources in the process. Finally, we may not have adequate remedies if our
proprietary content is appropriated, our proprietary rights are violated
or our
trade secrets are disclosed.
Copyrights
Our
copyrights, some of which have been registered and others of which remain
unregistered, derive from a combination of program and source code embodied
in
software titles that we license from third parties, as well as program and
source code embodied in software titles that we have internally developed
on our
own.
We
entered into a license agreement in June 1999 with Parsons Technology, Inc.
which forms the basis of our copyright protection for products that accounted
for approximately 99% of our revenues in 2006, 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
annual report on Form 10-KSB for the year ended December 31, 2006 as Exhibit
10.3. At the time, it was acquired as part of a combination of related
transactions involving ourselves, Parsons Technology, then a wholly owned
subsidiary of Mattel, Inc.®,
and TLC
Multimedia Inc., then also a wholly owned subsidiary of Mattel, Inc.®
Aside
from the license, the transactions involved an asset sale, a product
distribution agreement, and a related services agreement. Taken as a whole,
and
essentially, we had acquired from TLC Multimedia a software publishing and
sales
division (known and referred to by many then as the “Parsons Church Group”). In
accordance with its terms, we agreed to pay a one-time non-recurring fee
of $5
million to obtain the license, which fee was payable over a subsequent
approximate one year period. The related asset sale involved separate
consideration.
The
license that we acquired in 1999 provided us with the right, originally for
a
term of ten years, to publish, use, distribute, sublicense and sell, exclusively
worldwide in non-secular channels and non-exclusively (with the continuing
right
retained by Riverdeep, Inc., successor to Parsons Technology) on an unrestricted
basis in secular channels, a collection of 65 individual top-selling
Christian-related software titles owned by Parsons Technology, including
QuickVerse®
and
Membership Plus®,
among
others. The license covered a variety of other add-on content titles
(e.g.,
various Bible translations, study guides and sermon preparation tools). The
license also included the right for us to modify the programs (including
the
source code) in order to prepare derivative works and future versions of
the
programs, and stated that we would exclusively own all rights associated
with
any such modifications.
Beginning
in 2000, we became involved in a series of mediations arising out of or
otherwise in connection with the 1999 license. The first of these involved
the
payment terms of the $5 million licensing fee. Rather than making payments
in
accordance with the fee schedule as originally set forth in the agreement,
we
entered into an arrangement with Parsons Technology’s direct sales group whereby
we provided resale products and in turn received an offset credit against
the
balance due under the fee provision in the license. The dispute centered
on the
amount of product actually resold, and, therefore, the amount of offset credit
to which we were entitled. Prior to the resolution of this contest, a second
dispute arose, naming Parsons Technology and ourselves, among others, as
parties
thereto. The first mediation was set aside, and ultimately resolved in
conjunction with the latter proceeding as 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 into this
annual report on Form 10-KSB for the fiscal year ended December 31, 2006
as
Exhibit 10.14.
Since
1999, the developments, including modifications and improvements, that we
have
made to the originally acquired copyrighted programs covered by the license
have
been extensive. We have used both in-house developers and third-party
contractors in these modifications and improvements over which we retain
the
exclusive ownership. Given these developments, which have been made through
seven subsequent versions, eight different editions and three new platforms
of
QuickVerse®,
five
subsequent versions and one new edition of Membership Plus®,
and
various subsequent versions of some of the other titles to which we acquired
rights under the license (including those in each of the print and graphics,
pastoral, children’s, and language tutorial product categories), we believe that
the real value of the copyrights associated with these titles lay almost
exclusively at this point in the improvements that we own rather than the
base
copyrights that we were originally granted and that continue to be owned
by
Riverdeep, Inc. Moreover, it is our belief that the original source code
covered
by the license has been effectively rendered valueless by virtue of these
subsequent modifications and improvements. Although we do not believe that
any
third parties have been granted any rights to date in addition to our own
to
publish or sell these titles into secular channels, and do believe that,
even if
this has occurred or should occur in the future, the barriers to entry created
by the extensive developments that we have made and now own to these otherwise
licensed titles would make it practically infeasible for any third party
to
effectively compete with us in relation to these products in any market,
there
can be no assurance that one or more competitors will not emerge at some
point
or that they will not impact on our sales and revenues.
As
noted
above, our largest-selling title, QuickVerse®,
is one
from which we originally derived our rights under the 1999 license. One of
the
features that make QuickVerse®
such a
popular title is its breadth of content. A very significant percentage of
this
content is licensed by us from various third-party content providers for
inclusion in QuickVerse®.
We are
therefore responsible for paying royalties on a regular basis to these providers
in connection with our sales of QuickVerse®.
In
total, we currently have content licensing agreements with 46 different
publishers for approximately 770 individual Bible translations and other
biblical or related scholarly works which are incorporated in various editions
of our QuickVerse®
products, or in some cases sold as stand-alone or add-on content. These
licensing agreements are typically non-exclusive and for a fixed duration
(e.g.,
a term
of 3 or 5 years). Royalties are generally paid within 30 days following the
end
of a quarter and are calculated as a percentage of net sales from a work
(e.g.,
ranging from 3% to 10% according to the licensing agreements), based upon
factors such as value as a stand-alone product as compared to, for example,
value when bundled with other titles within a collective work. These license
agreements typically cover content in the context of both stand-alone products
and as bundled works. For example, consumers who purchase QuickVerse®
pay the
suggested retail price and are in part paying for the technology within the
program along with the content. QuickVerse®
titles
sold to new consumers or new users are subject to royalties on all content
within each specific QuickVerse®
title.
However, upgrade sales to existing users are only subject to royalties on
new
content additions of the upgraded version.
In
addition to the copyrights associated with the 1999 license described above,
copyright protection exists in relation to the software titles that we resell
published by others. These copyrights, however, are held by the publishers
and/or their respective third-party content providers.
While
approximately 82% of our copyrighted software programs are registered with
the
U.S. Copyright Office, approximately 18% remains unregistered, including
all of
the works included in the enhancements that we have made to titles from which
we
originally derived our rights under the 1999 license. In the U.S., works
afforded the benefit of copyright protection can either be registered with
the
U.S. Copyright Office or remain unregistered, and, although registration
offers
certain advantages to the holder in being able to assert its rights (including
a
rebuttable presumption of ownership and entitlement to statutory damages
and
attorneys fees), the fact remains that an original work in the U.S. becomes
protected by the copyright laws from the moment it is “fixed in a tangible
medium,” which, as it relates to software, has long been interpreted to mean
when it is stored on a hard drive or removable disk.
Trademarks
As
part
of the 1999 license, we acquired the unlimited right to use the registered
trademarks associated with the various titles licensed thereunder exclusively
worldwide in non-secular channels and non-exclusively in secular channels.
Because of the fact that each of QuickVerse®
and
Membership Plus®
had been
on the market for approximately ten years by the time we acquired the license,
and each had a substantial existing user base, the trademarks for these products
alone were deemed at the time to be of great importance and value. We believe
that our initiatives in introducing subsequent versions, editions and platforms
of these titles since then, as well as our having maintained extremely high
publishing standards throughout the period that we have been publishing these
titles, have served to sustain and enhance the importance and value of these
trademarks.
Trade
Secrets
Whenever
we deem it important for purposes of maintaining competitive advantages,
our
policy requires parties with whom we share, or who otherwise are likely to
become privy to, our trade secrets or other confidential information, including
source code, to execute and deliver to us confidentiality and/or non-disclosure
agreements prior to their exposure to any such information. Among others,
this
includes employees, consultants and other advisors, including our in-house
and
outsourced software developers and collaborators, each of whom we require
to
execute such an agreement upon commencement of their employment, consulting
or
advisory relationships. These agreements generally provide that all confidential
information developed or made known to the individual by us during the course
of
the individual’s relationship with us is to be kept confidential and not to be
disclosed to third parties except in specific circumstances. In the case
of
employees and consultants, the agreements provide that all inventions conceived
by the individual in the course of their employment or consulting relationship
shall be our exclusive property.
EMPLOYEES
As
of
April 17, 2007, we had twenty-three full-time employees. Of those twenty-three,
four were part of the senior-level executive and financial management team,
four
were in the product development team, seven were on the sales team, and eight
were in fulfillment, administration, and related support positions. For the
fiscal year ended December 31, 2006, our annual employee costs (including
wages,
related payroll taxes and benefits) totaled approximately $1,703,000, equivalent
to 41% 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.
We
rely
heavily on our current officers and directors in operating the business.
We are
not subject to any collective bargaining agreements and believe that our
relationships with our employees are good.
SEASONALITY
Our
business is highly seasonal. More than 50% of our annual sales are expected
to
occur in the five months of September through January; the five months of
April
through August are generally our weakest, historically accounting for less
than
30% of annual sales.
Our
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 $7,563.76 and, as of
April
17, 2007, there was approximately one month remaining under the lease. We
have
no reason to believe at this time that we will not be able to renew the lease
for this premises for a term appropriate with our business objectives and
on
economic terms that we deem to be reasonably acceptable.
We
maintain additional leased office space in Naperville, Illinois for certain
product development activity. We lease this 880 square foot premises under
a
three year lease agreement with Transwestern Great Lakes, L.P. Our monthly
rent
is $1,356.67 and there are twenty-three months remaining under the
lease.
Two
of
our full-time employees work in home offices located in Cedar Rapids, Iowa.
We
do not pay for any space associated with these operations.
As
of the
date of this annual report on Form 10-KSB for the year fiscal year ended
December 31, 2006, 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.
No
matters were submitted to a vote of our stockholders during the fourth quarter
of the fiscal year ended December 31, 2006.
MARKET
INFORMATION
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 Yahoo.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
|
|||||||
|
2005
|
High
|
Low
|
|||||
|
First
Quarter
|
$
|
0.150
|
$
|
0.070
|
|||
|
Second
Quarter
|
$
|
0.150
|
$
|
0.090
|
|||
|
Third
Quarter
|
$
|
0.140
|
$
|
0.070
|
|||
|
Fourth
Quarter
|
$
|
0.170
|
$
|
0.070
|
|||
|
2006
|
High
|
Low
|
|||||
|
First
Quarter
|
$
|
0.150
|
$
|
0.090
|
|||
|
Second
Quarter
|
$
|
0.150
|
$
|
0.040
|
|||
|
Third
Quarter
|
$
|
0.080
|
$
|
0.030
|
|||
|
Fourth
Quarter
|
$
|
0.060
|
$
|
0.030
|
|||
STOCKHOLDERS
As
of
April 17, 2007, there were approximately 800 holders of record of our common
stock, with any shares held by persons or companies in street or nominee
name
counted only under such street or nominee name.
DIVIDENDS
Since
inception, no dividends have been paid on our common stock and we do not
anticipate paying any dividends in the foreseeable future. Although it is
our
intention to utilize all available funds for the development of our business,
no
restrictions are in place that would limit or restrict our ability to pay
dividends.
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
EQUITY
COMPENSATION PLAN INFORMATION
|
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
(a)
|
Weighted-average
exercise price of outstanding options, warrants and
rights
(b)
|
|
Number
of Securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a)
(c)
|
|
|||||
|
Equity
compensation plans approved by security holders
|
855,000
|
$
|
0.11
|
645,000
|
||||||
|
Equity
compensation plans not approved by security holders
|
3,800,000
|
$
|
0.097
|
---
|
||||||
|
Total
|
4,655,000
|
$
|
0.099
|
645,000
|
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. 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
that may be issued.
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 Stock Incentive 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, which is based on the last available closing price of our common
stock
and are not less than the par value of such shares of common stock. 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 Financial Accounting
Standards Board Interpretation No. 44, are excluded from the income tax
advantages afforded employees by the Internal Revenue Code.
All
issued options, whether under the plan or not, create the obligation for
stock
issuance upon payment of the corresponding exercise price.
RECENT
SALES OF UNREGISTERED SECURITIES
There
were no previously unreported sales of unregistered securities during the
fiscal
years ended December 31, 2005 or 2006.
The
following discussion should be read together with our consolidated financial
statements for the period ended December 31, 2006 and the notes to the
consolidated financial statements.
CRITICAL
ACCOUNTING POLICIES
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 of
reserve for 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, and (iii) the life and realization of identifiable
intangible assets. The amounts we will ultimately incur or recover could
differ
materially from current estimates.
Royalty
Agreements
We
have
entered into certain agreements whereby we are obligated to pay royalties
for
content of software published. We generally pay royalties based on a percentage
of sales on respective products or on a fee per unit sold basis. We expense
software royalties as product costs during the period in which the related
revenues are recorded.
Accounts
Receivable
Accounts
receivable arise in the normal course of business. It is the policy of
management to continuously review the outstanding accounts receivable, as
well
as the bad debt write-offs experienced in the past, and establish an allowance
for doubtful accounts for uncollectible amounts. Individual accounts are
charged
against the allowance when they are deemed uncollectible.
Inventory
Inventory,
including out on consignment, consists primarily of software media, manuals
and
related packaging materials and is recorded at the lower of cost or market
value, determined on a first-in, first-out, and adjusted on a per-item, basis.
Intangible
Assets
In
accordance with SFAS No. 142, Goodwill
and Other Intangible Assets,
intangible assets with an indefinite useful life are not amortized. Intangible
assets with a finite useful life are amortized on the straight-line method
over
the estimated useful lives. All intangible assets are tested for impairment
annually during the fourth quarter.
Software
Development Costs
In
accordance with SFAS No. 86, Accounting
for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed,
software development costs are expensed as incurred until technological
feasibility and marketability has been established, generally with release
of a
beta version for customer testing. Once the point of technological feasibility
and marketability is reached, direct production costs (including labor directly
associated with the development projects), indirect costs (including allocated
fringe benefits, payroll taxes, facilities costs, and management supervision),
and other direct costs (including costs of outside consultants, purchased
software to be included in the software product being developed, travel
expenses, material and supplies, and other direct costs) are capitalized
until
the product is available for general release to customers. We amortize
capitalized costs on a product-by-product basis. Amortization for each period
is
the greater of the amount computed using (i) the straight-line basis over
the
estimated product life (generally from 12 to 18 months), or (ii) the ratio
of
current revenues to total projected product revenues.
Capitalized
software development costs are stated at the lower of amortized costs or
net
realizable value. Recoverability of these capitalized costs is determined
at
each balance sheet date by comparing the forecasted future revenues from
the
related products, based on management’s best estimates using appropriate
assumptions and projections at the time, to the carrying amount of the
capitalized software development costs. If the carrying value is determined
not
to be recoverable from future revenues, an impairment loss is recognized
equal
to the amount by which the carrying amount exceeds the future
revenues.
SFAS
No.
2, Accounting
for Research and Development Costs,
establishes accounting and reporting standards for research and development.
In
accordance with SFAS No. 2, costs we incur to enhance our existing products
after general release to the public (bug fixes) are expensed in the period
they
are incurred and included in research and development costs.
We
capitalize costs related to the development and maintenance of our Website
in
accordance with Financial Accounting Standard Board’s (“FASB’s”) Emerging Issues
Task Force (“EITF”) Issue No. 00-2, Accounting
for Website Development Costs.
Under
EITF Issue No. 00-2, costs expensed as incurred are as follows:
|
▪
|
planning
the Website,
|
|
|
▪
|
developing
the applications and infrastructure until technological feasibility
is
established,
|
|
|
▪
|
developing
graphics such as borders, background and text colors, fonts, frames,
and
buttons, and
|
|
|
▪
|
operating
the site such as training, administration and
maintenance.
|
Capitalized
costs include those incurred to:
|
▪
|
obtain
and register an Internet domain name,
|
|
|
▪
|
develop
or acquire software tools necessary for the development
work,
|
|
|
▪
|
develop
or acquire software necessary for general Website
operations,
|
|
|
▪
|
develop
or acquire code for web applications,
|
|
|
▪
|
develop
or acquire (and customize) database software and software to integrate
applications such as corporate databases and accounting systems
into web
applications,
|
|
|
▪
|
develop
HTML web pages or templates,
|
|
|
▪
|
install
developed applications on the web server,
|
|
|
▪
|
create
initial hypertext links to other Websites or other locations within
the
Website, and
|
|
|
▪
|
test
the Website applications.
|
We
amortize Website development costs on a straight-line basis over the estimated
life of the site, generally 36 months.
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.
Stock-Based
Compensation
In
accordance with SFAS No. 123(R), Share-Based
Payment,
we
measure the cost of employee services received in exchange for an award for
equity instruments based on the grant-date fair value and recognize the cost
over the requisite service period. In addition, any corporate income tax
benefit
realized upon exercise or vesting of an award in excess of that previously
recognized in earnings (referred to as a “windfall tax benefit”) will be
presented in the Consolidated Statements of Cash Flows as a financing (rather
than as operating) cash flow. Realized windfall tax benefits are credited
to
paid-in capital in the Consolidated Balance Sheets. Realized shortfall tax
benefits (amounts which are less than that previously recognized in earnings)
are first offset against the cumulative balance of windfall tax benefits,
if
any, and then charged directly to income tax expense.
Income
Taxes
We
follow
SFAS No. 109, Accounting
for Income Taxes,
which
requires the use of the asset and liability method of accounting for income
taxes. Under this method, deferred income taxes are provided for the temporary
differences between the financial reporting basis and the tax basis of our
assets and liabilities. Deferred tax assets and liabilities are measured
using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
Derivatives
We
account for warrants issued with shares of common stock in a private placement
according to EITF Issue 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled
in, a
Company’s Own Stock.
In
accordance with accounting mandate, the derivative liability associated with
the
warrants has been and shall continue to be adjusted to fair value (calculated
using the Black Scholes method) at each balance sheet date and is accordingly
reassessed at each such time to determine whether the warrants should be
classified (or reclassified, as appropriate) as a liability or as equity.
The
corresponding fair value adjustment is included in the consolidated statements
of operations as other expenses as the value of the warrants increases from
an
increase in our stock price at the balance sheet date and as other income
as the
value of the warrants decreases from a decrease in our stock price.
MANAGEMENT
OVERVIEW
During
the fourth quarter of 2006 we released an upgrade to our top-selling financial
and data management software, Membership Plus®.
Membership Plus®
2007 was
released in time for the holiday season in two editions, Membership
Plus®
2007
Standard and Membership Plus®
2007
Deluxe, with a range in retail price from $199.95 and $399.95.
QuickVerse®
2007
Mobile was also released during the fourth quarter of 2006.
QuickVerse®
2007
Mobile is available in three editions, QuickVerse®
2007
Mobile Standard, QuickVerse®
2007
Mobile Deluxe and QuickVerse®
2007
Mobile Platinum, with a range in retail price from $29.95 to $69.95.
Furthermore, we teamed up with Thomas Nelson Publishers®
and
released for the first time the Vine’s Complete Collection®
for
QuickVerse®
(Windows) users. This extensive reference collection has a retail price of
$59.95.
During
the third quarter of 2006 we released an upgrade to our flagship product,
QuickVerse®,
which
was one month earlier compared to our upgrade release of QuickVerse®
in 2005.
In addition, this marked the second year in a row that we released an upgrade
to
the QuickVerse®
(Windows) product line that would reach the retail stores prior to the holiday
season beginning. QuickVerse®
2007 is
currently available in the following six editions:
|
▪
|
QuickVerse®
2007 Bible Suite,
|
|
|
▪
|
QuickVerse®
2007 Essentials,
|
|
|
▪
|
QuickVerse®
2007 Standard,
|
|
|
▪
|
QuickVerse®
2007 Expanded,
|
|
|
▪
|
QuickVerse®
2007 Deluxe, and
|
|
|
▪
|
QuickVerse®
2007 Platinum.
|
These
QuickVerse®
2007
editions range in retail price from $39.95 to $799.95. The
QuickVerse®
2007 new
features include web dictionary support, integrated PDF files, integrated
RSS
subscriptions and integrated web pages. We believe that the unique features
of
the new QuickVerse®
2007
editions will provide us with an opportunity to broaden our customer base
as our
products appeal not only to those just beginning their journey into Bible
study
but also to the scholars who are searching for an in-depth knowledge of the
Bible.
During
the second quarter of 2006 we released QuickVerse®
2006
Macintosh®
Gold
Edition, with a suggested retail price of $349.95, which offers more content
to
Mac users than ever before. This edition offers 19 Bibles and 144 reference
titles, a retail value of over $4,000 if sold separately. We also released
the
Holman Christian Standard Bible®,
with a
suggested retail price of $29.95, which is sponsored by Broadman & Holman
Publishers. This Bible translation provides English-speaking people across
the
world with an accurate, readable Bible in contemporary English and equips
serious Bible students with an accurate translation for personal study, private
devotions and memorization.
Finally,
during the first quarter of 2006, we released QuickVerse®
2006
Parable Edition, with a suggested retail price of $49.95, and
QuickVerse®
2006
Bible Suite, with a suggested retail price of $29.95. QuickVerse®
2006
Bible Suite appeals to those customers seeking their first Bible study software.
QuickVerse®
2006
Parable Edition is sold exclusively at Parable®
retail
outlets and through Parable®’s
website,
at www.parable.com, and unlike other QuickVerse®
editions, QuickVerse®
2006
Parable contains exclusive Parable®
content
such as Books
That Change Lives
and
Standing
Firm Devotional.
Comparatively,
during the fourth quarter of 2005, we released QuickVerse®
2006
Mobile in four editions. During the third quarter of 2005, we released
QuickVerse®
2006
three months earlier than our upgrade release of QuickVerse®
in 2004.
During the second quarter of 2005, and for
the
first time in our operating history,
we
introduced QuickVerse®
to the
Macintosh Operating System in two editions, QuickVerse®
Macintosh
Black Box (includes
12 Bibles and 56 reference titles),
with a
suggested retail price of $99.95 and QuickVerse®
Macintosh
White Box (includes
9 Bibles and 40 reference titles),
with a
suggested retail price of $49.95. We also released an updated version of
Bible
Illustrator®
3.0
entitled Sermon Builder®
4.0,
with
a suggested retail price of $69.95.
Lastly,
during the first quarter of 2005, we released an upgrade to our top-selling
financial and data management software, Membership Plus®,
with a
suggested retail price of between $149.95 and $349.95, and introduced
QuickVerse®
2005
Essentials, with a suggested retail price of $49.95, and QuickVerse®
2005
Platinum, with a suggested retail price of $799.95.
