FindEx.com, Inc. Form 10-QSB September 30, 2006
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-QSB
(Mark
One)
|
[X]
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the
quarterly period ended September 30, 2006.
|
[_]
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
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For
the
transition period from ________ to _________.
Commission
File Number: 0-29963
FINDEX.COM,
INC.
(Exact
name of small business issuer as specified in its charter)
|
Nevada
|
88-0379462
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|
(State
or other jurisdiction of
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(I.R.S.
Employer
|
|
incorporation
or organization)
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Identification
No.)
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11204
Davenport Street, Suite 100, Omaha, Nebraska 68154
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(Address
of principal executive offices)
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(402)
333-1900
(Issuer’s
telephone number)
N/A
(Former
name, former address and former fiscal year, if changed since last
report)
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 [_]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
[_] No [X]
APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE
YEARS
Check
whether the registrant filed all documents and reports required to be filed
by
Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court. Yes
[_] No [_]
APPLICABLE
ONLY TO CORPORATE ISSUERS
State
the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: 50,038,317 common shares as of November
17,
2006.
Transitional
Small Business Disclosure Format (Check one): Yes
[_] No [X]
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Page
Number
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F-1
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1
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16
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17
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17
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17
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17
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17
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18
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Findex.com,
Inc.
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|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
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September
30, 2006
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|
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December
31, 2005
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|
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Assets
|
|
Current
assets:
|
|
Cash
and cash equivalents
|
|
$
|
992
|
|
$
|
119,560
|
|
|
Accounts
receivable, trade, net
|
|
|
270,209
|
|
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405,380
|
|
|
Inventory
|
|
|
151,013
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|
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214,604
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Other
current assets
|
|
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235,887
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128,206
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|
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Total
current assets
|
|
|
658,101
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|
867,750
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Property
and equipment, net
|
|
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79,985
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|
|
114,191
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Software
license, net
|
|
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1,384,645
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1,762,276
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Capitalized
software development costs, net
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518,216
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707,067
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Other
assets
|
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276,568
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253,001
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Total
assets
|
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$
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2,917,515
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$
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3,704,285
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|
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Liabilities
and stockholders’ equity
|
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Current
liabilities:
|
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Note
payable
|
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$
|
75,000
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$
|
---
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|
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Accounts
payable, trade
|
|
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712,411
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556,042
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Accrued
royalties
|
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574,129
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472,548
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Derivative
liabilities
|
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952,914
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2,062,462
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Other
current liabilities
|
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551,991
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802,395
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Total
current liabilities
|
|
|
2,866,445
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|
|
3,893,447
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Long-term
obligations
|
|
|
156,961
|
|
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52,891
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Commitments
and contingencies (Note 8)
|
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Stockholders’
equity:
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Common
stock
|
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49,558
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48,620
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Paid-in
capital
|
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7,595,437
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7,461,424
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Retained
(deficit)
|
|
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(7,750,886
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)
|
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(7,752,097
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)
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Total
stockholders’ equity
|
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(105,891
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)
|
|
(242,053
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)
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Total
liabilities and stockholders’ equity
|
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$
|
2,917,515
|
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$
|
3,704,285
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|
|
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See
accompanying notes.
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Findex.com,
Inc.