Despite
our decreased gross revenues during the twelve months ended December 31,
2006,
we were able to decrease our total operating expenses by reducing our sales
and
marketing costs as well as our general and administrative costs. Although
there
can be no assurance, we anticipate that revenues will increase in real terms
during our 2007 fiscal year based upon our development schedule for the fiscal
year and the introduction of new titles that will broaden the content made
available for our QuickVerse®
products.
|
Statement
of Operations for Years Ended December 31
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
%
|
|||
|
Net
revenues
|
$
|
3,742,751
|
$
|
5,337,342
|
$
|
(1,594,591
|
)
|
-30
|
%
|
||||
|
Cost
of sales
|
1,755,400
|
2,126,164
|
(370,764
|
)
|
-17
|
%
|
|||||||
|
Gross
profit
|
$
|
1,987,351
|
$
|
3,211,178
|
$
|
(1,223,827
|
)
|
-38
|
%
|
||||
|
Total
operating expenses
|
(3,039,670
|
)
|
(4,273,209
|
)
|
1,233,539
|
-29
|
%
|
||||||
|
Loss
from operations
|
$
|
(1,052,319
|
)
|
$
|
(1,062,031
|
)
|
$
|
9,712
|
-1
|
%
|
|||
|
Other
income
|
1,065
|
14,855
|
(13,790
|
)
|
-93
|
%
|
|||||||
|
Other
adjustments
|
(49,314
|
)
|
(436,686
|
)
|
387,372
|
-89
|
%
|
||||||
|
Gain
(loss) on fair value adjustment of derivatives
|
1,535,594
|
(33,797
|
)
|
1,569,391
|
-4,644
|
%
|
|||||||
|
Gain
(loss) on disposition of assets
|
3,173
|
(1,869
|
)
|
5,042
|
-270
|
%
|
|||||||
|
Other
expenses
|
(77,097
|
)
|
(11,029
|
)
|
(66,068
|
)
|
599
|
%
|
|||||
|
Income
(loss) before income taxes
|
$
|
361,102
|
$
|
(1,530,557
|
)
|
$
|
1,891,659
|
-124
|
%
|
||||
|
Provision
for income taxes
|
292,598
|
(50,709
|
)
|
343,307
|
-677
|
%
|
|||||||
|
Net
income (loss)
|
$
|
653,700
|
$
|
(1,581,266
|
)
|
$
|
2,234,966
|
-141
|
%
|
For
the
year ended December 31, 2006 we had net income of approximately $654,000
compared to a net loss of approximately $1,581,000 for the year ended December
31, 2005. However, our gross profit decreased approximately $1,224,000 from
a
gross profit of approximately $3,211,000 for the year ended December 31,
2005 to
a gross profit of approximately $1,987,000 for the year ended December 31,
2006
(a reduction of approximately 7%). Although we decreased our total operating
expenses approximately $1,234,000 from approximately $4,273,000 for the year
ended December 31, 2005 to approximately $3,039,000 for the year ended December
31, 2006, our loss from operations only decreased approximately $10,000 from
approximately $1,062,000 for the year ended December 31, 2005 to approximately
$1,052,000. These negative results of operations are primarily attributable
to
the following:
|
▪
|
our
gross revenues decreased approximately $2,163,000 to approximately
$
4,146,000 for the year ended December 31, 2006 from approximately
$6,309,000 for the year ended December 31, 2005. This decrease
is
primarily attributable to the following:
|
||
|
▪
|
an
overall net decrease in unit sales of our QuickVerse®
product line due to a reduction in the perceived value on the part
of
customers of certain upgrades based on the relative frequency
thereof;
|
||
|
▪
|
the
lack of product releases during the year ended December 31, 2006
as
compared to the year ended December 31, 2005, specifically our
annual
release of Membership Plus®;
and
|
||
|
▪
|
the
decreased suggested retail price in those products that were released
during the year ended December 31, 2006 compared to those released
during
the year ended December 31, 2005;
|
||
|
▪
|
our
cost of sales decreased approximately $371,000 for the year ended
December
31, 2006; however, as a percentage of gross revenues our costs
of sales
increased from approximately 34% of gross revenues for the year
ended
December 31, 2005 to 42% of gross revenues for the year ended December
31,
2006 due to the increased percentage of gross revenues related
to
amortization of software development costs, direct costs, and royalties;
|
||
|
▪
|
we
incurred liquidated damage penalties of approximately $49,000 in
connection with our failure to meet certain contractual registration
obligations; and
|
||
|
▪
|
our
interest expense increased approximately $66,000 for the year ended
December 31, 2006 due to a loan agreement that was entered into
in order
to fund our working capital
deficit.
|
||
Our
net
income increased approximately $2,235,000 from a net loss of approximately
$1,581,000 for the year ended December 31, 2005 to a net income of approximately
$654,000 for the year ended December 31, 2006. This increase is mainly
attributed to the non-cash valuation gain of approximately $1,536,000 we
recognized from the fair value adjustment of our derivative liabilities during
the year ended December 31, 2006. Under applicable accounting mandate, a
decrease in our stock price results in a decrease in the fair value of the
derivative liability and a valuation gain to be recognized in our income
statement whereas an increase in our stock price results in an increase in
the
fair value of the derivative liability and a valuation loss to be recognized
in
our income statement.
Offsetting
to some degree the negative results of operations detailed above were two
positive developments during the year ended December 31, 2006. First, a
registration statement on Form SB-2, originally filed by us on November 22,
2004, was declared effective by the SEC on February 1, 2006, thereby halting
any
further accrual of liquidated damages in relation to previously granted
registration rights. Second, we released our annual upgrade of our
QuickVerse®
(Windows) product line in time for the retail stores to receive their orders
prior to the commencement of the holiday season.
Revenues
We
derive
revenues from the sale of packaged software products, product support and
multiple element arrangements that may include any combination of these items.
Revenue is recognized when persuasive evidence of an arrangement exists
(generally a purchase order), we have delivered the product, the fee is fixed
or
determinable and collectibility is probable. For our packaged software products,
we typically recognize revenue from the sale when we ship the product. We
sell
some of our products on consignment to a limited number of resellers. We
recognize revenue for these consignment transactions only when the end-user
sale
has occurred. Service revenue resulting from technical support plans is
recognized over the life of the plan, which is generally one year. Revenue
associated with advance payments from our customers is deferred until we
ship
the product or offer the support service. Revenue for software distributed
electronically via the Internet is recognized when the customer has been
provided with the access codes that allow the customer to take immediate
possession of the software on its hardware and evidence of the arrangement
exists. For revenue arrangements involving multiple products or product and
service packages, we allocate and defer revenue for the undelivered products
or
product and service packages based on their vendor-specific objective evidence
of fair value, which is generally the price charged when that product or
product
and service package is sold separately.
We
reduce
product revenue for estimated returns and price protections that are based
on
historical experience and other factors such as the volume and price mix
of
products in the retail channel, trends in retailer inventory and economic
trends
that might impact customer demand for our products. Estimated returns are
also
based upon a percentage of total retail and direct sales. Direct sales accounted
for approximately 53% of our 2006 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
years ended December 31, 2005 and 2006, respectively.
Trends
that our returns typically follow include (i) the seasonality of sales, and
(ii)
the fact that, generally, relatively higher return rates occur in connection
with recently released title or title versions. 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 in order to move channel
inventory.
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
provided for in the contract between us and the corresponding
distributor/retailer. Under certain circumstances, including for example
the
expiration of a given contract or the discovery that a given product is
defective, distributors and bookstores may be eligible to receive a cash
refund
if returns exceed amounts owed. Returns from sales made directly to consumers
are accepted within 45 days of purchase and involve a cash refund. Product
returns, price protections or price concessions that exceed our reserves
could
materially adversely affect our business and operating results and could
increase the magnitude of quarterly fluctuations in our operating and financial
results.
In
general, price protection programs insure retail customers a refund of a
portion
of their purchase price to the extent the product they have purchased drops
in
price within a given time frame following their purchase. In general, price
protection reduces customers’ anxieties in connection with a purchase decision
associated with a concern that they might obtain a better price if they were
to
wait than if they were to act immediately. Although we have historically
employed price protection programs in connection with many of our product
promotions, and although we released QuickVerse®
2007 in
late August 2006 to the Christian Booksellers Association retail channel,
we did
not implement a price protection program on our QuickVerse®
2006
titles. Furthermore, we do not anticipate implementing a price protection
program in the near future.
Software
products are sold separately, without an obligation of future performance
such
as upgrades, enhancements or additional software products, and are sold with
postcontract 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 Years Ended December 31
|
2006
|
|
|
%
to Sales
|
|
|
2005
|
|
|
%
to Sales
|
|
|
Change
|
|
|
%
|
|||
|
Gross
revenues
|
$
|
4,146,086
|
100
|
%
|
$
|
6,309,017
|
100
|
%
|
$
|
(2,162,931
|
)
|
-34
|
%
|
||||||
|
Add
rebate reserve adjustment
|
1,240
|
0
|
%
|
19,640
|
0
|
%
|
(18,400
|
)
|
-94
|
%
|
|||||||||
|
Less
reserve for sales returns and allowances
|
(404,575
|
)
|
10
|
%
|
(991,315
|
)
|
16
|
%
|
586,740
|
-59
|
%
|
||||||||
|
Net
revenues
|
$
|
3,742,751
|
90
|
%
|
$
|
5,337,342
|
84
|
%
|
$
|
(1,594,591
|
)
|
-30
|
%
|
Gross
revenues decreased approximately $2,163,000 from approximately $6,309,000
for
the year ended December 31, 2005 to approximately $4,146,000 for the year
ended
December 31, 2006. We believe that this decrease was primarily attributable
to
the lack of product releases during the year ended December 31, 2006 as compared
to the year ended December 31, 2005, and most notably the prolonged delay
in our
annual release of Membership Plus®.
During
2005 and 2006, the following products were released throughout the years,
respectively:
First
Quarter 2005
|
▪
|
an
enhanced version of our top financial and data management product,
Membership Plus®,
including Membership Plus®
2005 Standard Edition, with a suggested retail price of $149.95,
and
Membership Plus®
2005 Deluxe Edition, with a suggested retail price of
$349.95;
|
|
|
▪
|
an
enhanced version of QuickVerse®
2005 Essentials, with a suggested retail price of $49.95; and
|
|
|
▪
|
QuickVerse®
2005 Platinum Edition, with a suggested retail price of
$799.95.
|
Second
Quarter 2005
|
▪
|
QuickVerse®
2006 Macintosh, including QuickVerse®
2006 Macintosh Black Box Edition, with a suggested retail price
of $99.95,
and QuickVerse®
2006 Macintosh White Box Edition, with a suggested retail price
of $49.95;
and
|
|
|
▪
|
an
enhanced version of Bible
Illustrator®
3.0
entitled Sermon Builder®
4.0,
with a suggested retail price of
$69.95.
|
Third
Quarter 2005
|
▪
|
an
enhanced version of our flagship product, QuickVerse®,
including QuickVerse®
2006 Starter, with a suggested retail price of $9.95,
QuickVerse®
2006 Parable®
Edition, with a suggested retail price of $49.95, QuickVerse®
2006 Bible Suite, with a suggested retail price of $29.95,
QuickVerse®
2006 Essentials, with a suggested retail price of $49.95,
QuickVerse®
2006 Standard, with a suggested retail price of $99.95,
QuickVerse®
2006 Expanded, with a suggested retail price of $199.95,
QuickVerse®
2006 Deluxe, with a suggested retail price of $299.95 and
QuickVerse®
2006 Platinum, with a suggested retail price of
$799.95.
|
Fourth
Quarter 2005
|
▪
|
an
upgrade to our four editions of QuickVerse®
2006 Mobile, including Standard, with a suggested retail price
of $29.95,
Deluxe, with a suggested retail price of $39.95, Platinum Edition,
with a
suggested retail price of $69.95, and Life Application Study Bible,
with a
suggested retail price of $39.95.
|
First
Quarter 2006
|
▪
|
QuickVerse®
2006 Parable Edition, with a suggested retail price of $49.95;
and
|
|
|
▪
|
QuickVerse®
2006 Bible Suite, with a suggested retail price of
$29.95.
|
Second
Quarter 2006
|
▪
|
QuickVerse®
2006 Macintosh Gold Box Edition, with a suggested retail price
of $349.95;
and
|
|
|
▪
|
Holman
Christian Standard Bible®,
with a suggested retail price of
$29.95.
|
Third
Quarter 2006
|
▪
|
an
enhanced version of our flagship product, QuickVerse®,
including QuickVerse®
2007 Bible Suite, with a suggested retail price of $39.95,
QuickVerse®
2007 Essentials, with a suggested retail price of $59.95,
QuickVerse®
2007 Standard, with a suggested retail price of $129.95,
QuickVerse®
2007 Expanded, with a suggested retail price of $249.95,
QuickVerse®
2007 Deluxe, with a suggested retail price of $349.95 and
QuickVerse®
2007 Platinum, with a suggested retail price of $799.95.
|
Fourth
Quarter 2006
|
▪
|
an
enhanced version of our top-selling financial and data management
software, Membership Plus®,
including Membership Plus®
2007 Standard, with a suggested retail price of $199.95, and Membership
Plus®
2007 Deluxe, with a suggested retail price of $399.95;
|
|
|
▪
|
an
upgrade to our QuickVerse®
Mobile products, including QuickVerse®
2007 Mobile Standard, with a suggested retail price of $29.95,
QuickVerse®
2007 Mobile Deluxe, with a suggested retail price of $39.95, and
QuickVerse®
2007 Mobile Platinum, with a suggested retail price of $69.95;
and
|
|
|
▪
|
the
Vine’s Complete Collection®
for QuickVerse®
(Windows) users, an extensive reference collection from Thomas
Nelson
Publishers®,
with a suggested retail price of
$59.95.
|
Of
note,
and generally, the retail price points for our products released during the
year
ended December 31, 2006 were significantly less than those released during
the
year ended December 31, 2005. Furthermore, due to the unexpected loss of
our
primary developer for Membership Plus®
in May
2005, we experienced an eight month delay in our annual release of Membership
Plus®,
which
typically is released in the month of February. As it turned out, Membership
Plus®
2007 was
released in October 2006. Finally, we believe we have experienced a decrease
in
gross revenues due to the technological advancements and improved product
stability in our QuickVerse®
product
line, as well as the increased frequency of product upgrades thereof, which
in
turn has led to an overall decrease in our percentage of QuickVerse®
upgrade
sales to our existing QuickVerse®
user
base. QuickVerse®
2007
Windows was released in August 2006, eleven months following our 2005
QuickVerse®
upgrade
release and QuickVerse®
2006
Windows was released in September 2005, nine months following our 2004
QuickVerse®
upgrade
release. In the past, we have experienced greater sales within the first
and
second quarter of the fiscal year due to the then recent upgrade releases
of our
two main product lines, QuickVerse®
and
Membership Plus®.
During
each of the years ended December 31, 2005 and 2006, our sales efforts were
focused on directly targeting end-users through telemarketing and Internet
sales. However, as noted above, due to the consistency in our development
schedule and the annual releases of our flagship product, QuickVerse®,
upgrade
sales are not increasing at a rapid rate. However, we anticipate that revenues
will increase in the future as we continue to expand the content available
for
our QuickVerse®
products, develop new products for multiple platforms, and offer our products
at
a range of price points intended to appeal to various market sub-segments.
Sales
returns and allowances decreased approximately $586,000 from approximately
$991,000 for the year ended December 31, 2005 to approximately $405,000 for
the
year ended December 31, 2006. As a percentage of gross revenues, sales returns
and allowances also decreased from approximately 16% for the year ended December
31, 2005 to approximately 10% for the year ended December 31, 2006. While
this
decrease in real terms is mainly attributable to our relative lack of product
releases during the year ended December 31, 2006, we believe the percentage
decline is mainly attributable to the timing of our product releases. Typically,
sales returns and allowances trend upward after a new product is released
as
distributors and retail stores will return old product in exchange for the
new
product release. For the fourth quarter of 2005, we experienced a greater
increase in sales returns and allowances due to QuickVerse®
2006
Windows shipping in September 2005 as compared to QuickVerse®
2005
Windows shipping in December 2004, just nine months earlier. Furthermore,
sales
returns and allowance for the year ended December 31, 2005 reflect the release
of Membership Plus®
2005
(released in the first quarter 2005) as compared to a late release of Membership
Plus®
2007
(released in the fourth quarter 2006). Due to the extended time-line between
the
releases of the Membership Plus®
product
line, we have experienced fewer returns from retail stores as there was a
significant lapse in time in the availability of a new product to exchange
the
old product with. During the year ended December 31, 2005 the following items
contributed to the sales returns and allowances:
|
▪
|
price
protections afforded to retailers who had purchased prior versions
of
Membership Plus®
and
QuickVerse®
within
one year or less of our release of upgraded versions of each of
Membership
Plus®,
in February 2005, and QuickVerse®,
in September 2005. Historically, our product upgrades have extended
over
two to three years and therefore, price protections were not issued;
|
|
|
▪
|
increased
price points associated with products introduced; and
|
|
|
▪
|
higher
actual returns on the Membership Plus®
2005 product line due to some then unresolved maintenance issues
and the
loss of our primary developer of Membership Plus®.
|
Overall,
we expect to release enhanced versions of our biggest-selling products on
an
annual basis generally going forward, and anticipate sales returns and
allowances as a percentage of gross revenues to decrease over time as a result
of increased stability in the functionality of our products, decreasing reliance
on retail sales and increasing reliance on direct sales, which have historically
resulted in fewer returns, and improved planning in the timing of new product
version releases.
Cost
of Sales
|
Cost
of Sales for Years Ended December 31
|
2006
|
|
|
%
to Sales
|
|
|
2005
|
|
|
%
to Sales
|
|
|
Change
|
|
|
%
|
|
||
|
Direct
costs
|
$
|
522,358
|
13
|
%
|
$
|
674,846
|
11
|
%
|
$
|
(152,488
|
)
|
-23
|
%
|
||||||
|
Less
reserve for sales returns and allowances
|
(59,925
|
)
|
-1
|
%
|
(148,245
|
)
|
-2
|
%
|
88,320
|
-60
|
%
|
||||||||
|
Amortization
of software development costs
|
706,445
|
17
|
%
|
806,531
|
13
|
%
|
(100,086
|
)
|
-12
|
%
|
|||||||||
|
Royalties
|
354,464
|
9
|
%
|
471,651
|
7
|
%
|
(117,187
|
)
|
-25
|
%
|
|||||||||
|
Freight-out
|
120,291
|
3
|
%
|
171,904
|
3
|
%
|
(51,613
|
)
|
-30
|
%
|
|||||||||
|
Fulfillment
|
111,767
|
3
|
%
|
149,477
|
2
|
%
|
(37,710
|
)
|
-25
|
%
|
|||||||||
|
Cost
of sales
|
$
|
1,755,400
|
42
|
%
|
$
|
2,126,164
|
34
|
%
|
$
|
(370,764
|
)
|
-17
|
%
|
Cost
of
sales consists primarily of direct costs, amortized software development
costs,
non-capitalized technical support wages, royalties paid to third party providers
of intellectual property and the costs associated with reproducing, packaging,
fulfilling and shipping our products. Exclusive of third-party royalties
paid,
our cost of sales decreased approximately $254,000 from approximately $1,655,000
for the year ended December 31, 2005 to approximately $1,401,000 for the
year
ended December 31, 2006, and increased as a percentage of gross revenues
approximately 8% for the year ended December 31, 2006. The overall percentage
increase is predominantly attributable to increased amortization of software
development costs, which, as a percentage of gross revenues, increased
approximately 4% from 13% for the year ended December 31, 2005 to approximately
17% for the year ended December 31, 2006. The amortization recognized during
the
year ended December 31, 2006 resulted from several new software releases
in 2005
and 2006 including:
|
▪
|
Membership
Plus®
2005
(released February 2005),
|
|
|
▪
|
QuickVerse®
2006 Macintosh (released June 2005),
|
|
|
▪
|
Sermon
Builder®
4.0 (released June 2005),
|
|
|
▪
|
QuickVerse®
2006 Windows (released September 2005),
|
|
|
▪
|
QuickVerse®
2006 Mobile (released October 2005),
|
|
|
▪
|
QuickVerse®
2006 Bible Suite (released March 2006),
|
|
|
▪
|
QuickVerse®
2006 Macintosh Gold Edition (released June 2006),
|
|
|
▪
|
Holman
Christian Standard Bible®
(released April 2006),
|
|
|
▪
|
QuickVerse
2007®
Windows (released August 2006) and
|
|
|
▪
|
Membership
Plus®
2007 (released October 2006).
|
The
shorter timeframes between our product upgrades along with the increased
amount
of product releases during the fiscal year 2005 led to the increased amount
of
amortization as a percentage of gross revenues recognized for the year ended
December 31, 2006.
Comparatively,
during the year ended December 31, 2005, the amortization recognized resulted
from:
|
▪
|
QuickVerse®
2005 Windows (released December 2004),
|
|
|
▪
|
Membership
Plus®
2005 (released February 2005),
|
|
|
▪
|
QuickVerse®
2006 Macintosh (released June 2005),
|
|
|
▪
|
Sermon
Builder®
4.0 (released June 2005),
|
|
|
▪
|
QuickVerse®
2006 Windows (released September 2005),
|
|
|
▪
|
QuickVerse®
2006 Mobile (released October 2005),
|
|
|
▪
|
QuickVerse®
8.0 (released December 2003), and
|
|
|
▪
|
Membership
Plus®
8.0 (released January 2004).
|
The
direct costs and manufacturing overhead percentage are expected to continue
at
these levels as more development projects are implemented in a shortened
timeframe.
Fulfillment
costs decreased approximately $38,000 from approximately $150,000 for the
year
ended December 31, 2005 to approximately $112,000 for the year ended December
31, 2006. This decrease is a direct result of decreased sales volume coupled
with continued improvements in efficiency at our fulfillment
center.
Freight
costs decreased approximately $52,000 from approximately $172,000 for the
year
ended December 31, 2005 to approximately $120,000 for the year ended December
31, 2006. As with fulfillment, this decrease resulted from the overall decrease
we experienced year over year in sales volume.
Royalties
paid to third party providers of intellectual property decreased approximately
$117,000 from approximately $472,000 for the year ended December 31, 2005
to
approximately $355,000 for the year ended December 31, 2006, and increased
approximately 2% as a percentage of gross revenues for the year ended December
31, 2006. The percentage increase reflects the following:
|
▪
|
sales
of QuickVerse®
2005 editions to a liquidator in the first and third quarters of
2006 and
no sales to a liquidator in the first and third quarters of
2005;
|
|
|
▪
|
our
increased sales focus on the QuickVerse®
product line in connection with which our continuing royalty obligations
are relatively high;
|
|
|
▪
|
an
overall increase in retail sales due to the early release of the
QuickVerse®
2007 product line;
|
|
|
▪
|
an
overall decrease in upgrade sales of QuickVerse®
due to the increased frequency of product version upgrades;
and
|
|
|
▪
|
our
decreased sales focus for the period on the Membership Plus®
product line, in connection with which we have no continuing royalty
obligations. We experienced an eight month delay in our annual
upgrade
release of Membership Plus®
2007 and, during the first quarter of 2005, we released an upgrade
to
Membership Plus®
in
February 2005.
|
Our
royalty payments are expected to increase in the future in real terms as
sales
to new users are expected to increase, more development projects are implemented
for new and/or enhanced products, and as we continue to expand the content
available for our QuickVerse®
line of
products. Upgrade sales will remain only subject to royalties on their content
additions.
Software
development costs are expensed as incurred as research and development until
technological feasibility and marketability have been established, at which
time
development costs are capitalized until the software title is available for
general release to customers. Software development is segregated by title
and
technology platform. Once a product has been successfully released, subsequent
revisions and upgrades are deemed to constitute development, and, accordingly,
the costs of the revision and upgrade are capitalized. Capitalized costs
are
amortized on a product-by-product basis using the greater of (i) straight-line
amortization over the estimated life of the product or (ii) the ratio of
current
revenues from the product to the total projected revenue over the life of
the
product. Generally, we consider technological feasibility to have been
established with the release of a “beta” version for testing.
Our
software development costs for the years ended December 31, 2006 and 2005
are
summarized in the table below. These costs, consisting primarily of direct
and
indirect labor and related overhead charges, capitalized during the years
ended
December 31, 2006 and 2005, were approximately $491,000 and approximately
$812,000, respectively. Accumulated amortization of these development costs,
included in cost of sales, totaled approximately $706,000 and approximately
$807,000 for the years ended December 31, 2006 and 2005, respectively. The
overall decrease in the amortization, as well as the overall decrease in
the
capitalized costs, reflects the decreased amount of product releases for
the
year ended December 31, 2006. Furthermore, during the year ended December
31,
2005 we were capitalizing the development costs related to our
QuickVerse®
Macintosh product line which was our first introduction for the Macintosh
platform.
|
Software
Development Costs For Years Ended December 31
|
2006
|
|
|
2005
|
|||
|
Beginning
balance
|
$
|
707,067
|
$
|
701,289
|
|||
|
Capitalized
|
491,073
|
812,309
|
|||||
|
Amortized
(cost of sales)
|
706,445
|
806,531
|
|||||
|
Ending
balance
|
$
|
491,695
|
$
|
707,067
|
|||
|
Research
and development expense (General and administrative)
|
$
|
190,726
|
$
|
216,397
|
We
expect
our cost of sales to increase over time consistent with anticipated increases
in
revenues due to aggressive product development and introduction
schedules.
Sales,
General and Administrative
|
Sales,
General and Administrative Costs for Years Ended December
31
|
2006
|
|
|
%
to Sales
|
|
|
2005
|
|
|
%
to Sales
|
|
|
Change
|
|
|
%
|
|||
|
Selected
expenses:
|
|||||||||||||||||||
|
Commissions
|
$
|
192,812
|
5
|
%
|
$
|
695,914
|
11
|
%
|
$
|
(503,102
|
)
|
-72
|
%
|
||||||
|
Advertising
and direct marketing
|
253,676
|
6
|
%
|
576,754
|
9
|
%
|
(323,079
|
)
|
-56
|
%
|
|||||||||
|
Sales
and marketing wages, reclassified
|
334,295
|
8
|
%
|
342,784
|
5
|
%
|
(8,488
|
)
|
-2
|
%
|
|||||||||
|
Total
sales and marketing
|
$
|
780,783
|
19
|
%
|
$
|
1,615,452
|
26
|
%
|
$
|
(834,669
|
)
|
-52
|
%
|
||||||
|
Research
and development
|
190,726
|
5
|
%
|
216,397
|
3
|
%
|
(25,670
|
)
|
-12
|
%
|
|||||||||
|
Personnel
costs
|
739,822
|
18
|
%
|
816,955
|
13
|
%
|
(77,133
|
)
|
-9
|
%
|
|||||||||
|
Legal
|
91,069
|
2
|
%
|
187,499
|
3
|
%
|
(96,430
|
)
|
-51
|
%
|
|||||||||
|
Accounting
|
66,855
|
2
|
%
|
27,735
|
0
|
%
|
39,120
|
141
|
%
|
||||||||||
|
Rent
|
101,238
|
2
|
%
|
82,172
|
1
|
%
|
19,066
|
23
|
%
|
||||||||||
|
Telecommunications
|
41,554
|
1
|
%
|
53,092
|
1
|
%
|
(11,538
|
)
|
-22
|
%
|
|||||||||
|
Corporate
services
|
54,000
|
1
|
%
|
73,972
|
1
|
%
|
(19,972
|
)
|
-27
|
%
|
|||||||||
|
Investor
services
|
46,875
|
1
|
%
|
---
|
0
|
%
|
46,875
|
0
|
%
|
||||||||||
|
Other
general and administrative costs
|
350,619
|
8
|
%
|
480,404
|
8
|
%
|
(129,785
|
)
|
-27
|
%
|
|||||||||
|
Total
general and administrative
|
$
|
1,682,758
|
41
|
%
|
$
|
1,938,226
|
31
|
%
|
$
|
(255,468
|
)
|
-13
|
%
|
||||||
As
gross
revenues decreased approximately $2,163,000 from our year ended December
31,
2005 to our year ended December 31, 2006, total sales, general and
administrative costs decreased approximately $1,090,000 from approximately
$3,554,000 for the year ended December 31, 2005 to approximately $2,464,000
for
the year ended December 31, 2006. Of the total sales, general and administrative
costs, sales and marketing expenses decreased approximately $834,000 from
approximately $1,615,000 for the year ended December 31, 2005 to approximately
$781,000 for the year ended December 31, 2006. Included in sales expenses,
third-party telemarketing commissions decreased approximately $503,000 from
approximately $696,000 for the year ended December 31, 2005 to approximately
$193,000 for the year ended December 31, 2006, and decreased as a percentage
of
gross revenues from approximately 11% to approximately 5% for the years ended
December 31, 2005 and 2006, respectively. This decrease is mainly attributed
to
the lack of product releases during the year ended December 31, 2006, as
well as
the use of our own recently developed in-house direct telemarketing sales
team,
an initiative specifically aimed at reducing our reliance on third-party
telemarketing services.
Advertising
and direct marketing costs decreased approximately $323,000 from approximately
$577,000 for the year ended December 31, 2005 to approximately $254,000 for
the
year ended December 31, 2006 and decreased as a percentage of gross revenues
from approximately 9% to approximately 6% for the years ended December 31,
2005
and 2006, respectively. The decrease in advertising and direct marketing
costs
reflect the fact that there was no upgrade release to the Membership
Plus®
product
line during the first nine months of the year ended December 31, 2006 as
compared to the Membership Plus®
2005
release in the early part of the year ended December 31, 2005. In addition,
there was as an overall decrease in the number of product releases during
the
year ended December 31, 2006 compared to that of the year ended December
31,
2005. We anticipate advertising and direct marketing costs to increase in
future
periods as we continue to enhance our product visibility online, increase
and
focus more on our direct marketing efforts, and increase the scope and frequency
of our print advertising campaigns in order to maximize sales associated
with
new products and product enhancements.
Wages
associated with our sales team and marketing team have been reclassified
and are
included in the total sales and marketing costs. The reclassified sales and
marketing wages decreased approximately $9,000 from approximately $343,000
for
the year ended December 31, 2005 to approximately $334,000 for the year ended
December 31, 2006. This decrease is attributed to the streamlining of our
CBA
sales team. We expect the sales and marketing wages to increase in future
periods as we expand our in-house direct telemarketing sales team as well
as our
other marketing and related personnel.
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 $216,000 for
the
year ended December 31, 2005 compared to approximately $191,000 for the year
ended December 31, 2006. The decrease in 2006 reflects fewer development
projects in our pipeline as compared to 2005. Research and development expenses
are expected to increase in future periods as we continue to expand our internal
development team, add new products and product versions, and as we continue
to
expand the amount of content made available to our QuickVerse®
users.
The
capitalization of direct and indirect labor and related overhead charges
as
software development costs (see “Cost of Sales” above) decreased by
approximately $113,000 from approximately $396,000 for the year ended December
31, 2005 to approximately $283,000 for the year ended December 31, 2006.
This
decrease reflects the development of our QuickVerse®
Macintosh product line during the year ended December 31, 2005, which was
our
first product line for the Macintosh platform. Furthermore, the decrease
is
reflective of the decreased amount of development projects for the year ended
December 31, 2006 as well as the reduction in our development staff. It is
anticipated that personnel costs will continue to increase in future periods
as
operating capital is available and deployed to further fund the staffing
requirements of our product development, direct sales teams and marketing
staff.
Total
net
personnel costs decreased approximately $77,000, from approximately $817,000
for
the year ended December 31, 2005, to approximately $740,000 for the year
ended
December 31, 2006. In addition, gross direct salaries and wages, before
adjustment of capitalized wages and reclassifications (see prior paragraph),
decreased approximately $129,000, from approximately $1,603,000 to approximately
$1,474,000, over the same period. The decrease in direct salaries and wages
was
a result of losing our main developer for our Membership Plus®
product
line as well as the loss of our marketing manager. Due to a cost cutting
initiative, we also lost our Vice President of Sales and Marketing and an
individual on our product development staff. However, we do anticipate direct
salaries and wages to in the future given our continued focus on expanding
our
direct telemarketing sales team, marketing staff and product development
staff.
As a percentage of gross revenues, direct salaries and wages increased
approximately 11% from approximately 25% for the year ended December 31,
2005 to
approximately 36% for the year ended December 31, 2006.
Gross
direct salaries and wages includes approximately $-0- and $20,000 in expense
for
upper management year-end bonus accrual for the years ending December 31,
2005
and 2006, respectively. Furthermore, we recognized approximately $18,000
of
expense, included in direct salaries and wages, in connection with the grant
of
850,000 stock options to non-executive employees for the year ended December
31,
2006.
As
a
result of having restructured our health benefits plans in October 2005,
our
employment-related healthcare costs have decreased approximately $32,000
from
approximately $140,000 for the year ended December 31, 2005 to approximately
$108,000 for the year ended December 31, 2006. In July 2005, we initiated
a
Simple IRA retirement plan for our employees and for those who participated
we
decided to match up to 3% of the employee’s annual gross pay. Therefore, we
anticipate that our costs related to this benefit will increase in future
periods as more employees take advantage of the retirement plan.
Direct
legal costs decreased approximately $96,000 for the year ended December 31,
2006
as a result of our having concluded certain ongoing registration and related
securities matters early in the year. It is anticipated that legal costs
will
increase and decrease in future periods in direct relation to the level of
our
capital-raising initiatives, acquisition and/or divestiture-related initiatives,
and other transactional activity. .
Accounting
and audit related expenses increased approximately $39,000 for the year ended
December 31, 2006 as a result of engaging a new principal accounting firm
for
our fiscal year end 2005 audit. It is anticipated that accounting costs will
continue to increase in the future as we expect that our fees payable to
the new
principal accounting firm, which we expect to utilize on an ongoing basis,
will
generally be higher than those payable to our former accounting
firm.
Rent
costs increased approximately $19,000 for the year ended December 31, 2006
as a
result of periodic percentage increase provisions in our lease agreements.
It is
anticipated that rent cost will continue to increase in the future as our
lease
agreement for our office/warehouse facilities in Omaha, Nebraska extends
through
May 2007, and therefore, we will need to review our options and enter into
a new
lease agreement which will most likely require a higher dollar value per
square
foot. We are also exploring the possibility of leasing a warehouse facility
in
Omaha, Nebraska that would enable us to cease our dependency on a third-party
to
fulfill our retail product sales. Furthermore, our lease agreement for our
office space in Naperville, Illinois extends through March 2009.
Telecommunications-related
costs decreased approximately $12,000 for the year ended December 31, 2006
as a
result of our having switched our local and long-distance carriers beginning
in
February 2005. Our call volume enabled us to change our service to dedicated
T-1
lines which in turn reduced our long-distance charges. We also invested in
internet protocol phones for our remote locations which reduced the overall
local and long distance charges in our Illinois and Iowa locations. Furthermore,
we experienced a decrease in call volume in the technical support and customer
service departments for the year ended December 31, 2006 due to the delayed
Membership Plus®
upgrade
release. We anticipate an increase in call volume during the first quarter
of
2007 as a result of our October 2006 release of Membership Plus®
2007. In
general, we anticipate our telecommunications-related costs to increase in
the
future consistent with overall revenue growth.
Corporate
service fees decreased approximately $20,000 for the year ended December
31,
2006 resulting from the expiration of an independent consulting agreement
and
the resultant ability on our part to cease carrying the associated expense
for a
2004 issuance to such consultant of a warrant to purchase 600,000 shares
of
common stock which had been allocated over the term of the agreement. During
the
first part of 2006, we engaged the services of an independent consultant
for
purposes of business development. We do expect these fees to increase in
future
periods as we have engaged the services of another independent consultant
beginning in March 2007 for purposes of business development.
Finally,
investor services fees increased approximately $47,000 for the year ended
December 31, 2006 as we entered into an investor relations service agreement
in
April 2006. These fees are related to the hiring of an investor relations
firm
and the expense for the issuance of a total of 250,000 restricted shares
of
common stock allocated over the term of the investor relations contract.
We
anticipate these fees to increase in future periods.
Registration
Rights Penalties
As
of
December 31, 2006, and in connection with a July 19, 2004 private placement
with
Barron Partners, LP and a certain Registration Rights Agreement, as amended,
we
had accrued a total of approximately $490,000 (284 days at $1,726 per day)
in
penalties under the terms of the Registration Rights Agreement, of which
we paid
$150,000 prior to April 7, 2006. On April 7, 2006, we signed a two-year
promissory note for $336,000 together with simple interest at the rate of
8% per
annum with Barron Partners for the unpaid registration rights penalties.
The
note agreement calls for monthly installments for the first twelve months
of
$10,000, beginning May 1, 2006 and $20,000 per month thereafter. In the
aggregate, the accrual of, and the payments made in connection with, the
registration rights penalties have had a material adverse effect on our
business, our financial condition, including liquidity and profitability,
and
our results of operations, including a decrease in our net income of
approximately $49,000 for the year ended December 31, 2006.
Derivatives
In
May
2004, we issued a three-year warrant to purchase up to 600,000 shares of
our
common stock to a consultant. This warrant may be exercised on a cashless
basis
at the option of the holder at a price per share of $0.15. In November 2004,
we
issued two five-year warrants to purchase an aggregate of 21,875,000 shares
of
our common stock in connection with a certain Stock Purchase Agreement completed
with Barron Partners, LP, on July 19, 2004. The first warrant entitles the
holder to purchase up to 10,937,500 shares of our common stock at a price
of
$0.18 per share, and the second warrant entitles the holder to purchase up
to
10,937,500 additional shares of our common stock at a price of $0.60 per
share.
Each warrant is subject to standard adjustment provisions and each provides
for
settlement in registered shares of our common stock and may, at the option
of
the holder, be settled in a cashless, net-share settlement.
These
warrants have been accounted for as a liability according to the guidance
of
EITF 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled
in, a
Company’s Own Stock.
In
accordance with the accounting mandate, the derivative liability associated
with
these warrants has been, and shall continue to be, until each is either fully
exercised or expires, adjusted to fair value at each balance sheet date and
is
accordingly reassessed at each such time to determine whether the warrants
should be classified (or reclassified, as appropriate) as a liability or
as
equity. Under EITF 00-19, a decrease in our stock price results in a decrease
in
the fair value of the derivative liability and a valuation gain to be recognized
in our income statement whereas an increase in our stock price results in
an
increase in the fair value of the derivative liability and a valuation loss
to
be recognized in our income statement. At December 31, 2006 and 2005, the fair
value of the derivative liability was approximately $527,000 and $2,062,000,
respectively, and a fair value adjustment of approximately $1,536,000 has
been
included in other income for the year ended December 31, 2006 and a fair
value
adjustment of $34,000 has been included in other expenses for the year ended
December 31, 2005. If our stock price rebounds in the future to a level
consistent with our stock price at December 2005, the fair value of the
derivative liability will increase and therefore, we could potentially reflect
a
valuation loss.
Amortization
Amortization
expenses remained steady at approximately $532,000 for the years ended December
31, 2006 and 2005. The software license acquired from TLC in July of 1999
(the
“1999 license”) is amortized over a 10 year useful life and will have been fully
amortized by the close of the year ending December 31, 2009. Amortization
expense for 2006 and 2005 reflect the continual amortization of the software
license as well as the amortization of our website, www.quickverse.com, which
we
launched during the second quarter of 2004.
Income
Tax Benefits
Our
effective tax rate differs from the statutory federal rate due to differences
between income and expense recognition prescribed by the Internal Revenue
Code
and Generally Accepted Accounting Principles. We utilize different methods
and
useful lives for depreciating property and equipment. Changes in estimates
(reserves) are recognized as expense for financial reporting but are not
deductible for income tax purposes.
We
have
recognized a net deferred tax asset whose realization depends on generating
future taxable income. At December 31, 2006, management adjusted the amount
of
valuation allowance based on the assessment that we 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 federal income tax purposes, of approximately
$9,052,000. These carryforwards are the result of income tax losses generated
in
2000 ($2,086,000 expiring in 2020), 2001 ($5,191,000 expiring in 2021), 2002
($235,000 expiring in 2022), 2005 ($956,000 expiring in 2025), and 2006
($584,000 expiring in 2026). We will need to achieve a minimum annual taxable
income, before deduction of operating loss carryforwards, of approximately
$486,000 to fully utilize the current loss carryforwards. Although there
can be
no assurance, we expect the deductible temporary differences (reserves) to
reverse sometime beyond the next fiscal year.
LIQUIDITY
AND CAPITAL RESOURCES
Our
primary needs for liquidity and capital resources are the funding of our
continued operations, which includes the ongoing internal development of
new
products, expansion and upgrade of existing products, and marketing and sales.
Although there can be no assurance, we believe cash generated through our
continuing operations will be at least minimally sufficient to sustain our
operations, albeit with very limited growth. However, our pursuit of an
aggressive growth plan, whether based on internally developed products or
strategic product line acquisitions and/or licensing opportunities will likely
require funding from outside sources. Funding from outside sources may include
but is not limited to the exercise of outstanding warrants and pursuit of
other
financing options such as commercial loans, common stock and/or preferred
stock
issuances and convertible notes. At this time, we have no legally committed
funds for future capital expenditures including software development.
|
Working
Capital at December 31
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
%
|
|||
|
Current
assets
|
$
|
725,178
|
$
|
867,750
|
$
|
(142,572
|
)
|
-16
|
%
|
||||
|
Current
liabilities
|
$
|
2,431,002
|
$
|
3,893,447
|
$
|
(1,462,445
|
)
|
-38
|
%
|
||||
|
Retained
deficit
|
$
|
7,098,397
|
$
|
7,752,097
|
$
|
(653,700
|
)
|
-8
|
%
|
As
of
December 31, 2006, we had $725,178 in current assets, $2,431,002 in current
liabilities and a retained deficit of $7,098,397. We had income before income
taxes of $361,102 and a net income after income taxes of $653,700 for the
year
ended December 31, 2006. For 2006, we had a gain of approximately $1,536,000
from the fair value adjustment of derivatives and a non-recurring expense
totaling approximately $49,000 related to registration rights penalties.
See
“Results Of Operations” above. By contrast, as of December 31, 2005 we had
$867,750 in current assets, $3,893,447 in current liabilities and a retained
deficit of $7,752,097. Non-recurring expenses for 2005 included registration
rights penalties totaling approximately $437,000 and a loss of approximately
$34,000 form the fair value adjustment of derivatives.
|
Cash
Flows for Years Ended December 31
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
%
|
|
||
|
Cash
flows provided by operating activities
|
$
|
538,050
|
$
|
612,345
|
$
|
(74,295
|
)
|
-12
|
%
|
||||
|
Cash
flows (used) by investing activities
|
$
|
(516,987
|
)
|
$
|
(801,422
|
)
|
$
|
284,435
|
-35
|
%
|
|||
|
Cash
flows (used) by financing activities
|
$
|
(91,951
|
)
|
$
|
(32,722
|
)
|
$
|
(59,229
|
)
|
181
|
%
|
Net
cash
provided by operating activities was approximately $538,000 for the year
ended
December 31, 2006, and approximately $612,000 for the year ended December
31,
2005. The decrease was primarily due to a decrease in the amounts received
from
customers resulting from decreased sales, a temporary decrease in payments
to
trade vendors and content provides and an increase in interest paid that
was
related to a loan agreement. See “Financing” below.
Net
cash
used in investing activities was approximately $517,000 for the year ended
December 31, 2006 and approximately $801,000 for the year ended December
31,
2005. The decrease was mainly the result of capitalizing fewer costs associated
with software development. Further, during the year ended December 31, 2005,
the
restriction on the cash held in reserve by our merchant banker was lifted,
thereby freeing up additional cash not previously accessible by us.
Net
cash
used by financing activities was approximately $92,000 for the year ended
December 31, 2006, and approximately $33,000 for the year ended December
31,
2005. The increase was due to an increase in payments made on long-term notes
payable. Furthermore, net cash used for 2006 reflects proceeds received from
a
convertible note payable of $150,000 as well as the repayment of the convertible
note payable of $150,000. See “Financing” below.
Financing
As
part
of the July 19, 2004 financing transaction with Barron Partners, LP, we entered
into a certain Registration Rights Agreement pursuant to which we became
committed to registering all of the shares issued as part of such transaction,
including those issuable under each of two warrants. On November 22, 2004
we
filed a registration statement on Form SB-2 covering the shares issued to
Barron
Partners, as well as the shares underlying the warrants issued to Barron
Partners. On February 1, 2006, the SEC declared such registration statement
effective. Due to 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),
and
in accordance with the Registration Rights Agreement, we accrued a total
of
approximately $490,000 (284 days at $1,726 per day) in penalties, of which
we
had paid $150,000 prior to April 7, 2006. On April 7, 2006, we signed a two-year
promissory note for $336,000 together with simple interest at the rate of
8% per
annum with Barron Partners for the unpaid registration rights penalties.
The
note agreement calls for monthly installments for the first twelve months
of
$10,000, beginning May 1, 2006 and $20,000 per month thereafter. The accrual
and
payment on the registration rights penalties has had a material adverse effect
on our business, our financial condition, including liquidity and profitability,
and our results of operations, including a corresponding $49,000 decrease
in our
net income for the year ended December 31, 2006.
On
July
20, 2006, we entered into a loan agreement with an individual for the principal
sum of $150,000, to fund an existing working capital deficit. The loan was
evidenced by a convertible secured promissory note bearing interest at a
rate of
10% per thirty-day period with the principal, together with all accrued
interest, due on or before September 18, 2006. In further consideration of
the
loan, we issued the lender a three-year common stock purchase warrant to
acquire
up to an aggregate of 100,000 shares of our common stock at an exercise price
of
$0.07 per share. On September 19, 2006, we entered into a Modification and
Extension Agreement in connection with this note. As of the original maturity
date and in accordance with the original terms of the loan agreement, we
repaid
fifty percent of the original principal ($75,000). This Modification and
Extension Agreement extended the repayment term of the balance of the
outstanding principal under the loan agreement ($75,000), as well as the
interest payable thereon and on the principal previously repaid, until October
20, 2006. In consideration for the extension of the maturity date, we agreed
to
pay an amount equal to one percentage point on the principal that remains
outstanding ($750). On October 19, 2006, in connection with the above-mentioned
loan, we repaid in full the remaining principal ($75,000), the interest payable
on the original principal amount of $150,000 ($35,416.67) and the consideration
payable for the extension of the maturity date ($750).
We
have
been unsuccessful in previous attempts to secure bank financing due to our
internal financial ratios and negative working capital position and do not
expect that we will be successful in securing any such financing unless and
until our ratios in this regard improve. Although we have, in the past, secured
financing on our open accounts receivable, we were unable to pursue that
option
because of a lien placed upon our accounts receivable, together with all
of our
other assets, in connection with the security interest granted to the lender
for
the July 20, 2006 loan. As of October 19, 2006, however, this loan was retired
in full and financings secured against our open accounts receivable may once
again, therefore, be a possible option for us in satisfying our future financing
needs.
Contractual
Liabilities
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 2009. We are responsible for all insurance
expenses associated with this lease.
At
December 31, 2006, the future minimum rental payments required under these
leases are as follows:
|
2007
|
$
|
43,458
|
||
|
2008
|
16,280
|
|||
|
2009
|
4,070
|
|||
|
Total
future minimum rental payments
|
$
|
63,808
|
We
lease
telephone equipment under a capital lease due to expire in November 2009.
The
asset and liability under the capital lease are recorded at the present value
of
the minimum lease payments. The asset is depreciated over a 5 year life.
Minimum
future lease payments under capital leases as of December 31, 2006 for each
of
the next five years and in the aggregate are:
|
2007
|
$
|
13,726
|
||
|
2008
|
13,726
|
|||
|
2009
|
12,582
|
|||
|
2010
|
---
|
|||
|
2011
|
---
|
|||
|
Total
minimum lease payments
|
40,034
|
|||
|
Less:
Amount representing interest
|
6,248
|
|||
|
Total
obligations under capital lease
|
33,786
|
|||
|
Less:
Current installments of obligations under capital lease
|
10,318
|
|||
|
Long-term
obligation under capital lease
|
$
|
23,468
|
The
Potential Impact of Known Facts, Commitments, Events and Uncertainties on
Future
Operating Results or Future Liquidity Requirements
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. Effective
January 1, 2006, we adopted SFAS No. 123(R). We do not believe the adoption
of
SFAS No. 123 (R) to have a material impact on our business, our financial
condition, including liquidity and profitability, or our results of
operations.
In
February 2006, the FASB issued Statement No. 155, Accounting
for Certain Hybrid Financial Instruments - an amendment of FASB Statements
No.
133 and 140.
The
Statement permits fair value remeasurement for any hybrid financial instrument
that contains an embedded derivative that otherwise would require bifurcation.
The new Statement also requires companies to identify interests in securitized
financial assets that are freestanding derivatives or contain embedded
derivatives that would have to be accounted for separately. This new Statement
is effective for fiscal years beginning after September 15, 2006 with early
adoption permitted. We do not believe the adoption of SFAS No. 155 to have
a
material impact on our business, our financial condition, including liquidity
and profitability, or our results of operations.
In
March
2006, the FASB issued Statement No. 156, Accounting
for Servicing of Financial Assets, an amendment of Statement No.
14.
SFAS
No. 156 requires all separately recognized servicing assets and servicing
liabilities to be initially measured at fair value, if practicable, and permits
an entity to subsequently measure those servicing assets and servicing
liabilities at fair value. SFAS No. 156 is effective for fiscal years beginning
after September 15, 2006. We do not believe the adoption of SFAS No. 156
to have
a material impact on our business, our financial condition, including liquidity
and profitability, or our results of operations.
In
April
2006, the FASB issued Staff Position FIN 46(R)-6, Determining
Variability to be Considered in Applying FIN 46(R).
FIN
46(R)-6 states that the variability to be considered in applying FIN 46(R)
shall
be based on an analysis of the design of the entity following a two-step
process. The first step is to analyze the nature of the risks in the entity.
The
second step would be to determine the purpose(s) for which the entity was
created and determine the variability (created by the risks identified in
Step
1) the entity is designed to create and pass along to its interest holders.
The
guidance in this FASB Staff Position is effective prospectively beginning
July
1, 2006, although companies have until December 31, 2006 to elect retrospective
applications. We do not believe the adoption of FIN 46(R)-6 to have a material
impact on our business, our financial condition, including liquidity and
profitability, or our results of operations.
In
July
2006, the FASB released FIN 48, Accounting
for Uncertainty in Income Taxes - an interpretation of SFAS No.
109.
This
interpretation clarifies the accounting for uncertainty in income taxes
recognized in accordance with SFAS No. 109. This interpretation prescribes
a
recognition threshold and measurement attribute for financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. It also provides guidance on derecognition, classification, interest
and penalties, interim periods and disclosure. FIN 48 is effective for fiscal
years beginning after December 15, 2006. We have adopted FIN 48 as of January
1,
2007, and we do not believe the adoption to have a material impact on our
business, our financial condition, including liquidity and profitability,
or our
results of operations.
In
September 2006, the FASB issued Statement No. 157, Fair
Value Measurements, which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. This Statement applies under other accounting pronouncements
that require or permit fair value measurements, but does not require any
new
fair value measurements. SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. We are currently
assessing the potential impact that adoption of SFAS No. 157 will have on
our
financial statements.
In
September 2006, the FASB issued Statement No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans—an
amendment of FASB Statements No. 87, 88, 106, and 132(R). This
Statement requires an employer to recognize the overfunded or underfunded
status
of a defined benefit postretirement plan (other than a multiemployer plan)
as an
asset or liability in its statement of financial position and to recognize
changes in that funded status in the year in which the changes occur through
comprehensive income of a business entity or changes in unrestricted net
assets
of a not-for-profit organization. This Statement also requires an employer
to
measure the funded status of a plan as of the date of its year-end statement
of
financial position, with limited exceptions. SFAS 158 is effective for financial
statements issued for fiscal years ending after December 15, 2006. We do
not
believe the adoption of SFAS No. 158 to have a material impact on our business,
our financial condition, including liquidity and profitability, or our results
of operations.
In
February 2007, the FASB issued SFAS Statement No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities.
This
Statement provides companies with an option to report selected financial
assets
and liabilities at fair value. The standard’s objective is to reduce both
complexity in accounting for financial instruments and the volatility in
earnings caused by measuring related assets and liabilities differently.
The
standard requires companies to provide additional information that will help
investors and other users of financial statements to more easily understand
the
effect of the company’s choice to use fair value on its earnings. It also
requires companies to display the fair value of those assets and liabilities
for
which the company has chosen to use fair value on the face of the balance
sheet.
The new standard does not eliminate disclosure requirements included in other
accounting standards, including requirements for disclosures about fair value
measurements included in SFAS No. 157 and SFAS No. 107, Disclosures
about Fair Value of Financial Instruments.
SFAS
No. 159 is effective as of the start of fiscal years beginning after November
15, 2007. Early adoption is permitted. We are currently assessing the potential
impact that adoption of SFAS No. 159 will have on our financial
statements.
RISK
FACTORS
Several
of the matters discussed in this annual report on Form 10-KSB for the fiscal
year ended December 31, 2006 contain forward-looking statements that involve
risks and uncertainties. Factors associated with the forward-looking statements
that could cause actual results to differ from those projected or forecast
are
included in the statements below. In addition to other information contained
in
this annual report, readers should carefully consider the following cautionary
statements and risk factors.
GENERAL
BUSINESS RISKS
Our
liquidity and capital resources are very limited.
Our
ability to fund working capital and anticipated capital expenditures will
depend
on our future performance, which is subject to general economic conditions,
our
customers, actions of our competitors and other factors that are beyond our
control. Our ability to fund operating activities is also dependent upon
(i) the
extent and availability of bank and other credit facilities, (ii) our ability
to
access external sources of financing, and (iii) our ability to effectively
manage our expenses in relation to revenues. Although we believe that our
existing working capital, together with cash flow from operations, will be
adequate to meet our minimum anticipated liquidity requirements over the
next
twelve months, given our initiative toward rapid revenue growth and due to
our
need to service certain long-term liabilities, it is likely to become necessary
for us to raise additional capital to support growth and/or otherwise finance
potential acquisitions. Furthermore, there can be no assurance that our
operations or access to external sources of financing will continue to provide
resources sufficient to satisfy our liabilities arising in the ordinary course
of business, and while it may be possible to borrow funds as required, any
such
additional capital is likely to require that we sell and issue additional
equity
and/or convertible securities, including shares issuable upon exercise of
currently outstanding warrants, any of which issuances would have a dilutive
effect on holdings of existing shareholders. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources”.
There
is uncertainty as to our ability to continue as a going concern.
Our
audited financial statements for the period ending December 31, 2006, including
the footnotes thereto, call into question our ability to continue as a going
concern. This conclusion was drawn from the fact that, as of the date of
those
financial statements, we had a negative current ratio and total liabilities
in
excess of total assets. Those factors, as well as ambiguities associated
with
our ability to secure additional financing for continued operations, if
necessary, created, at the time, an uncertainty regarding our ability to
continue as a going concern, and, furthermore, there can be no assurance
that we
have mitigated against this risk, and that our financial statements, going
forward, will not also call into question our ability to continue as a going
concern. See Note 19 in the Notes to the Consolidated Financial Statements
for
the year ended December 31, 2006.
Our
accumulated deficit makes it harder for us to borrow
funds.
As
of
December 31, 2006, and as a result of historical losses in prior years, our
accumulated deficit was $7,098,397. 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:
|
▪
|
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,
CBA, 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
“Description of Business - Competition”.
We
depend on only two titles for the overwhelming majority of our
revenue.
In
fiscal
year 2006, approximately 92% of our total revenue was derived from two software
titles; QuickVerse®,
comprising approximately 65% of total revenue, and Membership Plus®,
comprising approximately 27% of total revenue. We expect that these two products
will continue to produce a disproportionately large amount of our revenue
for
the foreseeable future. Due to this dependence on a limited number of titles,
the failure of one or more titles or title versions to achieve anticipated
results would likely have a material adverse effect on our business, our
financial condition, including liquidity and profitability, and our results
of
operations. See “Description of 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 among 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 Macintosh®
OS X and
Windows®
Mobile)
has resulted in longer development cycles, higher development expenditures
and
the need to more carefully monitor and plan development processes associated
with these products.
We
cannot
be certain that we will be able to meet planned release dates for some or
all of
our new titles or title versions. In the past, we have experienced significant
delays in our introduction of some new titles and title versions. For instance,
delays in duplication, packaging and distribution caused our
QuickVerse®
2005 to
begin shipping in early-December 2004, long after the holiday season had
been
underway. As a result, we experienced fewer sales than we might otherwise
have
had the product been available before the holiday selling season began, which
we
believe had a material adverse effect on our results of operations for the
2004
fourth quarter. Furthermore, we experienced a delay in our annual release
of
Membership Plus®
2007,
which had been scheduled to commence shipping in February 2006 but which,
due to
delays associated with the loss of one of our key developers, commenced shipping
in October 2006. It is likely in the future that delays will continue to
occur
and that some new titles or title versions will not be released in accordance
with our internal development schedule, having a negative impact on our
business, our financial condition, including liquidity and profitability,
and
our results of operations in that period. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations -
Revenues”.
We
have experienced, and may continue to experience, reduced revenues and
fluctuations in our quarterly operating results due to the limited life cycle
of
our products.
The
average life cycle of a new title ranges anywhere from a few years to
indefinitely, and the average life cycle of a new title version ranges anywhere
from twelve to upwards of eighteen months, making our revenue and operating
results difficult to predict and susceptible to substantial fluctuations
from
quarter to quarter. While there can be no assurance, we expect, based on
historical experience, that a majority of sales for a new title or title
version
will occur within the first thirty to one hundred twenty days following its
release, and that net revenue associated with the initial introduction will
generally account for a disproportionately large percentage of total net
revenue
over the life of the title or title version. For example, our
QuickVerse®
2006
began shipping in September 2005, nine months following the release of
QuickVerse®
2005 and
three months following the release of QuickVerse®
2005
Platinum, resulting, we believe, in a product market overlap that ultimately
led
to fewer customer upgrades upon our initial release of QuickVerse®
2006.
Furthermore, factors such as competition, market acceptance, seasonality
and
technological developmental and/or promotional expenses associated with a
title
or title version can shorten the life cycle of older titles and title versions
and increase the importance of our ability to regularly release new titles
and
title versions. Consequently, if net revenue in a given period is below
expectation, our business, our financial condition, including liquidity and
profitability, and our results of operations for that period are likely to
be
negatively affected, as has repeatedly occurred in the past.
Product
returns, price protections or price concessions that exceed our anticipated
reserves could result in worse than expected operating
results.
At
the
time we ship our products we establish reserves, including reserves that
estimate the potential for future product returns and price concessions.
In the
past, particularly during title version transitions, we have had to increase
price concessions to our wholesale retail customers. If consumer demand for
a
specific title or title version falls below expectations or significantly
declines below previous rates of retail sell-through, then a price concession
or
credit may be requested by our wholesale retail customers to spur further
retail
channel sell-through. Coupled with more competitive pricing, if product returns,
price protections or price concessions exceed our reserves the magnitude
of
quarterly fluctuations will increase and our operating and financial results
will be negatively impacted. Furthermore, if we incorrectly assess the
creditworthiness of any one of our wholesale customers who take delivery
of our
products on credit, we could be required to significantly increase reserves
previously established.
Typically
we experience the highest reserves at the end of the first quarter and fourth
quarter and the lowest at the end of the third quarter. Historically, actual
returns have been within management’s prior estimates, however, we cannot be
certain that any future write-offs exceeding reserves will not occur or that
amounts written off will not have a material adverse effect on our business,
our
financial condition, including liquidity and profitability, and our results
of
operations. See “Management’s Discussion and Analysis of Financial Condition and
Results of Operations - Revenues”.
Errors
or defects in our software products may cause a loss of market acceptance
and
result in fewer sales and/or greater returns of our
products.
Our
products are complex and may contain undetected errors or defects when first
introduced or as new versions are released. In the past, we have discovered
software errors in some of our new products and enhancements following
introduction into the market. Because our products are complex, we anticipate
that software errors and defects will be present in new products or releases
in
the future. Although to date, we have not discovered any material errors,
future
errors and defects could result in adverse product reviews and a loss of,
or
delay in, market acceptance of our products.
We
may not have available funds to develop products that consumers
want.
The
Bible-study, inspirational content and organizational management software
markets are subject to rapid technological developments. Although the life
of
most of our titles may be quite long, the life of any given version tends
to be
relatively short, in many cases less than three years. To develop products
that
consumers, church and other faith-based organizations desire, we must
continually improve and enhance our existing products and technologies and
develop new products and technologies that incorporate these technological
developments. Our inability to do this would likely have a material adverse
effect on our business, our financial condition, including liquidity and
profitability, and our results of operations.
We
focus
our development and publishing activities principally on new versions of
our
existing titles. We cannot, however, be certain that we will have the financial
and technical resources available to continue to develop these new title
versions particularly since we must undertake these initiatives while remaining
competitive in terms of performance and price. This will require substantial
investments in research and development, often times well in advance of the
widespread release of a product into the market and any revenues these products
may generate.
Our
costs
for product development for the fiscal year ended December 31, 2006 were
lower
than the fiscal year ended December 31, 2005; however, we anticipate our
product
development costs will increase in the future as a result of the higher costs
associated with releasing more software titles or new title versions across
multiple user interface platforms, and the complexity of developing such
titles
and title versions for next-generation systems, among other reasons. We
anticipate that our profitability will continue to be impacted by the levels
of
research and development expenditures relative to revenue and by fluctuations
relating to the timing of development in anticipation of future user interface
platforms.
The
loss of any of our key executives could have a material adverse effect on
our
business.
Our
success depends to a large degree upon the skills of our three key executives,
Steven Malone, Kirk R. Rowland and William Terrill. We presently do not maintain
key person life insurance on any of our three key executives. Although we
have
employment agreements with each of our three key executives, there can be
no
assurance that we will be able to retain these executives or attract and
retain
additional key executives. The loss of any one of our three key executives
would
likely have a material adverse effect on our business, our financial condition,
including liquidity and profitability, and our results of operations. See
“Management - Directors and Executive Officers”.
The
successful development of our products depends on our ability to attract,
integrate, motivate and retain highly skilled
personnel.
Our
success depends to a large extent on our ability to attract, hire and retain
skilled software developers, programmers and other highly skilled technical
personnel. The software industry is characterized by a high level of employee
mobility and aggressive recruiting among competitors for personnel with
programming, technical and product development skills. We may not be able
to
attract and retain skilled personnel or may incur significant costs in order
to
do so. If we are unable to attract additional qualified employees or retain
the
services of key personnel, our business, our financial condition, including
liquidity and profitability, and our results of operations could be negatively
impacted.
Our
intellectual property may not be adequately protected from unauthorized use
by
others, which could increase our litigation costs and adversely affect our
sales.
Our
copyrighted software content and the brand recognition associated with our
related product trademarks are the most important assets that we possess
in our
ability to generate revenues and profits, and we rely very significantly
on
these intellectual property assets in being able to effectively compete in
our
market. There can be no assurance that these intellectual property assets
will
provide meaningful protection to us from unauthorized use by others, which
could
result in an increase in competing products and a reduction in our own sales.
If
we must pursue litigation in the future to enforce or otherwise protect our
intellectual property rights, or to determine the validity and scope of the
proprietary rights of others, we may not prevail and will likely have to
make
substantial expenditures and divert valuable resources in any case. This
is
particularly true given the fact that the copyrights that we own to the source
code and other improvements made to our largest-selling products since 1999
have
not been registered, which means that we may not rely upon the otherwise
existing advantage of a rebuttable presumption of ownership in the event
of, and
in connection with, any such litigation. See “Description of Business -
Intellectual Property”.
Our
exclusive rights to publish and sell our largest-selling titles are limited
to
non-secular channels.
Approximately
99% of our revenues in 2006, including those generated from sales of
QuickVerse®
and
Membership Plus®,
by far
our two largest selling software titles, were derived from the publication
and
sale of software titles to which we have only the exclusive license to publish
and sell into non-secular channels. Although, as of the date hereof, we do
not
believe that any third parties have been granted rights in addition to our
own
to publish or sell these titles into secular channels, and we believe that,
even
if this has occurred or should occur in the future, the barriers to entry
created by the extensive developments that we have made and now own to these
otherwise licensed titles would make it practically infeasible for any third
party to effectively compete with us in relation to these products in any
market, there can be no assurance that one or more competitors will not emerge
at some point or that they will not adversely impact our sales and revenues.
See
“Description of 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, and our results
of
operations.
New
Internet access devices may change the way information is displayed requiring
us
to change our products.
Recent
increases in the use of Internet devices to access inspirational content
and the
continued development of Internet devices as a medium for the delivery of
network-based information, content, and services may require us to change
our
products. Our success depends on our ability to understand the method upon
which
our search engines operate and our ability to service new and emerging devices
to access the Internet, such as browser phones, personal digital assistants,
and
other wireless devices. To the extent these new Internet access devices change
the way that information is displayed to the end-user or causes a change
in the
medium that is searched, we may be required to revise the methodology of
our
products. We cannot predict the impact that new devices will have on our
services across the entire spectrum of developing technologies, and any required
product adaptations may result in loss of revenue and goodwill, increased
expenses, and reduced operating margins.
Revenue
varies due to the seasonal nature of consumer software purchases.
Our
business is highly seasonal. More than 50% of our annual sales are expected
to
occur in the five months of September through January; the five months of
April
through August are generally our weakest, typically generating less than
30% of
our annual sales. The seasonal pattern is due primarily to the increased
consumer demand for software during the year-end holiday selling season and
the
reduced demand for software during the summer months. Our earnings vary
significantly and are materially affected by releases of popular titles and
title versions and, accordingly, may not necessarily reflect the seasonal
patterns of the industry as a whole. We expect that operating results will
continue to fluctuate seasonally in the future.
RISKS
ASSOCIATED WITH AN INVESTMENT IN OUR COMMON STOCK
We
may incur derivative liabilities in an as yet unknown amount in connection
with
our prior issuance of common stock warrants.
In
November 2004, in connection with a certain Stock Purchase Agreement, we
issued
two warrants to purchase an aggregate of 21,875,000 shares of our common
stock
to Barron Partners, LP. Subject to standard adjustment provisions, each warrant
provides for settlement in registered shares of our common stock and each,
for
the duration of any period in which there is not an effective registration
statement covering the shares underlying the warrants, may be settled in
a
cashless, net-share settlement. In accordance with applicable accounting
mandate, until each
of
the warrants issued to Barron Partners are either fully exercised or
expire,
the
derivative liability associated with these warrants must
continuously
be
adjusted
to fair value at each balance sheet date and accordingly reassessed at each
such
time to determine whether the warrants should be classified (or reclassified,
as
appropriate) as a liability or as equity. The fair value of each warrant
was
initially assessed at $2,187,500
using
the Black-Scholes valuation method,
with such
fair
value directly
relating
and
fluctuating
in
response to the share price of our common stock. At December
31, 2006,
the
fair value of the derivative liability was approximately $527,000,
and a
fair value adjustment of approximately $1,536,000 has
been
included
in other income
for
the
period then ended.
In
the
event that the fair value of the derivative liability exceeds the amount
of any
cashless, net-share settlement under the warrants, we may find it necessary
to
compensate the holder through cash payments, which would have a material
adverse
effect on our business, our financial condition, including liquidity and
profitability, and our results of operations, including a corresponding
reduction in our net income and the likelihood of a net loss for the year.
See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Derivatives”.
Up
to 47,341,666 shares of our common stock are eligible for public resale as
a
result of a registration statement filing which is likely to depress our
stock
price.
As
of the
date of the filing of this annual report on Form 10-KSB for the fiscal year
ended December 31, 2006, we also have on file with the SEC a registration
statement on Form SB-2, originally declared effective on February 1, 2006,
which
registration statement caused to be eligible for immediate resale on the
public
market 24,341,666 shares of our common stock and an additional 23,000,000
shares
of our common stock underlying warrants to the extent exercised. As a percentage
of our total outstanding common stock, this represents 64.8%. If a significant
number of shares are offered for sale simultaneously, which is likely to
occur,
it would have a depressive effect on the trading price of our common stock
on
the public market. Any such depressive effect may encourage short positions
and
short sales, which could place further downward pressure on the price of
our
common stock. Moreover, all of the shares sold in the offering are freely
transferable without restriction or further registration under the Securities
Act (except for any shares purchased by our “affiliates”, as defined in Rule 144
of the Securities Act), which could place even further downward pressure
on the
price of our common stock. Furthermore, should a simultaneous sell-off occur,
and due to the thinly-traded market for our common stock, stockholders may
have
difficulty selling shares of our common stock, at or above the price paid,
at a
fair market value or even at all.
Unless
an active trading market develops for our common stock, you may not be able
to
sell your shares.
We
are a
reporting company and our common stock is listed on the OTC Bulletin Board
(owned and operated by the Nasdaq Stock Market, Inc.), however, there is
no
active trading market for our common stock. There can be no assurance that
an
active trading market will ever develop for our common stock or, if it does
develop, that it will be maintained. Failure to develop or maintain an active
trading market will have a generally negative effect on the price of our
common
stock, and you may be unable to sell your shares or any attempted sale of
such
shares may have the effect of lowering the market price, and therefore your
investment could be a complete or partial loss.
Unless
and until we garner analyst research coverage, we are unlikely to create
long-term market value in our common stock.
Although
we are a reporting company and our common shares are listed on the OTC Bulletin
Board, we are unaware of any investment banking firms, large or small, that
currently provide analyst research coverage on our company and, given our
relatively small size within the public securities markets, it is unlikely
that
any investment banks will begin doing so in the near future. Without continuing
research coverage by reputable investment banks or similar firms, it is
considerably more difficult, and unlikely, to attract the interest of most
institutional investors, which are generally considered to be very important
in
achieving a desirable balance in shareholder composition and long-term market
value in a stock. While we intend to continue to aggressively pursue investor
relations initiatives designed to create visibility for our company and common
stock, and hope to garner analyst coverage in the future, there can be no
assurance that we will succeed in this regard and any inability on our part
to
develop such coverage is likely to materially impede the realization of
long-term market value in our common stock.
Since
our common stock is thinly traded, it is more susceptible to extreme rises
or
declines in price, and you may not be able to sell your shares at or above
the
price you paid.
You
may
have difficulty reselling shares of our common stock, either at or above
the
price you paid, or even at a fair market value. The stock markets often
experience significant price and volume changes that are not related to the
operating performance of individual companies, and because our common stock
is
thinly traded, it is particularly susceptible to such changes. These broad
market changes may cause the market price of our common stock to decline
regardless of how well we perform as a company, and, depending on when you
determine to sell, you may not be able to obtain a price at or above the
price
you paid.
Trading
in our common stock on the OTC Bulletin Board may be limited thereby making
it
more difficult for you to resell any shares you may
own.
Our
common stock trades on the OTC Bulletin Board. 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 Global Select 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 Global Select 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.
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 2006, our trading price fluctuated from a low of $0.03
to a
high of $0.15 per share.
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.
Future
sales of our common stock by our officers or directors may depress our stock
price.
Our
officers and directors are not contractually obligated to refrain from selling
any of their shares; therefore, our officers and directors may sell any shares
owned by them which are registered under the Securities Act, or which otherwise
may be sold without registration to the extent permitted by Rule 144 or other
exemptions. Because of the perception by the investing public that a sale
by
such insiders may be reflective of their own lack of confidence in our
prospects, the market price of our common stock could decline as a result
of a
sell-off following sales of substantial amounts of common stock by our officers
and directors into the public market, or even the mere perception that these
sales could occur.
Future
issuances of our common or preferred stock may depress our stock price and
dilute your interest.
We
may
want to issue additional shares of our common stock in future financings
and may
grant stock options to our employees, officers, directors and consultants
under
our stock incentive plan. Any such issuances could have the effect of depressing
the market price of our common stock and, in any case, would dilute the
interests of our common stockholders. In addition, we could issue serial
preferred stock having rights, preferences and privileges senior to those
of our
common stock, including the right to receive dividends and/or preferences
upon
liquidation, dissolution or winding-up in excess of, or prior to, the rights
of
the holders of our common stock. This could depress the value of our common
stock and could reduce or eliminate the amounts that would otherwise have
been
available to pay dividends on our common stock (which are unlikely in any
case)
or to make distributions on liquidation.
If
you require dividend income, you should not rely on an investment in our
common
stock.
Because
we have very limited cash resources and a substantial accumulated deficit
relative to recent earnings, we have not declared or paid any dividends on
our
common stock since our inception and we do not anticipate declaring or paying
any dividends on our common stock in the foreseeable future. Rather, we intend
to retain earnings, if any, for the continued operation and expansion of
our
business. It is unlikely, therefore, that holders of our common stock will
have
an opportunity to profit from anything other than potential appreciation
in the
value of our common stock held by them. If you require dividend income, you
should not rely on an investment in our common stock.
The
lack of a majority of independent directors on our board of directors may
affect
our ability to be listed on a national securities exchange.
We
are
not currently subject to the listing requirements of any national securities
exchange. The listing standards of the national securities exchanges require
that a company’s board of directors consist of a majority of directors who are
independent as defined by the Sarbanes-Oxley Act of 2002 and as defined by
applicable listing standards, and that the audit committee of the board of
directors must consist of at least two members, both of whom are independent.
Similarly, the compensation and nominating committees of company boards of
directors must also consist of independent directors. As of March 31, 2006,
only
two of our directors, who were the only members of our audit committee, met
the
definition of an “independent” director as defined by the Sarbanes-Oxley Act of
2002 and as defined by listing standards. Currently, we have, only a single
director who meets the definition of an “independent” director as defined by the
Sarbanes-Oxley Act of 2002 and the listing standards of the national securities
exchanges. Despite our efforts to do so, we have not yet identified qualified
and willing individuals to serve as additional independent directors. Two
of our
three directors are currently serving as our executive officers and thereby
do
not qualify as independent. There is no guarantee that we will be able to
appoint an additional director who will satisfy these independence requirements.
For so long as we remain unable to appoint an additional independent director
to
our board, we will be unqualified to list any of our capital stock on a national
securities exchange.
There
may exist a potential conflict of interest between us and each of our former
and
current counsel.
In
the
past we have issued, and we may continue in the future to issue, warrants
to
purchase our common stock as equity compensation for legal and other services
rendered in connection with the preparation of our securities filings.
Specifically, we have issued certain warrants to Michael M. Membrado, our
corporate and securities counsel, all of which currently remain outstanding
and
unexercised. Due to these issuances, there exists the potential for a conflict
of interest between us and each of our current and former counsel insofar
as the
recipients may have been or may be motivated by personal interests that are
not
necessarily aligned with our own.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors
FindEx.com
Inc.
We
have
audited the accompanying consolidated balance sheets of FindEx.com Inc.
and
subsidiaries as of December 31, 2006 & 2005, and the related consolidated
statements of operations, changes in shareholders’ equity, and cash flows for
the years then ended. These financial statements are the responsibility
of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An
audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the
accounting principles used and significant estimates made by management,
as well
as evaluating the overall consolidated financial statement presentation.
We
believe that our audit provides a reasonable basis for our opinion.
The
Company is not required to have, nor were we engaged to perform, an audit
of its
internal control over financial reporting. Our audit included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion.
In
our
opinion, the financial statements referred to above present fairly, in
all
material respects, the financial position of FindEx.com Inc. and subsidiaries
as
of December 31, 2006 & 2005 and the results of operations and cash flows for
the years ended December 31, 2006 & 2005 in conformity with accounting
principles generally accepted in the United States of America.
/s/
BRIMMER, BUREK & KEELAN LLP
Brimmer,
Burek & Keelan LLP
Tampa,
Florida
April
17,
2007
|
CONSOLIDATED
BALANCE SHEETS
|
|||||||
|
December
31, 2006 and 2005
|
|||||||
|
|
|||||||
|
|
2006
|
2005
|
|||||
|
Assets
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
48,672
|
$
|
119,560
|
|||
|
Accounts
receivable, trade, net
|
318,000
|
405,380
|
|||||
|
Inventories
|
145,344
|
214,604
|
|||||
|
Deferred
income taxes, net
|
98,800
|
85,392
|
|||||
|
Other
current assets
|
114,362
|
42,814
|
|||||
|
Total
current assets
|
725,178
|
867,750
|
|||||
|
Property
and equipment, net
|
86,638
|
114,191
|
|||||
|
Software
license, net
|
1,258,769
|
1,762,276
|
|||||
|
Capitalized
software development costs, net
|
491,695
|
707,067
|
|||||
|
Deferred
income taxes, net
|
443,600
|
183,195
|
|||||
|
Other
assets
|
49,965
|
69,806
|
|||||
|
Total
assets
|
$
|
3,055,845
|
$
|
3,704,285
|
|||
|
|
|||||||
|
Liabilities
and stockholders’ equity
|
|||||||
|
Current
liabilities:
|
|||||||
|
Current
maturities of long-term debt
|
$
|
210,318
|
$
|
11,955
|
|||
|
Accrued
royalties
|
649,763
|
472,548
|
|||||
|
Accounts
payable, trade
|
693,260
|
556,042
|
|||||
|
Accrued
registration rights penalties
|
-
|
336,686
|
|||||
|
Accrued
payroll
|
174,257
|
206,988
|
|||||
|
Reserve
for sales returns
|
97,603
|
125,492
|
|||||
|
Derivatives
|
526,868
|
2,062,462
|
|||||
|
Other
current liabilities
|
78,933
|
121,274
|
|||||
|
Total
current liabilities
|
2,431,002
|
3,893,447
|
|||||
|
Long-term
debt
|
79,468
|
33,786
|
|||||
|
Deferred
income taxes, net
|
1,100
|
19,105
|
|||||
|
Commitments
and contingencies (Note 16)
|
|||||||
|
Stockholders’
equity:
|
|||||||
|
Preferred
stock, $.001 par value
|
|||||||
|
5,000,000
shares authorized
|
|||||||
|
-0-
and -0- shares issued and outstanding, respectively
|
---
|
---
|
|||||
|
Common
stock, $.001 par value
|
|||||||
|
120,000,000
shares authorized,
|
|||||||
|
49,788,317
and 48,619,855 shares issued and outstanding, respectively
|
49,788
|
48,620
|
|||||
|
Paid-in
capital
|
7,592,884
|
7,461,424
|
|||||
|
Retained
(deficit)
|
(7,098,397
|
)
|
(7,752,097
|
)
|
|||
|
Total
stockholders’ equity
|
544,275
|
(242,053
|
)
|
||||
|
Total
liabilities and stockholders’ equity
|
$
|
3,055,845
|
$
|
3,704,285
|
|||
|
|
|||||||
|
See
accompanying notes.
|
|||||||
|
Findex.com,
Inc.
|
|||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|||||||
|
|
|||||||
|
Year
Ended December 31
|
2006
|
2005
|
|||||
|
Revenues,
net of reserves and allowances
|
$
|
3,742,751
|
$
|
5,337,342
|
|||
|
Cost
of sales
|
1,755,400
|
2,126,164
|
|||||
|
Gross
profit
|
1,987,351
|
3,211,178
|
|||||
|
Operating
expenses:
|
|||||||
|
Sales
and marketing
|
780,783
|
1,615,452
|
|||||
|
General
and administrative
|
1,682,758
|
1,938,226
|
|||||
|
Bad
debt (recovery) expense
|
(3,858
|
)
|
137,303
|
||||
|
Amortization
expense
|
531,719
|
531,524
|
|||||
|
Depreciation
expense
|
48,268
|
50,704
|
|||||
|
Total
operating expenses
|
3,039,670
|
4,273,209
|
|||||
|
Loss
from operations
|
(1,052,319
|
)
|
(1,062,031
|
)
|
|||
|
Interest
income
|
791
|
1,059
|
|||||
|
Other
income
|
274
|
13,796
|
|||||
|
Other
adjustments
|
(49,314
|
)
|
(436,686
|
)
|
|||
|
Gain
(loss) on fair value adjustment of derivatives
|
1,535,594
|
(33,797
|
)
|
||||
|
Gain
(loss) on disposition of assets
|
3,173
|
(1,869
|
)
|
||||
|
Interest
expense
|
(77,097
|
)
|
(11,029
|
)
|
|||
|
Income
(loss) before income taxes
|
361,102
|
(1,530,557
|
)
|
||||
|
Provision
for income taxes
|
292,598
|
(50,709
|
)
|
||||
|
Net
income (loss)
|
$
|
653,700
|
$
|
(1,581,266
|
)
|
||
|
|
|||||||
|
Earnings
(loss) per share:
|
|||||||
|
Basic
|
$
|
0.01
|
$
|
(0.03
|
)
|
||
|
Diluted
|
$
|
0.01
|
$
|
(0.03
|
)
|
||
|
|
|||||||
|
Weighted
average shares outstanding:
|
|||||||
|
Basic
|
49,223,299
|
48,619,855
|
|||||
|
Diluted
|
50,023,319
|
48,619,855
|
|||||
|
|
|||||||
|
See
accompanying notes.
|
|||||||
|
Findex.com,
Inc.
|
||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
||||||||||||||||
|
|
||||||||||||||||
|
|
Retained
|
|||||||||||||||
|
|
Common
Stock
|
Paid-In
|
Earnings
|
|||||||||||||
|
|
Shares
|
Amount
|
Capital
|
(Deficit)
|
|
Total
|
||||||||||
|
|
||||||||||||||||
|
Balance,
December 31, 2004
|
48,619,855
|
$
|
48,620
|
$
|
7,521,339
|
$
|
(6,170,831
|
)
|
$
|
1,399,128
|
||||||
|
Common
stock warrant reclassified as derivative
|
---
|
---
|
(59,915
|
)
|
---
|
(59,915
|
)
|
|||||||||
|
Net
loss, December 31, 2005
|
---
|
---
|
---
|
(1,581,266
|
)
|
(1,581,266
|
)
|
|||||||||
|
Balance,
December 31, 2005
|
48,619,855
|
$
|
48,620
|
$
|
7,461,424
|
$
|
(7,752,097
|
)
|
$
|
(242,053
|
)
|
|||||
|
Common
stock issued for services
|
1,168,462
|
1,168
|
100,332
|
---
|
101,500
|
|||||||||||
|
Common
stock warrant issued for services
|
---
|
---
|
7,958
|
---
|
7,958
|
|||||||||||
|
Common
stock warrant issued for short-term note
|
---
|
---
|
4,993
|
---
|
4,993
|
|||||||||||
|
Employee
stock options granted
|
---
|
---
|
18,177
|
---
|
18,177
|
|||||||||||
|
Net
income, December 31, 2006
|
---
|
---
|
---
|
653,700
|
653,700
|
|||||||||||
|
Balance,
December 31, 2006
|
49,788,317
|
$
|
49,788
|
$
|
7,592,884
|
$
|
(7,098,397
|
)
|
$
|
544,275
|
||||||
|
|
||||||||||||||||
|
See
accompanying notes.
|
||||||||||||||||
|
Findex.com,
Inc.
|
|||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|||||||
|
|
|||||||
|
Year
Ended December 31
|
2006
|
2005
|
|||||
|
Cash
flows from operating activities:
|
|||||||
|
Cash
received from customers
|
$
|
3,795,288
|
$
|
5,369,139
|
|||
|
Cash
paid to suppliers and employees
|
(3,188,469
|
)
|
(4,761,153
|
)
|
|||
|
Other
operating receipts
|
274
|
13,796
|
|||||
|
Interest
paid
|
(75,598
|
)
|
(11,896
|
)
|
|||
|
Interest
received
|
791
|
1,059
|
|||||
|
Taxes
refunded
|
5,764
|
1,400
|
|||||
|
Net
cash provided by operating activities
|
538,050
|
612,345
|
|||||
|
Cash
flows from investing activities:
|
|||||||
|
Acquisition
of property and equipment
|
(26,807
|
)
|
(35,746
|
)
|
|||
|
Proceeds
from sale of property and equipment
|
9,264
|
---
|
|||||
|
Software
development costs
|
(491,073
|
)
|
(812,309
|
)
|
|||
|
Website
development costs
|
(8,371
|
)
|
(16,163
|
)
|
|||
|
Deposits
refunded
|
---
|
62,796
|
|||||
|
Net
cash (used) by investing activities
|
(516,987
|
)
|
(801,422
|
)
|
|||
|
Cash
flows from financing activities:
|
|||||||
|
Payments
made on long-term notes payable
|
(91,951
|
)
|
(32,722
|
)
|
|||
|
Proceeds
from convertible notes payable
|
150,000
|
---
|
|||||
|
Payments
made on convertible notes payable
|
(150,000
|
)
|
---
|
||||
|
Net
cash (used) by financing activities
|
(91,951
|
)
|
(32,722
|
)
|
|||
|
Net
decrease in cash and cash equivalents
|
(70,888
|
)
|
(221,799
|
)
|
|||
|
Cash
and cash equivalents, beginning of year
|
119,560
|
341,359
|
|||||
|
Cash
and cash equivalents, end of year
|
$
|
48,672
|
$
|
119,560
|
|||
|
|
|||||||
|
Reconciliation
of net income to cash flows from operating activities:
|
|||||||
|
Net
income (loss)
|
$
|
653,700
|
$
|
(1,581,266
|
)
|
||
|
Adjustments
to reconcile net income (loss) to net cash
|
|||||||
|
provided
by operating activities:
|
|||||||
|
Software
development costs amortized
|
706,445
|
806,531
|
|||||
|
Stock
and warrants issued for services
|
67,670
|
---
|
|||||
|
Provision
for (recovery of) bad debts
|
(3,858
|
)
|
137,303
|
||||
|
Depreciation
& amortization
|
579,987
|
582,228
|
|||||
|
(Gain)
loss on disposal of property and equipment
|
(3,173
|
)
|
1,869
|
||||
|
(Gain)
loss on fair value adjustment of derivatives
|
(1,535,594
|
)
|
33,797
|
||||
|
Change
in assets and liabilities:
|
|||||||
|
Decrease
in accounts receivable
|
91,238
|
24,136
|
|||||
|
Decrease
in inventories
|
69,260
|
19,396
|
|||||
|
Decrease
in refundable taxes
|
5,764
|
1,400
|
|||||
|
(Increase)
decrease in prepaid expenses
|
(20,313
|
)
|
64,865
|
||||
|
Increase
in accrued royalties
|
177,215
|
185,034
|
|||||
|
Increase
(decrease) in accounts payable
|
145,177
|
(65,762
|
)
|
||||
|
(Decrease)
in income taxes payable
|
(780
|
)
|
---
|
||||
|
(Decrease)
increase in deferred taxes
|
(291,818
|
)
|
50,709
|
||||
|
(Decrease)
increase in other liabilities
|
(102,870
|
)
|
352,105
|
||||
|
Net
cash provided by operating activities
|
$
|
538,050
|
$
|
612,345
|
|||
|
|
|||||||
|
See
accompanying notes.
|
|||||||
Findex.com,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2006 and 2005
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Findex.com,
Inc. was incorporated under the laws of the State of Nevada on November 7,
1997, as EJH Entertainment, Inc. On December 4, 1997, we acquired EJH
Entertainment, Inc., an Idaho corporation, in a stock-for-stock transaction.
EJH
Idaho was incorporated on June 21, 1968, as Alpine Silver, Inc. Alpine
changed its name to The Linked Companies, Inc. on December 4, 1992. On
September 9, 1996, The Linked Companies acquired Worldwide Entertainment, Inc.,
a Delaware corporation, in a stock-for-stock transaction and changed its name
to
Worldwide Entertainment, Inc. On June 27, 1997, Worldwide Entertainment changed
its name to EJH Entertainment, Inc.
On
April
30, 1999, we acquired Findex Acquisition Corporation, a Delaware corporation
in
a stock-for-stock transaction and our name 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, and (iii) the life and realization of identifiable
intangible assets. The amounts we will ultimately incur or recover could differ
materially from current estimates.
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, 2006 and 2005, we did not maintain any uninsured
cash
balances.
We
sell a
majority of our products to consumers through distributors, Christian
bookstores, Internet and direct marketing efforts. Although we attempt to
prudently manage and control accounts receivable and perform ongoing credit
evaluations in the normal course of business, we generally require no collateral
on our product sales. During 2006, we incurred sales transactions with
approximately 19,000 consumers and 550 retail bookstores and distributors.
Our
top five retail customers in aggregate accounted for 23% of gross sales for
the
year ended December 31, 2006. Only one retail customer accounted for more than
10% of gross sales (10.4%) in the year ended December 31, 2006. Accounts
receivable relating to this retail customer was $3,584 as of December 31,
2006.
During
the years ended December 31, 2006 and 2005, we derived 65% and 66%,
respectively, of our total revenue from sales of QuickVerse®,
27% and
26%, respectively, from sales of Membership Plus®,
and 8%
and 8%, respectively, from sales of other software titles.
During
the years ended December 31, 2006 and 2005, four vendors provided purchases
individually of 10% or more of the total product and material purchases as
follows: Vendor A (cd replicator) accounted for 19% and 24%, respectively,
Vendor B (printer) accounted for 19% and 23%, respectively, Vendor C (retail
boxes) accounted for 20% and 19%, respectively, and Vendor D (fulfillment)
accounted for 17% and 5%, respectively. Accounts payable relating to Vendors
A,
B, C, and D were $12,161 and $8,886, $13,160 and $8,820, $26,819 and $17,031,
and $4,493 and $23,882, as of December 31, 2006 and 2005, 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.
ACCOUNTS
RECEIVABLE
We
sell
our products to resellers and distributors generally under terms appropriate
for
the creditworthiness of the customer. Our terms generally range from net 30
days
for domestic resellers, net 60 days for domestic distributors, to net 90 days
for international resellers and distributors. Receivables from customers are
unsecured. We continuously monitor our customer account balances and actively
pursue collections on past due balances.
We
maintain an allowance for doubtful accounts comprised of two components, (i)
historical collections performance and (ii) specific collection issues. If
actual bad debts differ from the reserves calculated based on historical trends
and known customer issues, we record an adjustment to bad debt expense in the
period in which the difference occurs. Such adjustment could result in
additional expense or a reduction of expense.
Our
accounts receivable go through a collection process that is based on the age
of
the invoice and requires attempted contacts with the customer at specified
intervals and the assistance from other personnel within the company who have
a
relationship with the customer. If after a number of days, we have been
unsuccessful in our collections efforts, we may turn the account over to a
collection agency. We write-off accounts to our allowance when we have
determined that collection is not likely. The factors considered in reaching
this determination are (i) the apparent financial condition of the customer,
(ii) the success we’ve had in contacting and negotiating with the customer and
(iii) the number of days the account has been outstanding. To the extent that
our collections do not correspond with historical experience, we may be required
to incur additional charges.
INVENTORY
Inventory,
including out on consignment, consists primarily of software media, manuals
and
related packaging materials and is recorded at the lower of cost or market
value, determined on a first-in, first-out, and adjusted on a per-item basis.
PROPERTY
AND EQUIPMENT
Property
and equipment are recorded at cost. Furniture, fixtures and computer equipment
are depreciated over five years using the straight-line method. Software is
depreciated over three years using the straight-line method. Expenditures for
maintenance, repairs and other renewals of items are charged to expense when
incurred.
ACCOUNTING
FOR LONG-LIVED ASSETS
We
review
property and equipment and intangible assets for impairment whenever events
or
changes in circumstances indicate that the carrying amount of an asset may
not
be recoverable. Recoverability is measured by comparison of our carrying amount
to future net cash flows the assets are expected to generate. If such assets
are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds its fair market value.
Property and equipment to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
INTANGIBLE
ASSETS
In
accordance with SFAS No. 142, Goodwill
and Other Intangible Assets,
intangible assets with an indefinite useful life are not amortized. Intangible
assets with a finite useful life are amortized on the straight-line method
over
the estimated useful lives. All intangible assets are tested for impairment
annually during the fourth quarter.
SOFTWARE
DEVELOPMENT COSTS
In
accordance with SFAS No. 86, Accounting
for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed,
software development costs are expensed as incurred until technological
feasibility and marketability has been established, generally with release
of a
beta version for customer testing. Once the point of technological feasibility
and marketability is reached, direct production costs (including labor directly
associated with the development projects), indirect costs (including allocated
fringe benefits, payroll taxes, facilities costs, and management supervision),
and other direct costs (including costs of outside consultants, purchased
software to be included in the software product being developed, travel
expenses, material and supplies, and other direct costs) are capitalized until
the product is available for general release to customers. We amortize
capitalized costs on a product-by-product basis. Amortization for each period
is
the greater of the amount computed using (i) the straight-line basis over the
estimated product life (generally from 12 to 18 months), or (ii) the ratio
of
current revenues to total projected product revenues. Total cumulative
capitalized software development costs were $1,714,882 and $2,561,043, less
accumulated amortization of $1,223,187 and $1,853,976 at December 31, 2006
and
2005, 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 $190,726 and $216,397 for the years ended December 31, 2006 and 2005,
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 the 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
$108,582 and $102,663, less accumulated amortization of $72,571 and $46,811
at
December 31, 2006 and 2005, 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).
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 2006 or 2005 and maintain a reserve for rebate
claims remaining unpaid from 2000 and 2001.
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, email and other electronic means, and providing technical support
assistance to our customers. In connection with the sale of certain products,
we
provide a limited amount of free technical support assistance to customers.
We
do not defer the recognition of any revenue associated with sales of these
products, since the cost of providing this free technical support is
insignificant. The technical support is provided within one year after the
associated revenue is recognized and free product enhancements (bug fixes)
are
minimal and infrequent. We accrue the estimated cost of providing this free
support upon product shipment and are recorded as cost of sales.
ADVERTISING
Advertising
costs, including direct response advertising costs, are charged to operations
as
incurred. We have determined that direct response advertising costs are
insignificant. Total advertising costs for the years ended December 31, 2006
and
2005 were approximately, $184,000 and $512,000, respectively.
STOCK-BASED
COMPENSATION
Effective
January 1, 2006, we adopted SFAS No. 123(R), Share-Based
Payment.
Our
stock-based compensation plans are described in Note 13. We are reporting this
change in accounting principle using the modified prospective method.
Accordingly, prior years were not restated. In addition, we had no compensation
expense associated with unvested equity-based awards which were granted prior
to
2006.
SFAS
No.
123(R) requires that we measure the cost of the employee services received
in
exchange for an award for equity instruments based on the grant-date fair value
and to recognize this cost over the requisite service period. It also provides
that any corporate income tax benefit realized upon exercise or vesting of
an
award in excess of that previously recognized in earnings (referred to as a
“windfall tax benefit”) will be presented in the Consolidated Statements of Cash
Flows as a financing (rather than as operating) cash flow. Realized windfall
tax
benefits are credited to paid-in capital in the Consolidated Balance Sheets.
Realized shortfall tax benefits (amounts which are less than that previously
recognized in earnings) are first offset against the cumulative balance of
windfall tax benefits, if any, and then charged directly to income tax
expense.
Prior
to
adoption of SFAS No. 123(R), we used the intrinsic value method prescribed
by
APB No. 25, Accounting
for Stock Issued to Employees
to
account for our employee stock options and other stock-based compensation.
Under
this method, because the exercise price of stock options granted to employees
and directors equaled the market price of the underlying stock on the date
of
the grant, no compensation expense was recognized. Expense attributable to
other
types of stock-based awards was also generally recognized in our reported
results under APB No. 25.
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
follow
SFAS No. 109, Accounting
for Income Taxes,
which
requires the use of the asset and liability method of accounting for income
taxes. Under this method, deferred income taxes are provided for the temporary
differences between the financial reporting basis and the tax basis of our
assets and liabilities. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
EARNINGS
PER SHARE
We
follow
SFAS No. 128, Earnings
Per Share,
to
calculate and report basic and diluted earnings per share (“EPS”). Basic EPS is
computed by dividing income available to common stockholders by the weighted
average number of shares of common stock outstanding for the period. Diluted
EPS
is computed by giving effect to all dilutive potential shares of common stock
that were outstanding during the period. For us, dilutive potential shares
of
common stock consist of the incremental shares of common stock issuable upon
the
exercise of stock options and warrants for all periods, convertible notes
payable and the incremental shares of common stock issuable upon the conversion
of convertible preferred stock.
When
discontinued operations, extraordinary items, and/or the cumulative effect
of an
accounting change are present, income before any of such items on a per share
basis represents the “control number” in determining whether potential shares of
common stock are dilutive or anti-dilutive. Thus, the same number of potential
shares of common stock used in computing diluted EPS for income from continuing
operations is used in calculating all other reported diluted EPS amounts. In
the
case of a net loss, it is assumed that no incremental shares would be issued
because they would be anti-dilutive. In addition, certain options and warrants
are considered anti-dilutive because the exercise prices were above the average
market price during the period. Anti-dilutive shares are not included in the
computation of diluted EPS, in accordance with SFAS No. 128.
COMPREHENSIVE
INCOME (LOSS)
We
have
adopted SFAS No. 130, Reporting
Comprehensive Income.
SFAS
No. 130 establishes standards of reporting and displaying comprehensive income
and its components of net income and “other comprehensive income” in a full set
of general-purpose financial statements. “Other comprehensive income” refers to
revenues, expenses, gains and losses that are not included in net income, but
rather are recorded directly in stockholders’ equity. The adoption of this
Statement had no impact on our net income or loss or stockholders’ equity.
TRANSFER
OF FINANCIAL ASSETS
We
have
adopted SFAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.
SFAS
No. 140 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities and provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The adoption of this standard did not
have a material effect on our results of operations or financial position.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
Unless
otherwise indicated, the fair values of all reported assets and liabilities
that
represent financial instruments (none of which are held for trading purposes)
approximate the carrying values of such instruments because of the short
maturity of those instruments.
DERIVATIVES
We
account for warrants issued with shares of common stock in a private placement
according to EITF Issue 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in,
a
Company’s Own Stock.
In
accordance with the accounting mandate, the derivative liability associated
with
the warrants has been and shall continue to be adjusted to fair value
(calculated using the Black-Scholes method) at each balance sheet date and
is
accordingly reassessed at each such time to determine whether the warrants
should be classified (or reclassified, as appropriate) as a liability or as
equity. The corresponding fair value adjustment is included in the consolidated
statements of operations as other expenses as the value of the warrants
increases from an increase in our stock price at the balance sheet date and
as
other income as the value of the warrants decreases from a decrease in our
stock
price.
RECENTLY
ISSUED PRONOUNCEMENTS
Uncertain
Tax Positions
In
July
2006, the FASB issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes
(FIN No.
48) to clarify what criteria must be met prior to recognition of the financial
statement benefit, in accordance with SFAS 109, of a position taken in a tax
return. The provisions of the final interpretation apply broadly to all tax
positions taken by an enterprise, including the decision not to report income
in
a tax return or the decision to classify a transaction as tax exempt. The
prescribed approach is based on a two-step benefit recognition model. The first
step is to evaluate the tax position for recognition by determining if the
weight of available evidence indicates it is more likely than not, based on
the
technical merits and without consideration of detection risk, that the position
will be sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step is to measure the appropriate
amount of the benefit to recognize. The amount of the benefit to recognize
is
measured as the largest amount of tax benefit that is greater than 50 percent
likely of being ultimately realized upon settlement. The tax provision must
be
derecognized when it is no longer more likely than not of being sustained.
The
interpretation also provides guidance on recognition and classification of
related penalties and interest, classification of liabilities, and disclosures
of unrecognized tax benefits. The change in net assets, if any, as a result
of
applying the provisions of this interpretation is considered a change in
accounting principle with the cumulative effect of the change treated as an
offsetting adjustment to the opening balance of retained earnings in the period
of transition. The final interpretation is effective for the first annual period
beginning after December 15, 2006, with earlier application encouraged. We
have
adopted FIN No. 48 as of January 1, 2007. Management believes the impact of
adoption is immaterial to the financial statements on the date of
adoption.
Fair
Value
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements,
to
provide enhanced guidance for using fair value to measure assets and
liabilities. The standard also expands disclosure requirements for assets and
liabilities measured at fair value, how fair value is determined, and the effect
of fair value measurements on earnings. The standard applies whenever other
authoritative literature requires, or permits, certain assets or liabilities
to
be measured at fair value, but does not expand the use of fair value. SFAS
No.
157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those years. Early adoption
is permitted. We plan to adopt SFAS No. 157 as of January 1, 2008. The balance
sheet items carried at fair value consist of derivatives and other financial
instruments. Additionally, we use fair value concepts to test various long-lived
assets for impairment and to initially measure assets and liabilities acquired
in a business combination. Management is currently evaluating the impact of
adoption on how these liabilities are currently measured.
RECLASSIFICATIONS
Certain
accounts in our 2005 financial statements have been reclassified for comparative
purposes to conform with the presentation in our 2006 financial
statements.
NOTE
2 - ACCOUNTS RECEIVABLE
At
December 31, 2006 and 2005, accounts receivable consisted of the following
(see
Note 1):
|
2006
|
2005
|
||||||
|
Trade
receivables
|
$
|
329,000
|
$
|
483,380
|
|||
|
Less:
Allowance for doubtful accounts
|
11,000
|
78,000
|
|||||
|
Accounts
receivable, trade
|
$
|
318,000
|
$
|
405,380
|
NOTE
3 - INVENTORIES
At
December 31, 2006 and 2005, inventories consisted of the following:
|
2006
|
2005
|
||||||
|
Raw
materials
|
$
|
83,702
|
$
|
118,158
|
|||
|
Finished
goods
|
61,642
|
96,446
|
|||||
|
Inventories
|
$
|
145,344
|
$
|
214,604
|
NOTE
4 - PROPERTY AND EQUIPMENT, NET
At
December 31, 2006 and 2005, property and equipment consisted of the
following:
|
2006
|
2005
|
||||||
|
Computer
equipment
|
$
|
76,004
|
$
|
93,992
|
|||
|
Computer
software
|
78,738
|
65,442
|
|||||
|
Office
equipment
|
61,831
|
85,431
|
|||||
|
Office
furniture and fixtures
|
75,748
|
68,171
|
|||||
|
Warehouse
equipment
|
4,659
|
12,159
|
|||||
|
296,980
|
325,195
|
||||||
|
Less:
Accumulated depreciation
|
210,342
|
211,004
|
|||||
|
Property
and equipment, net
|
$
|
86,638
|
$
|
114,191
|
At
December 31, 2006 and 2005, Office equipment contained telephone equipment
under
a capital lease obligation with a cost basis of $51,788. See Notes 8 and 14.
NOTE
5 - SOFTWARE LICENSE AGREEMENT, NET
In
July
1999, we completed an exclusive license agreement with Parsons Technology,
Inc.,
a subsidiary of 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.
On
October 20, 2003, we reached settlement in a dispute with The Zondervan
Corporation and TLC which extended indefinitely the term of the software license
agreement.
As
required by SFAS No. 142, management periodically evaluates the remaining useful
life of the license agreement and revises the amortization period if it is
determined that the useful life is longer or shorter than originally estimated.
Amortization expense, determined using the straight-line method, has been
calculated using the original 10-year economic life. The software license is
tested for impairment annually during the fourth quarter.
At
December 31, 2006 and 2005, the software license consisted of the
following:
|
2006
|
2005
|
||||||
|
Software
license cost
|
$
|
5,135,574
|
$
|
5,135,574
|
|||
|
Less:
Accumulated amortization
|
3,876,805
|
3,373,298
|
|||||
|
Software
license, net
|
$
|
1,258,769
|
$
|
1,762,276
|
Amortization
expense related to this intangible asset was $503,508 for both years.
Amortization expense is expected to be $503,508 each year through 2008 and
$251,751 for 2009, at which time the license will be fully amortized.
NOTE
6 - NOTE PAYABLE
In
July
2006, we entered into a loan agreement with an individual for $150,000. The
agreement bore interest at a rate of 10% per thirty-day period and carried
an
original due date of September 18, 2006. On September 19, 2006, for additional
consideration of $750, we entered into a modification and extension agreement
which extended the repayment term of the balance of the outstanding principal
under the loan, as well as the interest payable thereon, until October 20,
2006.
The loan was paid in full on October 19, 2006. The loan agreement was secured
by
a first priority security interest in all of our assets, including the
intellectual property comprising the software products upon which we are
dependent for revenue, and was convertible, together with any accrued interest
thereon, into restricted shares of our common stock at a conversion price equal
to $0.07 per share. In further consideration, we issued the lender a 3-year
common stock purchase warrant to acquire up to an aggregate of 100,000
restricted shares of common stock at an exercise price of $0.07 per share.
See
Note 10.
NOTE
7 - DERIVATIVES
At
December 31, 2006 and 2005, the derivative liability consisted of the
following:
|
2006
|
2005
|
||||||
|
Warrant
A
|
$
|
2,692
|
$
|
47,389
|
|||
|
Warrant
B
|
276,755
|
1,030,348
|
|||||
|
Warrant
C
|
247,421
|
984,725
|
|||||
|
Derivatives
|
$
|
526,868
|
$
|
2,062,462
|
In
May
2004, we issued a 3-year warrant (Warrant A) to purchase up to 600,000 shares
of
our common stock to a consultant. This warrant may be exercised on a cashless
basis at the option of the warrant holder at a price per share of $0.15. We
will
receive up to $90,000 from the warrant holder upon the exercise of this warrant.
This warrant has been accounted for as a liability according to the guidance
of
EITF 00-19 and the fair value of the warrant has been determined using the
Black-Scholes valuation method with the assumptions listed in the table
below.
In
November 2004, we issued two 5-year warrants to purchase up to an aggregate
of
21,875,000 shares of our common stock in connection with a certain Stock
Purchase Agreement completed with a New York based private investment
partnership on July 19, 2004. The first warrant (Warrant B) entitles the holder
to purchase up to 10,937,500 shares of our common stock at a price of $0.18
per
share, and the second warrant (Warrant C) entitles the holder to purchase up
to
10,937,500 additional shares of our common stock at a price of $0.60 per share.
Each warrant is subject to standard adjustment provisions and each provides
for
settlement in registered shares of our common stock and may, at the option
of
the holder, be settled in a cashless, net-share settlement. The warrant holder
is prevented from electing a cashless exercise so long as there is an effective
registration statement for the shares underlying these warrants. The maximum
number of shares of our common stock to be received for each warrant in a
net-share settlement would be 10,937,500 but the actual number of shares settled
would likely be significantly less and would vary based on the last reported
sale price (as reported by Bloomberg) of our common stock on the date
immediately preceding the date of the exercise notice. These warrants are
accounted for as a liability according to the guidance of EITF 00-19 and the
fair value of each warrant has been determined using the Black-Scholes valuation
method with the assumptions listed in the table below.
|
|
Warrant
A
|
Warrant
B
|
Warrant
C
|
|||||||
|
Expected
term - years
|
0.33
|
2.86
|
2.86
|
|||||||
|
Stock
price at December 31, 2006
|
$
|
0.03
|
$
|
0.03
|
$
|
0.03
|
||||
|
Expected
dividend yield
|
0
|
%
|
0
|
%
|
0
|
%
|
||||
|
Expected
stock price volatility
|
235
|
%
|
212
|
%
|
212
|
%
|
||||
|
Risk-free
interest rate
|
4.71
|
%
|
4.61
|
%
|
4.61
|
%
|
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 $1,535,594 and
($33,797) have been included in other income (expenses) on the consolidated
statements of operations for the years ended December 31, 2006 and 2005,
respectively.
NOTE
8 - LONG-TERM DEBT
At
December 31, 2006 and 2005, long-term debt consisted of the
following:
|
2006
|
2005
|
||||||
|
Unsecured
term note payable to a corporation due October 2004 in monthly
installments of $5,285, including interest at 8%.
|
$
|
---
|
$
|
2,769
|
|||
|
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.
|
33,786
|
42,972
|
|||||
|
Unsecured
term note payable to a shareholder due March 2008 in monthly installments
of $10,000, plus interest at 8%, through April 2007, and monthly
installments of $20,000, plus interest at 8%, beginning May 2007.
See
Notes 11 and 17.
|
256,000
|
---
|
|||||
|
289,786
|
45,741
|
||||||
|
Less:
Current maturities
|
210,318
|
11,955
|
|||||
|
Long-term
debt
|
$
|
79,468
|
$
|
33,786
|
|||
Principal
maturities at December 31, 2006 are as follows:
|
2007
|
$
|
210,318
|
||
|
2008
|
67,591
|
|||
|
2009
|
11,877
|
|||
|
Total
|
$
|
289,786
|
NOTE
9 - INCOME TAXES
The
provision (benefit) for taxes on income from continuing operations for the
years
ended December 31, 2006 and 2005 consisted of the following:
|
2006
|
2005
|
||||||
|
Current:
|
|||||||
|
Federal
|
$
|
---
|
$
|
---
|
|||
|
State
|
(780
|
)
|
---
|
||||
|
(780
|
)
|
---
|
|||||
|
Deferred:
|
|||||||
|
Federal
|
(273,882
|
)
|
161,169
|
||||
|
State
|
(17,936
|
)
|
(110,460
|
)
|
|||
|
(291,818
|
)
|
50,709
|
|||||
|
Total
tax provision (benefit)
|
$
|
(292,598
|
)
|
$
|
50,709
|
||
The
reconciliation of income tax computed at statutory rates of income tax benefits
is as follows:
|
2006
|
2005
|
||||||
|
Expense
(benefit) at Federal statutory rate - 34%
|
$
|
122,775
|
$
|
(520,389
|
)
|
||
|
State
tax effects, net of Federal taxes
|
608
|
(110,460
|
)
|
||||
|
Nondeductible
expenses
|
4,933
|
14,814
|
|||||
|
Nontaxable
income
|
(524,689
|
)
|
187,051
|
||||
|
Deductible
temporary differences
|
---
|
(11,157
|
)
|
||||
|
Net
operating loss
|
---
|
505,575
|
|||||
|
Deferred
tax asset valuation allowance
|
103,775
|
(14,725
|
)
|
||||
|
Income
tax expense (benefit)
|
$
|
(292,598
|
)
|
$
|
50,709
|
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, 2006 and 2005 are as follows:
|
For
the year ended December 31, 2006
|
Federal
|
|
|
State
|
|
|
Total
|
|||
|
Current
Deferred Income Taxes
|
||||||||||
|
Reserves
and allowances
|
$
|
53,500
|
$
|
360
|
$
|
53,860
|
||||
|
Accrued
expenses
|
32,700
|
250
|
32,950
|
|||||||
|
Deferred
revenue
|
5,100
|
40
|
5,140
|
|||||||
|
Employee
stock options
|
6,100
|
50
|
6,150
|
|||||||
|
Operating
loss carryforwards
|
169,600
|
---
|
169,600
|
|||||||
|
267,000
|
700
|
267,700
|
||||||||
|
Less:
Valuation allowance
|
168,500
|
400
|
168,900
|
|||||||
|
Deferred
income tax asset, net
|
$
|
98,500
|
$
|
300
|
$
|
98,800
|
||||
|
Non-current
Deferred Income Taxes
|
||||||||||
|
Property
and equipment
|
$
|
450
|
$
|
---
|
$
|
450
|
||||
|
State
deferred tax liabilities
|
1,600
|
---
|
1,600
|
|||||||
|
Operating
loss carryforwards
|
2,900,350
|
6,300
|
2,906,650
|
|||||||
|
2,902,400
|
6,300
|
2,908,700
|
||||||||
|
Less:
Valuation allowance
|
1,831,500
|
2,700
|
1,834,200
|
|||||||
|
Deferred
income tax asset, net
|
1,070,900
|
3,600
|
$
|
1,074,500
|
||||||
|
Capitalized
development costs
|
(201,800
|
)
|
(1,500
|
)
|
$
|
(203,300
|
)
|
|||
|
Software
license fees
|
(423,500
|
)
|
(3,200
|
)
|
(426,700
|
)
|
||||
|
State
deferred tax assets
|
(2,000
|
)
|
---
|
(2,000
|
)
|
|||||
|
Deferred
income tax liability
|
(627,300
|
)
|
(4,700
|
)
|
$
|
(632,000
|
)
|
|||
|
Deferred
income tax asset, net
|
$
|
443,600
|
||||||||
|
Deferred
income tax liability, net
|
$
|
(1,100
|
)
|
|||||||
|
For
the year ended December 31, 2005
|
Federal
|
|
|
State
|
|
|
Total
|
|||
|
Current
Deferred Income Taxes
|
||||||||||
|
Reserves
and allowances
|
$
|
82,209
|
$
|
2,031
|
$
|
84,240
|
||||
|
Accrued
expenses
|
50,622
|
1,251
|
51,873
|
|||||||
|
Deferred
revenue
|
8,806
|
218
|
9,024
|
|||||||
|
Operating
loss carryforwards
|
85,091
|
531
|
85,622
|
|||||||
|
226,728
|
4,031
|
230,759
|
||||||||
|
Less:
Valuation allowance
|
141,705
|
3,662
|
145,367
|
|||||||
|
Deferred
income tax asset, net
|
$
|
85,023
|
$
|
369
|
$
|
85,392
|
||||
|
Non-current
Deferred Income Taxes
|
||||||||||
|
State
deferred tax liabilities
|
$
|
7,185
|
$
|
---
|
$
|
7,185
|
||||
|
Operating
loss carryforwards
|
2,794,956
|
25,101
|
2,820,057
|
|||||||
|
2,802,141
|
25,101
|
2,827,242
|
||||||||
|
Less:
Valuation allowance
|
1,751,338
|
22,804
|
1,774,142
|
|||||||
|
Deferred
income tax asset, net
|
1,050,803
|
2,297
|
$
|
1,053,100
|
||||||
|
Capitalized
development costs
|
(270,308
|
)
|
(6,678
|
)
|
$
|
(276,986
|
)
|
|||
|
Property
and equipment
|
(188
|
)
|
(5
|
)
|
(193
|
)
|
||||
|
Software
license fees
|
(595,774
|
)
|
(14,719
|
)
|
(610,493
|
)
|
||||
|
State
deferred tax assets
|
(1,338
|
)
|
---
|
(1,338
|
)
|
|||||
|
Deferred
income tax liability
|
(867,608
|
)
|
(21,402
|
)
|
$
|
(889,010
|
)
|
|||
|
Deferred
income tax asset, net
|
$
|
183,195
|
||||||||
|
Deferred
income tax liability, net
|
$
|
(19,105
|
)
|
|||||||
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. The valuation
allowance for deferred tax assets was increased by $83,591 and $6,411 during
the
years ended December 31, 2006 and 2005, respectively.
At
December 31, 2006, we had available net operating loss carryforwards of
approximately $9,052,000 for federal income tax purposes that expire in 2026.
The federal carryforwards resulted from losses generated in 1996 through 2002,
2005 and 2006. We also had net operating loss carryforwards available from
various state jurisdictions ranging from approximately $14,000 to approximately
$841,000 that expire in 2021.
NOTE
10 - STOCKHOLDERS’ EQUITY
COMMON
STOCK
In
March
2006, we committed to issue a total of 438,462 restricted shares of common
stock
to our then outside directors, at the closing price as of March 30, 2006
($0.13), in lieu of cash payments of amounts accrued for their services as
members of our board from the period of September 1, 2004 through March 31,
2006. This issuance was valued at $57,000.
In
April
2006, we committed to issue a total of 500,000 restricted shares of common
stock
to a company for investor relations services, at the closing price as of April
2, 2006 ($0.13), in accordance with the terms of a twelve-month agreement.
In
October 2006, we reached agreement to suspend investor relations services and
to
reduce the share commitment by 250,000 shares (250,000 share net commitment).
This net issuance was valued at $32,500.
In
October 2006, we committed to issue a total of 480,000 restricted shares of
common stock to our outside director, at the closing price as of October 26,
2006 ($0.025), in lieu of cash payment of amounts accrued for his services
as a
member of our board from the period of April 1, 2006 through September 30,
2006.
This issuance was valued at $12,000.
COMMON
STOCK OPTIONS
During
2005, 55,000 vested stock options with an exercise price of $0.11, related
to
terminated employees, expired unexercised. We did not grant any options or
other
stock-based awards to any of the individuals for which the options expired,
during the six months prior to and after the option expirations.
In
October 2006, we granted our non-executive employees a total of 850,000 stock
options. These options carry an exercise price of $0.10 per share, have a 3-year
life, and vest immediately. These options were valued at $18,177. See Note
14.
COMMON
STOCK WARRANTS
In
March
2006, we committed to issue a 3-year warrant to purchase up to 300,000
restricted shares of our common stock, at a price per share of $0.13, to our
legal counsel, in lieu of cash as payment for certain accrued legal fees. This
warrant was valued at $7,958 based on the negotiated fair value of the services
provided as prescribed by SFAS No. 123(R), for share-based transactions with
non-employees.
In
July
2006, we issued a 3-year warrant to purchase up to 100,000 restricted shares
of
our common stock, at a price of $0.07 per share, to an individual, in connection
with the issuance of a convertible note payable. This warrant was valued at
$4,997. See Note 14. The value was treated as a discount on debt issued with
detachable stock purchase warrants, per APB No. 14, and amortized to interest
expense over the original life of the note. See Note 6.
During
2006, warrants to purchase up to 150,000 restricted shares of our common stock
with an average exercise price of $0.01 per share expired unexercised. During
the six months prior to and after the warrant expirations, we granted a warrant
to purchase up to 300,000 restricted shares of our common stock to the
individual for which the warrants expired (see warrant issuance
above).
SERIES
A CONVERTIBLE PREFERRED STOCK
The
rights, preferences and privileges of our Series A Preferred Stock, none of
which currently remain outstanding, are as follows:
Dividends
Holders
of Series A Preferred Stock are 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 are fully cumulative and are payable as determined by our board of
directors. As of December 31, 2006 and 2005, no dividends had been declared.
Liquidation
Holders
of Series A Preferred Stock are 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 are sufficient to make a complete
distribution to the preferred stockholders, such stockholders will share
in the
distribution of our assets on a pro rata basis in proportion to the aggregate
preferential amounts owed each stockholder. After payment is made to the
preferred stockholders, any remaining assets and funds will be 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 is 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.
Redemption
At
the
election of our board of directors, we are 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 are 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, are as follows:
Dividends
The
holders of Series B Preferred Stock are entitled to receive cumulative cash
dividends at the rate of $1.60 per annum per share. As of December 31, 2006
and
2005, no dividends had been declared.
Liquidation
The
Series B Preferred stockholders are 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
is 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 is 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.
Redemption
Subject
to restrictions, shares of the Series B Preferred Stock are 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 do 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 is not less than $18.00 per share.
Voting
Rights
The
holder of each share of Series B Preferred Stock is not entitled to vote,
except
as required by law and as a class. Voting as a class, the holders are entitled
to elect one director to fill one directorship.
NOTE
11 - OTHER ADJUSTMENTS
As
part
of the July 19, 2004 financing transaction, we entered into a Registration
Rights Agreement pursuant to which we became committed to registering all of
the
shares issued as part of such transaction, including those issuable under each
of two warrants. On November 22, 2004 we filed a registration statement on
Form SB-2 covering the shares issued, as well as the shares underlying the
warrants. In accordance with the terms of the Registration Rights Agreement,
as
amended, we had another 150 days, until April 22, 2005, to cause such
registration statement to be declared effective by the SEC, with any delays
in
meeting this obligation resulting in our being liable to the New York based
private investment firm in an amount equal to $630,000 per year, pro-rated
for
the duration of any such delay, which amounts to $1,726 per day. As of December
31, 2006 and 2005, we accrued a total of $49,314 and $436,686, respectively,
in
penalties under the terms of the Registration Rights Agreement. This has been
included in other adjustments. See Notes 8 and 17.
NOTE
12 - EARNINGS PER COMMON SHARE
Earnings
per common share are computed by dividing net income by the weighted average
number of shares of common stock and common stock equivalents outstanding during
the year. Common stock equivalents are the net additional number of shares
that
would be issuable upon the exercise of our outstanding common stock options
and
warrants (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 share and
the
effect on income and the average number of shares of dilutive potential common
stock:
|
For
the Year Ended December 31
|
2006
|
2005
|
|||||
|
Net
Income (loss)
|
$
|
653,700
|
$
|
(1,581,266
|
)
|
||
|
Common
stock dividend on Preferred Series A
|
---
|
---
|
|||||
|
Net
income (loss) available to common shareholders
|
$
|
653,700
|
$
|
(1,581,266
|
)
|
||
|
Basic
weighted average shares outstanding
|
49,223,299
|
48,619,855
|
|||||
|
Dilutive
effect of:
|
|||||||
|
Stock
options
|
670,180
|
---
|
|||||
|
Warrants
|
129,840
|
---
|
|||||
|
Diluted
weighted average shares outstanding
|
50,023,319
|
48,619,855
|
|||||
A
total
of 25,380,000 and 25,530,000 dilutive potential securities for the years ended
December 31, 2006 and 2005, respectively, have been excluded from the
computation of diluted earnings per common share, as their inclusion would
be
anti-dilutive.
NOTE
13 - STOCK-BASED COMPENSATION
Our
1999 Stock Incentive Plan authorizes the issuance of various forms of
stock-based awards including incentive and nonqualified stock options, stock
appreciation rights attached to stock options, and restricted stock awards
to
our directors, officers and other key employees. The plan has been approved
by our stockholders and as such, provides certain income tax advantages to
employees as provided under Sections 421, 422, and 424 of the Internal Revenue
Code. Stock options are granted at an exercise price as determined by our
board at the time the option is granted and may not be less than the par
value of such shares of common stock. None of the options granted under the
plan
have been granted with an exercise price less than fair value of the common
stock on the date of grant. Stock options vest quarterly over three years and
have a term of up to ten years. The plan authorizes an aggregate of 1,500,000
shares of common stock may be issued. We did not grant any options under the
plan during 2006 or 2005.
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 granted 850,000 fully-vested options outside of the
plan during 2006 to non-executive employees and did not grant any options
outside of the plan during 2005.
The
fair
value of each option award is estimated on the date of grant using the
Black-Scholes option-pricing model that uses the assumptions noted in the
following table. Expected volatilities are based on implied volatilities from
historical volatility of our stock. We use historical data to estimate option
exercise and employee termination within the valuation model; separate groups
of
employees that have similar historical exercise behavior are considered
separately for valuation purposes. The expected term of options granted is
derived from the output of the option valuation model and represents the period
of time that options granted are expected to be outstanding. The risk-free
rate
for periods within the contractual life of the option is based on the U.S.
Treasury yield curve in effect at the time of the grant.
|
2006
|
||||
|
Expected
volatility
|
193
|
%
|
||
|
Expected
dividend yield
|
0.00
|
%
|
||
|
Expected
term (in years)
|
3.00
|
|||
|
Risk-free
interest rate
|
4.61
|
%
|
Activity
under our stock option plans is summarized as follows:
|
Options
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted-Average
Remaining Contractual Term
|
|
|
Aggregate
Intrinsic Value
|
|||
|
Outstanding
at January 1, 2006
|
2,380,000
|
$
|
0.08
|
||||||||||
|
Granted
|
850,000
|
$
|
0.10
|
||||||||||
|
Exercised
|
---
|
---
|
|||||||||||
|
Forfeited
or expired
|
---
|
---
|
|||||||||||
|
Canceled
|
---
|
---
|
|||||||||||
|
Outstanding
at December 31, 2006
|
3,230,000
|
$
|
0.09
|
4.54
|
---
|
||||||||
|
Exercisable
at December 31, 2006
|
3,230,000
|
$
|
0.09
|
4.54
|
---
|
||||||||
The
weighted-average grant-date fair value of options granted during 2006 was
$0.025. There were no non-vested equity instruments at the beginning of the
year, end of the year, granted or forfeited during the year. The total fair
value of shares granted/vested during the year ended December 31, 2006 was
$18,177.
We
maintain a policy of issuing authorized but unissued shares of common stock
to
satisfy share option exercises.
The
fair
value of each warrant issued is estimated on the date of grant using the
Black-Scholes option-pricing model that uses the assumptions noted in the
following table.
|
2006
|
||||
|
Expected
volatility
|
196
|
%
|
||
|
Expected
dividend yield
|
0.00
|
%
|
||
|
Expected
term (in years)
|
3.00
|
|||
|
Risk-free
interest rate
|
4.91
|
%
|
Warrant
activity is summarized as follows:
|
Warrants
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted-Average
Remaining Contractual Term
|
|
|
Aggregate
Intrinsic Value
|
|||
|
Outstanding
at January 1, 2006
|
23,150,000
|
$
|
0.37
|
||||||||||
|
Granted
|
400,000
|
$
|
0.12
|
||||||||||
|
Exercised
|
---
|
---
|
|||||||||||
|
Forfeited
or expired
|
(150,000
|
)
|
($0.01
|
)
|
|||||||||
|
Canceled
|
---
|
---
|
|||||||||||
|
Outstanding
at December 31, 2006
|
23,400,000
|
$
|
0.37
|
2.46
|
$
|
1,200
|
|||||||
|
Exercisable
at December 31, 2006
|
23,400,000
|
$
|
0.37
|
2.46
|
$
|
1,200
|
|||||||
No
other
equity instruments were issued during 2006 to acquire goods and services. See
Note 10.
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 March 2009. We are responsible for all insurance
expenses associated with this lease. See Note 20.
Rental
expense for the years ended December 31, 2006 and 2005 amounted to $101,238
and
$82,172, respectively. Rental expenses are included in capitalized software
development costs. See Note 1.
At
December 31, 2006, the future minimum rental payments required under these
leases are as follows:
|
2007
|
$
|
43,458
|
||
|
2008
|
16,280
|
|||
|
2009
|
4,070
|
|||
|
Total
future minimum rental payments
|
$
|
63,808
|
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 2006 and 2005.
The
following table summarizes property held under capital leases at December 31,
2006:
|
Office
equipment
|
$
|
51,788
|
||
|
Less:
Accumulated depreciation
|
22,442
|
|||
|
Net
property and equipment under capital lease
|
$
|
29,346
|
Future
minimum lease payments under capital leases as of December 31, 2006 for each
of
the next five years and in the aggregate are:
|
2007
|
$
|
13,726
|
||
|
2008
|
13,726
|
|||
|
2009
|
12,582
|
|||
|
2010
|
---
|
|||
|
2011
|
---
|
|||
|
Total
minimum lease payments
|
40,034
|
|||
|
Less:
Amount representing interest
|
6,248
|
|||
|
Total
obligations under capital lease
|
33,786
|
|||
|
Less:
Current installments of obligations under capital lease
|
10,318
|
|||
|
Long-term
obligation under capital lease
|
$
|
23,468
|
NOTE
15 - SUPPLEMENTAL CASH FLOW INFORMATION
We
did
not incur any non-cash investing and financing activities during the years
ended
December 31, 2006 and 2005, respectively.
NOTE
16 - COMMITMENTS AND CONTINGENCIES
We
are
subject to legal proceedings and claims that arise in the ordinary course of
our
business. In the opinion of management, the amount of ultimate liability with
respect to these actions will not materially affect our financial statements
taken as a whole.
We
entered into a license agreement in June 1999 with Parsons Technology, Inc.,
a
copy of which has since been assigned to Riverdeep, Inc., the latest
licensor-assignee in a succession of assignments that have occurred since the
original agreement. The license, as we acquired it in 1999, provided us with
the
right, for a term of ten years, to publish, use, distribute, sublicense and
sell, exclusively worldwide in non-secular channels and non-exclusively in
secular channels, a collection of top-selling Christian-related software titles
and content owned by Parsons Technology.
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 Technical Officer (with a base
annual salary of $150,000). In addition to the bonus provisions and annual
base
salary, each employment agreement provides for payment of all accrued base
salaries ($17,191 included in accrued payroll at December 31, 2006), bonuses
($19,647 from fiscal 2004 and $19,895 from fiscal 2006 included in accrued
payroll at December 31, 2006), and any vested deferred vacation compensation
($26,196 included in accrued payroll at December 31, 2006) for termination
by
reason of disability. The agreements also provide for severance compensation
equal to the then base salary until the later of (i) the expiration of the
term
of the agreement as set forth therein or (ii) one year, when the termination
is
other than for cause (including termination by reason of disability). There
is
no severance compensation in the event of voluntary termination or termination
for cause.
In
2004,
we reduced our reserve for rebates payable based, in part, on our ability to
meet the financial obligation of claims carried forward from our last rebate
program in 2001. As such, we may have a legal obligation to pay rebates in
excess of the liability recorded.
On
July
19, 2004, we entered into a certain Stock Purchase Agreement pursuant to which
we agreed to issue and sell 21,875,000 restricted shares of our common stock
to
a New York based institutional investor, at a price of $0.08 per share. Under
the terms of transaction, the investor received two of our common stock purchase
warrants. The first warrant entitles the holder, for a period of up to five
years, to purchase up to 10,937,500 common shares at a price of $0.18 per share,
subject to standard adjustment provisions. The second warrant entitles the
holder, also for a period of up to five years, to purchase up to 10,937,500
additional common shares at a price of $0.60 per share, subject to standard
adjustment provisions.
As
part
of the financing transaction, we also entered into a certain Registration Rights
Agreement with the investor pursuant to which we became committed to registering
all of the shares issued as part of such transaction, including those issuable
under the warrants. The agreement also requires we maintain an effective
registration statement until the earlier of (i) July 19, 2007, or (ii) such
time
as all of the securities which are the subject of such registration statement
cease to be registrable securities. On November 22, 2004, we filed a
registration statement on Form SB-2 covering the shares issued to the investor,
as well as the shares underlying the warrants issued to the investor. On
February 1, 2006, the registration statement was declared effective by the
SEC.
NOTE
17 - RELATED PARTY TRANSACTIONS
Our
executive officers and employees, from time to time, make purchases of materials
and various expense items via their personal credit cards in lieu of a corporate
check for COD orders and/or prior to establishment of a line of credit with
a
vendor. We do not provide our employees or executive officers with corporate
credit cards and reimburse these purchases promptly.
On
April
7, 2006, we signed a 2-year, $336,000, 8% promissory note with the New York
based institutional investor for payment of the unpaid registration rights
penalties. See Notes 8 and 11.
We
had no
other transactions with related parties during the years ended December 31,
2006
and 2005.
NOTE
18 - 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
19 - GOING CONCERN
The
accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplates our continuation as a going concern. However, as of December 31,
2006 and 2005, we had negative working capital of $1,705,824 and $3,025,697,
respectively, and had an accumulated deficit of $7,098,397 and $7,752,097,
respectively. Although these factors raise substantial doubt about our ability
to continue as a going concern, we have taken several actions to mitigate the
risk that we will be unable to continue as a going concern through December
31,
2007. These actions include potentially selling some of our intangible assets
and pursuing mergers and acquisitions that will provide profitable operations
and positive operating cash flow.
NOTE
20 - SUBSEQUENT EVENTS
In
January 2007, our merchant banker held $40,000 cash in reserve to allow for
a
potential increase in credit card chargebacks from increased consumer purchases
during the fourth quarter of 2006.
In
March
2007, we secured a 2-year extension to our Naperville, Illinois office lease.
The extension expires March 31, 2009 and continues at a base rent of $1,357
per
month.
There
were no previously unreported events under this Item 8 during the fiscal
year
ended December 31, 2006.
(a)
Formation of Disclosure Controls and Procedures Officer
Committee
Our
Disclosure Controls and Procedures Officer Committee (the “Disclosure Policy
Committee”) was formed in September 2002 and reports directly to our Chief
Executive Officer and Chief Financial Officer. The Disclosure Policy Committee
has implemented disclosure controls and procedures that meet the standards
established by Rule 13a-15 of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”).
Disclosure
Controls and Procedures
The
Disclosure Policy Committee is primarily responsible for establishing and
maintaining disclosure controls and procedures designed to ensure that the
information required to be disclosed in our reports filed or submitted under
the
Exchange Act, is recorded, processed, summarized and reported in a timely
manner
as specified in the rules and forms set forth by the SEC and that the
information required to be disclosed in our reports is accumulated and
communicated to our management, including our principal executive and principal
financial officers, or other persons performing similar functions, as
appropriate to allow timely decisions regarding required
disclosure.
(b)
Evaluation of Disclosure Controls and Procedures and Annual Report on Internal
Control over Financial Reporting
The
Disclosure Policy Committee meets quarterly within one week of the last day
of
the period in which a given report is due. Members provide information that
is
documented in the Quarterly Control and Procedures Report for the period
in
which a quarterly 10-QSB or annual 10-KSB report is due. This report contains
attestations and documentation in regard to the following:
|
▪
|
The
fact that disclosure controls and procedures have been reviewed
as of the
end of the period covered by a given report;
|
|
|
▪
|
Any
concerns regarding weaknesses in disclosure controls and
procedures;
|
|
|
▪
|
Any
concerns relating to events that may require
disclosure;
|
|
|
▪
|
Any
concerns relating to internal fraud/defalcation;
|
|
|
▪
|
Potential
material losses;
|
|
|
▪
|
New
off-balance sheet arrangements; and
|
|
|
▪
|
Material
amounts not reflected on the general
ledger.
|
The
Quarterly Control and Procedures Report is completed, signed and presented
to
the CEO and CFO prior to completion of the first draft of each 10-QSB and
10-KSB. Because material issues may occur between regularly scheduled quarterly
meetings, this report is to be generated by the disclosure policy appropriate
officers at anytime warranted. The CEO and CFO will consult with our Disclosure
Policy Committee to determine any action that is necessary.
Our
CEO
and CFO have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Exchange Act) as of the end of the fiscal quarter covered by this annual
report
on Form 10-KSB. Based on this evaluation, our CEO and CFO have concluded
that
our disclosure controls and procedures are effective and designed to ensure
that
the information required to be disclosed in our reports filed or submitted
under
the Exchange Act, is recorded, processed, summarized and reported within
the
requisite time periods.
During
the course of their evaluation our CEO and CFO did not discover any fraud
involving management or any other personnel who play a significant role in
our
disclosure controls and procedures. Furthermore, because there were no
significant deficiencies and/or material weaknesses discovered no remedial
measures were necessary or taken during the period covered by this report
to
correct any such deficiencies.
(c)
Changes in Internal Control over Financial Reporting
No
changes in our disclosure controls and procedures, internal control over
financial reporting or other factors have occurred during the fiscal quarter
covered by this report that would materially affect or be reasonably likely
to
materially affect our disclosure controls and procedures or internal control
over financial reporting.
Our
Annual Meeting of the Stockholders of Findex.com, Inc., previously scheduled
to
be held on May 4, 2007, has been rescheduled for September 21,
2007.
There
were no reportable events under this Item 8B during the fiscal quarter ended
December 31, 2006.
ITEM
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS,CONTROL PERSONS AND CORPORATE
GOVERNANCE; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT.
Our
directors and executive officers and their ages as of April 17, 2007 were
as
follows:
|
Name
|
Age
|
Position
|
||
|
Steven
Malone
|
40
|
Director,
Chairman of the Board and President
|
||
|
John
A. Kuehne, CA
|
49
|
Director
|
||
|
Kirk
R. Rowland, CPA
|
47
|
Director
and Chief Financial Officer
|
||
|
William
Terrill
|
50
|
Chief
Technology Officer
|
||
|
Brittian
Edwards
|
44
|
Vice
President, CBA Sales and Licensing
|
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 nineteen
years
of experience in the computer industry, with the last thirteen focused on
software sales. As a National Account Manager from 1992 to 1996 for Grolier
Interactive, he was responsible for their largest retail and distribution
accounts. As Director of Corporate Sales from 1996 to 1998 for Software
Publishing Corporation, he was responsible for the on-going sales growth
of
premiere corporate products, such as the award winning Harvard Graphics,
as well
as the introduction of several new products to the corporate marketplace.
As
Director of Sales from 1998 to1999 for InfoUSA, he was responsible for sales
and
marketing of InfoUSA’s products to retail, distribution, OEM and corporate
accounts.
John
A. Kuehne, CA - Director
Mr.
Kuehne has served as one of our directors since December 2000. He is also
currently a management consultant and the President of SmallCap Corporate
Partners Inc., (www.smallcap.ca),
a
venture capital and management consulting 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 public
Canadian forest products company, where he eventually became Chief Financial
Officer. As the CFO of Doman Industries, Mr. Kuehne gained practical experience
in corporate finance and mergers and acquisitions, completing a $125 million
senior note issue through Bear Stearns and the $140 million acquisition of
Pacific Forest Products. Mr. Kuehne holds a Bachelor of Commerce degree from
the
University of Alberta (1984) and a Masters of Management from the J.L.Kellogg
Graduate School of Management at Northwestern University (1990). From June
2000
to May 2004 he served as a director of Prospector Consolidated Resources
Inc., a
Canadian public company. From January 2003 to November 2004 he served as
a
director of Beau Pre Explorations Ltd., also a Canadian public company. Mr.
Kuehne qualified as a Canadian Chartered Accountant in 1983 and as an American
Certified Public Accountant in 1985.
Kirk
R. Rowland, CPA - Chief Financial Officer
Mr.
Rowland has served as our Chief Financial Officer and as one of our directors
since April 2002. He served as our Vice President of Finance from March 2001
to
April 2002, and as our Director of Finance from December 1999 through March
2001. Mr. Rowland has over seventeen years of experience in public accounting
working in a multitude of industries, including insurance, manufacturing,
and
agriculture. Most recently, and from 1992 to 1999 he was a partner in Manning
& Associates, P.C. a local Nebraska accounting firm. From 1984 to 1988, Mr.
Rowland was a Senior Staff Accountant with KMG Main Hurdman (now KPMG), an
international accounting firm, and from 1988 to 1992 he was an Audit Supervisor
with Sommer, Magnuson, & Dawson, P.C.
William
Terrill - Chief Technology Officer
Mr.
Terrill rejoined us in July 2002 as our Chief Technology Officer after having
been involved with us from July 1999 to July 2000. He has over 27 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 Sales from July 1999
to
April 2002. Mr. Edwards has been in the Christian Booksellers Association
marketplace for more than 19 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 1998
to
become the National Sales Manager for Parsons Technology, then owned by
Broderbund.
Board
of Directors Committees
There
are
currently two standing committees comprised of members of our board of
directors. These include our audit committee and our compensation
committee.
Since
December 2000, our board of directors has maintained an audit committee.
As of
April 17, 2007, the audit committee consisted of only one member, John Kuehne,
who is a “financial expert” within the meaning of Item 407(d)(5) of Regulation
S-B. Mr. Kuehne qualifies as “independent” under Item 7(d)(3)(iv) of Schedule
14A of the Securities Exchange Act of 1934.
Since
July 2003, we have maintained a compensation committee. We currently only
have
one member, John A. Kuehne, serving on our compensation committee.
On
March
31, 2006, Dr. Henry M. Washington resigned as a member of our board of directors
as a result of other professional obligations, leaving us with only one
independent director and causing the entire board to temporarily function
as the
compensation committee. As of the date of the filing of this annual report
on
Form 10-KSB for the fiscal year ended December 31, 2006, and despite our
efforts
to do so, we have not yet identified a suitable replacement.
Except
as
may be provided in our bylaws (incorporated by reference into this Form 10-KSB
as Exhibt 3(ii)), we do not currently have specified procedures in place
pursuant to which whereby security holders may recommend nominees to the
Board
of Directors.
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.
Code
of Ethics
We
have
adopted the Code of Ethics attached as Exhibit 14.1 to this Form 10-KSB for
our
senior financial officers and the principal executive officer.
Compliance
with Section 16(a)
Section
16(a) of the Exchange Act requires our directors and executive officers,
and
persons who own more than ten percent of a registered class of our equity
securities, to file with the SEC initial reports of ownership and reports
of
changes in ownership of our common stock and other equity securities of ours.
Officers, directors and greater than ten percent stockholders are required
by
the SEC’s regulations to furnish us with copies of all Section 16(a) forms they
filed.
The
following table sets forth the compliance reporting under Section 16(a) for
the
fiscal year ended December 31, 2006.
|
|
Number
of Late
Reports
|
Number
of
Transactions
Not
Timely
Reported
|
Failure
to
File
|
|||||||
|
Barron
Partners, LP
|
---
|
---
|
1
|
SUMMARY
COMPENSATION TABLE
The
following table sets forth the total compensation awarded to, earned or paid,
for each of the last two fiscal years to our Chief Executive Officer and
each of
our executive officers earning a total compensation of $100,000 or more during
any such fiscal year. Steven Malone has served as our President and Chief
Executive Officer since March 2001. William Terrill has served as our Chief
Technology Officer since July 2002. Kirk R. Rowland has served as our Chief
Financial Officer and director since April 2002. No other individuals employed
by us earned a total compensation in excess of $100,000 during the fiscal
year
ended December 31, 2006.
|
Summary
Compensation
|
||||||||||||||||||||||||||||
|
Name
and Principal Position
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards ($)
|
|
|
Option
Awards ($)
|
|
|
Non-equity
Incentive Plan Compensation ($)
|
|
|
Non-qualified
Deferred Compensation Earnings ($) (a)
|
|
|
All
Other Compensation ($) (b)
|
|
|
Total
($)
|
|
||
|
Steven
Malone,
|
2006
|
$
|
150,000
|
$
|
6,632
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
650
|
$
|
5,041
|
$
|
162,323
|
|||||||||||
|
President
and Chief Executive Officer
|
2005
|
$
|
150,000
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
14,136
|
$
|
164,136
|
|||||||||||
|
|
||||||||||||||||||||||||||||
|
William
Terrill,
|
2006
|
$
|
150,000
|
$
|
6,632
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
4,680
|
$
|
10,872
|
$
|
172,184
|
|||||||||||
|
Chief
Technology Officer
|
2005
|
$
|
150,000
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
4,500
|
$
|
12,181
|
$
|
166,681
|
|||||||||||
|
|
||||||||||||||||||||||||||||
|
Kirk
R. Rowland,
|
2006
|
$
|
110,000
|
$
|
6,632
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
10,283
|
$
|
126,915
|
|||||||||||
|
Chief
Financial Officer
|
2005
|
$
|
110,000
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
10,314
|
$
|
120,314
|
|||||||||||
|
(a)
Represents accrued deferred compensation from our Simple IRA retirement
plan, which allows for those employees who participate to receive
an
employer's match in contribution funds up to 3% of the employee's
annual
gross pay.
|
||||||||||||||||||||||||||||
|
(b)
Represents earnings accrued at the end of each fiscal year for
vacation
hours earned that would be required to be paid in connection with
any
termination, including without limitation through retirement, resignation,
severance or constructive termination of any such executive officer's
employment.
|
||||||||||||||||||||||||||||
The
following table sets forth the outstanding equity awards, specifically
unexercised options, stock that has not vested, and equity incentive plan
awards, held by the executive officers named in the Summary Compensation
Table
as of fiscal year ended December 31, 2006.
|
Outstanding
Equity Awards at Fiscal Year-End
|
||||||||||||||||||||||||||||
|
|
Option
awards
|
Stock
awards
|
||||||||||||||||||||||||||
|
Name
|
Number
of Securities Underlying Unexercised options (#)
Exercisable
|
|
|
Number
of Securities Underlying Unexercised options (#)
Unexercisable
|
|
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options (#)
|
|
|
Option
Exercise Price ($)
|
|
|
Option
Expiration Date
|
|
|
Number
of Shares or Units of Stock that have not Vested
(#)
|
|
|
Market
Value of Shares or Units of Stock that have not Vested
($)
|
|
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other
Rights
that have not Vested (#)
|
|
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares,
Units or
Other rights that have not Vested ($)
|
|
||
|
Steven
Malone
|
250,000
|
---
|
---
|
$
|
0.11
|
July
17, 2011
|
---
|
$
|
---
|
---
|
$
|
---
|
||||||||||||||||
|
William
Terrill
|
500,000
|
---
|
---
|
$
|
0.05
|
June
6, 2012
|
---
|
$
|
---
|
---
|
$
|
---
|
||||||||||||||||
|
William
Terrill
|
500,000
|
---
|
---
|
$
|
0.05
|
June
7, 2013
|
---
|
$
|
---
|
---
|
$
|
---
|
||||||||||||||||
|
Kirk
R. Rowland
|
150,000
|
---
|
---
|
$
|
0.11
|
July
17, 2011
|
---
|
$
|
---
|
---
|
$
|
---
|
||||||||||||||||
Information
Concerning Stock Options
Our
Stock
Incentive Plan, adopted in 1999, authorizes the issuance of various forms
of
stock-based awards including incentive and nonqualified stock options, stock
appreciation rights attached to stock options, and restricted stock awards
to
our directors, officers and other key employees. In accordance with the terms
of
the Stock Incentive Plan, stock options are granted at an exercise price
as
determined by our board of directors at the time any such option is granted
but
which may not be less than the par value of our common shares ($.001).
We
did
not grant stock options to our executive officers during the fiscal year
ended
December 31, 2006. No executive exercised any stock options during the fiscal
year 2006.
EMPLOYMENT
AGREEMENTS
Mr.
Malone is employed by us pursuant to a two-year employment agreement extension,
which extension commenced on March 31, 2006, and which is a term extension
to
the previous employment agreement originally dated July 25, 2003. The original
agreement provided for a base annual salary equal to $150,000 and an annual
bonus equal to 1% of our net income. The employment agreement extension was
amended on April 13, 2007 to provide for an annual bonus equal to 1% of income
from operations adjusted for other income and interest expense for 2007 and
beyond. In the event Mr. Malone is terminated by us for reason other than
cause,
we are required to pay him his then base salary until the later of (i) the
expiration of the employment agreement or (ii) one year. Mr. Malone has agreed
to refrain from competing with us for a period of one year following the
termination of his employment.
Mr.
Terrill is employed by us pursuant to a two-year employment agreement extension,
which extension commenced on March 31, 2006, and which is a term extension
to
the previous employment agreement originally dated June 7, 2002. The original
agreement provided for a base annual salary equal to $150,000, an annual
bonus
equal to 1% of our net income, 500,000 stock options upon his start date
at an
exercise price of $0.05 per share, and an additional 500,000 stock options
upon
the one year anniversary of his start date based on performance criteria
outlined in a separate agreement. The agreement also included a signing cash
bonus of $10,000, which was converted on July 25, 2003 into 250,000 common
shares at the market price of $0.04 per share, the quoted trading price on
the
date the agreement was reached. The employment agreement extension was amended
on April 13, 2007 to provide for an annual bonus equal to 1% of income from
operations adjusted for other income and interest expense for 2007 and beyond.
In the event Mr. Terrill is terminated by us for reason other than cause,
we are
required to pay him his then base salary until the later of (i) the expiration
of the employment agreement or (ii) one year. Mr. Terrill has agreed to refrain
from competing with us for a period of one year following the termination
of his
employment.
Mr.
Rowland is employed by us pursuant to a two-year employment agreement extension,
which extension commenced on March 31, 2006, and which is a term extension
to
the previous employment agreement originally dated July 25, 2003. The original
agreement provided for a base annual salary equal to $110,000 and an annual
bonus equal to 1% of our net income. The employment agreement extension was
amended on April 13, 2007 to provide for an annual bonus equal to 1% of income
from operations adjusted for other income and interest expense for 2007 and
beyond. In the event Mr. Rowland is terminated by us for reason other than
cause, we are required to pay him his then base salary until the later of
(i)
the expiration of the employment agreement or (ii) one year. Mr. Rowland
has
agreed to refrain from competing with us for a period of one year following
the
termination of his employment.
DIRECTOR
COMPENSATION
The
following table sets forth the compensation of our outside directors for
the
fiscal year ended December 31, 2006.
|
Director
Compensation
|
||||||||||||||||||||||
|
Name
|
Fees
Earned or Paid in Cash ($)
|
|
|
Stock
Awards ($)
|
|
|
Option
Awards ($)
|
|
|
Non-Equity
Incentive Plan Compensation ($)
|
|
|
Non-Qualified
Deferred Compensation Earnings ($)
|
|
|
All
Other Compensation ($)
|
|
|
Total
($)
|
|
||
|
John
Kuehne (a)
|
$
|
6,000
|
$
|
18,000
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
24,000
|
||||||||
|
Henry
Washington (b)
|
$
|
---
|
$
|
3,000
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
---
|
$
|
3,000
|
||||||||
|
(a)
Stock awards consists of 46,154 restricted shares of common stock
issued
on March 31, 2006 at $0.13 per share in lieu of cash and meeting
fees and
480,000 restricted shares of common stock issued on October 26,
2006 at
$0.025 per share in lieu of cash and meeting fees.
|
||||||||||||||||||||||
|
(b)
Stock awards consists of 23,077 restricted shares of common stock
issued
on March 31, 2006 at $0.13 per share in lieu of cash and meeting
fees.
|
||||||||||||||||||||||
Mr.
Kuehne has served as one of our directors since December 2000. Mr. Kuehne's
compensation agreement currently provides for a monthly fee of $1,000 for
committee services and a monthly fee of $1,000 for services as a “financial
expert” (as defined in Regulation 228.401(e)(1)(i)(A) of Regulation S-B). We
currently accrue $2,000 a month for Mr. Kuehne’s services. Dr. Washington has
also served as one of our directors since December 2000; however, on March
31,
2006, Dr. Washington resigned as a member of our board of directors as a
result
of other professional obligations. Dr.Washington's compensation agreement
had
provided for a monthly fee of $1,000 for committee services.
The
tables below set forth information regarding the beneficial ownership of
our
common stock as of April 17, 2007. The information in these tables provides
the
ownership information for:
|
▪
|
each
person known by us to be the beneficial owner of more than 5% of
our
common stock;
|
|
|
▪
|
each
of our directors and executive officers; and
|
|
|
▪
|
all
of our directors and executive officers as a
group.
|
Beneficial
ownership has been determined in accordance with the rules and regulations
of
the SEC and includes voting or investment power with respect to our common
stock
and those rights to acquire additional shares within sixty days. Unless
otherwise indicated, the persons named in the table below have sole voting
and
investment power with respect to the number of shares of common stock indicated
as beneficially owned by them, except to the extent such power may be shared
with a spouse. Common stock beneficially owned and percentage ownership are
based on 49,788,317 shares of common stock currently outstanding (reflects
a
1-for-50 reverse stock-split of our common stock that occurred in 1997 and
a
1-for-20 reverse stock-split of our common stock that occurred on March 18,
1998) and 23,000,000 additional shares potentially acquired within sixty
days,
for a total of 72,788,317 shares. The address of each person listed is in
care
of Findex.com, Inc., 11204 Davenport Street, Suite 100, Omaha, Nebraska 68154.
|
Title
of Class
|
Name
of Beneficial Owner
|
Amount
and Nature of Beneficial Owner
|
Percent
of Class
|
|||
|
Common
Stock
|
Barron
Partners, LP (1)
|
43,750,000
|
60.1%
|
(1)
Consists of warrants to acquire up to 21,875,000 shares of common stock,
all of
which are presently exercisable and 21,875,000 shares of common stock directly
owned.
|
Title
of Class
|
Name
of Beneficial Owner
|
Amount
and Nature of Beneficial Owner
|
Percent
of Class
|
|||
|
Common
Stock
|
Steven
Malone (1)
|
2,203,111
|
3.0%
|
|||
|
Common
Stock
|
John
A. Kuehne (2)
|
2,464,157
|
3.4%
|
|||
|
Common
Stock
|
Kirk
R. Rowland (3)
|
1,819,111
|
2.5%
|
|||
|
Common
Stock
|
William
Terrill (4)
|
1,751,127
|
2.4%
|
|||
|
Common
Stock
|
All
officers and directors as
a group (4 persons)
|
8,237,506
|
11.3%
|
(1)
Consists of stock options to acquire up to 250,000 shares of common stock,
all
of which are presently exercisable, 1,719,111 shares of common stock directly
owned, and stock options to acquire up to 110,000 shares of common stock
all of
which are presently exercisable and 124,000 shares of common stock indirectly
owned through spouse.
(2)
Consists of stock options to acquire up to 175,000 shares of common stock,
all
of which are presently exercisable and 2,289,157 shares of common stock directly
owned.
(3)
Consists of stock options to acquire up to 150,000 shares of common stock,
all
of which are presently exercisable and 1,669,111 shares of common stock directly
owned.
(4)
Consists of stock options to acquire up to 1,000,000 shares of common stock,
all
of which are presently exercisable and 751,127 shares of common stock directly
owned.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
On
July
19, 2004, we entered into a certain Stock Purchase Agreement pursuant to
which
we agreed to issue and sell 21,875,000 restricted shares of our common stock
to
Barron Partners, LP, a New York based institutional investor, at a price
of
$0.08 per share. Under the terms of transaction, Barron Partners, LP received
two of our common stock purchase warrants. The first warrant entitles the
holder, for a period of up to five years, to purchase up to 10,937,500 common
shares at a price of $0.18 per share, subject to standard adjustment
provisions. The second warrant entitles the holder, also for a period of
up to five years, to purchase up to 10,937,500 additional common shares at
a
price of $0.60 per share, subject to standard adjustment provisions.
As
part
of the financing transaction, we also entered into a certain Registration
Rights
Agreement with Barron Partners, LP pursuant to which we became committed
to
registering all of the shares issued as part of such transaction, including
those issuable under the warrants.
Upon
receipt of the requisite stockholder approval to increase the number of
authorized common shares so as to allow us to deliver the warrants, effectively
obtained and effectuated as of November 10, 2004, we had 30 days within which
to
file a registration statement on Form SB-2 covering the
shares issued to Barron Partners, as well as the shares underlying the warrants
issued to Barron Partners. Accordingly, this registration statement was
filed
on
November 22, 2004. On
February 1, 2006, the SEC declared this registration statement effective.
Due to
continued delays in effectiveness of this registration statement (due
principally to ongoing efforts made necessary by our determination to restate
certain of our historical financial information), and in accordance with
the
Registration Rights Agreement, we accrued a total of approximately $490,000
(284
days at $1,726 per day) in penalties, of which we had paid $150,000 prior
to
April 7, 2006. On April 7, 2006, we issued a two-year promissory note for
$336,000 together with simple interest at the rate of 8% per annum to Barron
Partners for the unpaid registration rights penalties. The note agreement
calls
for monthly installments for the first twelve months of $10,000, beginning
May
1, 2006 and $20,000 per month thereafter. The accrual and payment on the
registration rights penalties has had a material adverse effect on our business,
our financial condition, including liquidity and profitability, and our results
of operations.
As
of the
date hereof, Barron Partners, LP owns 44.0% of our outstanding common stock
and,
subject to the restrictions contained in Article VII, subsection B of our
Articles of Incorporation, controls the vote associated with such
shares.
DIRECTOR
INDEPENDENCE
We
currently have three directors serving on our Board of Directors, Mr. Malone,
Mr. Rowland and Mr. Kuehne. We
are
not a listed issuer and, as such, are not subject to any director independence
standards. Using the definition of independence set forth in the rules of
the
American Stock Exchange, only Mr. Kuehne would be considered an independent
director of the Company.
|
No.
|
Description
of Exhibit
|
|
2.1
|
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.
|
|
3(i)(1)
|
Restated
Articles of Incorporation of Findex.com, Inc. dated June 1999 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
10, 2004
incorporated by reference to Exhibit 3.1(ii) on Form 10-QSB filed
November
10, 2004.
|
|
3(ii)
|
Restated
By-Laws of Findex.com, Inc., incorporated by reference to Exhibit
3.3 on
Form 8-K filed March 15, 2000.
|
|
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 Stock Purchase Agreement between Findex.com, Inc. and
Barron
Partners, LP 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
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
December
14, 2005.
|
|
10.15
|
Employment
Agreement Extension between Findex.com, Inc and Steven Malone dated
March
31, 2006, incorporated by reference to Exhibit 10.1 on Form 8-K
filed
April 6, 2006.
|
|
10.16
|
Employment
Agreement Extension between Findex.com, Inc and William Terrill
dated
March 31, 2006, incorporated by reference to Exhibit 10.2 on Form
8-K
filed April 6, 2006.
|
|
10.17
|
Employment
Agreement Extension between Findex.com, Inc and Kirk R. Rowland
dated
March 31, 2006, incorporated by reference to Exhibit 10.3 on Form
8-K
filed April 6, 2006.
|
|
10.18
|
Promissory
Note to Barron Partners, LP dated April 7, 2006, incorporated by
reference
to Exhibit 10.1 on Form 8-K filed April 13, 2006.
|
|
10.19
|
Share
Exchange Agreement between Findex.com, Inc. and the stockholders
of Reagan
Holdings Inc., dated March 7, 2000, incorporated by reference to
Exhibit
2.1 on Form 8-K filed March 15, 2000.
|
|
10.20
|
Convertible
Secured Promissory Note between FindEx.com, Inc. and W. Sam Chandoha,
dated July 20, 2006, incorporated by reference to Exhibit 10.1
on Form 8-K
filed July 26, 2006.
|
|
10.21
|
Security
Agreement between FindEx.com, Inc. and W. Sam Chandoha, dated July
20,
2006 incorporated by reference to Exhibit 10.2 on Form 8-K filed
July 26,
2006.
|
|
10.22
|
Common
Stock Purchase Warrant between FindEx.com, Inc. and W. Sam Chandoha,
dated
July 20, 2006 incorporated by reference to Exhibit 10.3 on Form
8-K filed
July 26, 2006.
|
|
10.23
|
Modification
and Extension Agreement Between FindEx.com, Inc. and W. Sam Chandoha,
dated September 20, 2006, incorporated by reference to Exhibit
10.1 on
Form 8-K filed September 25,2006.
|
|
10.24
|
Employment
Agreement Extension Amendment between Findex.com, Inc. and Steven
Malone
dated April 13, 2007. FILED HEREWITH.
|
|
10.25
|
Employment
Agreement Extension Amendment between Findex.com, Inc. and William
Terrill
dated April 13, 2007. FILED HEREWITH.
|
|
10.26
|
Employment
Agreement Extension Amendment between Findex.com, Inc. and Kirk
R. Rowland
dated April 13, 2007. FILED HEREWITH.
|
|
14.1
|
Code
of Ethics, adopted by Board of Directors April 17, 2006. FILED
HEREWITH.
|
|
21.1
|
Subsidiaries
of Findex.com, Inc. as of December 31, 2006. FILED
HEREWITH.
|
|
31.1
|
Certification
of Findex.com, Inc. Chief Executive Officer, Steven Malone, required
by
Rule 13a-14(a) or Rule 15d-14(a), and dated April 17, 2007. FILED
HEREWITH.
|
|
31.2
|
Certification
of Findex.com, Inc. Chief Financial Officer, Kirk R. Rowland, required
by
Rule 13a-14(a) or Rule 15d-14(a), and dated April 17, 2007. FILED
HEREWITH.
|
|
32.1
|
Certification
of Findex.com, Inc. Chief Executive Officer, Steven Malone, required
by
Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63
of Title
18 of the United States Code (18 U.S.C. 1350), and dated April
17, 2007.
FILED HEREWITH.
|
|
32.2
|
Certification
of Findex.com, Inc. Chief Financial Officer, Kirk R. Rowland, required
by
Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63
of Title
18 of the United States Code (18 U.S.C. 1350), and dated April
17, 2007.
FILED HEREWITH.
|
The
following table sets forth the aggregate amount of various professional fees
billed by our principal independent accountants for our last two fiscal years.
On December 22, 2005, upon recommendation of our Audit Committee, our Board
of
Directors dismissed Chisholm, Bierwolf &Nilson, LLC and engaged Brimmer,
Burek & Keelan LLP, as our principal independent accountants. Through the
fiscal year ended December 31, 2005, we had not been billed by Brimmer, Burek
& Keelan LLP with respect to their audit work performed for fiscal year
ended December 31, 2005. The fees shown in the table under the 2005 column
reflect fees billed to us by Chisholm, Bierwolf & Nilson, LLC.
|
2006
|
|
|
2005
|
||||
|
Audit
fees
|
$
|
57,955
|
$
|
20,446
|
|||
|
Audit-related
fees
|
$
|
---
|
$
|
---
|
|||
|
Tax
fees
|
$
|
---
|
$
|
---
|
|||
|
All
other fees
|
$
|
---
|
$
|
---
|
|||
|
All
other fees, including tax consultation and preparation
|
$
|
---
|
$
|
---
|
All
audit
fees are approved by our audit committee and board of directors. Neither
Chisholm, Bierwolf & Nilson, LLC nor Brimmer, Burek & Keelan LLP
provided any non-auditing services to us.
Signatures
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
FINDEX.COM,
INC.
|
|||
|
By:
/s/ Steven Malone
|
|||
|
Steven
Malone
|
|||
|
President
and Chief Executive Officer
|
Date:
April 17, 2007
Pursuant
to the requirements of the Securities and Exchange Act of 1934, this report
has
been signed below by the following persons on behalf of the registrant and
in
the capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/
Steven Malone
|
Chairman
of the Board, President and Chief
|
April
17, 2007
|
||
|
Steven
Malone
|
Executive
Officer (principal executive officer)
|
|||
|
/s/
John A. Kuehne
|
Director
|
April
17, 2007
|
||
|
John
A. Kuehne
|
||||
|
/s/
Kirk R. Rowland
|
Director
and Chief Financial Officer
|
April
17, 2007
|
||
|
Kirk
R. Rowland
|
(principal
financial and accounting officer)
|