|
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CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
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(Unaudited)
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Three
Months Ended
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Nine
Months Ended
|
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September
30,
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September
30,
|
|
|
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2006
|
|
|
2005
|
|
|
2006
|
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|
2005
|
|
| |
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Revenues,
net of reserves and allowances
|
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$
|
826,127
|
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$
|
1,023,609
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$
|
2,586,197
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$
|
3,978,019
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Cost
of sales
|
|
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391,771
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|
|
450,413
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1,361,157
|
|
|
1,410,191
|
|
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Gross
profit
|
|
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434,356
|
|
|
573,196
|
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1,225,040
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2,567,828
|
|
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Operating
expenses:
|
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Sales
and marketing
|
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193,223
|
|
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562,868
|
|
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580,684
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1,297,836
|
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General
and administrative
|
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385,658
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212,261
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1,310,340
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1,419,057
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Other
operating expenses
|
|
|
133,146
|
|
|
152,336
|
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|
424,567
|
|
|
466,553
|
|
|
Total
operating expenses
|
|
|
712,027
|
|
|
927,465
|
|
|
2,315,591
|
|
|
3,183,446
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|
|
Loss
from operations
|
|
|
(277,671
|
)
|
|
(354,269
|
)
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(1,090,551
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)
|
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(615,618
|
)
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Other
expenses, net
|
|
|
(47,898
|
)
|
|
(5,234
|
)
|
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(57,929
|
)
|
|
(12,009
|
)
|
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Registration
rights penalties
|
|
|
---
|
|
|
(158,792
|
)
|
|
(49,314
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)
|
|
(277,792
|
)
|
|
Gain
(loss) on valuation adjustment of derivatives
|
|
|
237,009
|
|
|
(328,121
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)
|
|
1,109,548
|
|
|
(874,992
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)
|
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Loss
before income taxes
|
|
|
(88,560
|
)
|
|
(846,416
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)
|
|
(88,246
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)
|
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(1,780,411
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)
|
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Income
tax (provision) benefit
|
|
|
114,909
|
|
|
(111,976
|
)
|
|
89,457
|
|
|
187,182
|
|
|
Net
income (loss)
|
|
$
|
26,349
|
|
$
|
(958,392
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)
|
|
1,211
|
|
|
(1,593,229
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)
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Retained
deficit at beginning of year
|
|
(7,752,097
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)
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(6,170,830
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)
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Retained
deficit at end of period
|
|
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$
|
(7,750,886
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)
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$
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(7,764,059
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)
|
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| |
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Net
income (loss) per share:
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Basic
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$
|
0.00
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$
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(0.02
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)
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$
|
0.00
|
|
$
|
(0.03
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)
|
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Diluted
|
|
$
|
0.00
|
|
$
|
(0.02
|
)
|
$
|
0.00
|
|
$
|
(0.03
|
)
|
|
|
|
Weighted
average shares outstanding:
|
|
Basic
|
|
|
49,558,317
|
|
|
48,619,855
|
|
|
49,294,214
|
|
|
48,619,855
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|
|
Diluted
|
|
|
51,167,410
|
|
|
48,619,855
|
|
|
51,660,240
|
|
|
48,619,855
|
|
|
|
|
See
accompanying notes.
|
|
Findex.com,
Inc.
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
(Unaudited)
|
|
|
|
Nine
Months Ended September 30
|
|
|
2006
|
|
|
2005
|
|
| |
|
Cash
flows from operating activities:
|
|
Cash
received from customers
|
|
$
|
2,683,215
|
|
$
|
4,049,153
|
|
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Cash
paid to suppliers and employees
|
|
|
(2,375,960
|
)
|
|
(3,565,309
|
)
|
|
Other
operating activities, net
|
|
|
(16,204
|
)
|
|
(3,910
|
)
|
|
Net
cash provided by operating activities
|
|
|
291,051
|
|
|
479,934
|
|
|
Cash
flows from investing activities:
|
|
Software
development costs
|
|
|
(412,108
|
)
|
|
(766,151
|
)
|
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Other
investing activities, net
|
|
|
(12,955
|
)
|
|
15,300
|
|
|
Net
cash (used) by investing activities
|
|
|
(425,063
|
)
|
|
(750,851
|
)
|
|
Cash
flows from financing activities:
|
|
Proceeds
from note payable, net
|
|
|
75,000
|
|
|
---
|
|
|
Payments
made on long-term notes payable
|
|
|
(59,556
|
)
|
|
(30,604
|
)
|
|
Net
cash provided (used) by financing activities
|
|
|
15,444
|
|
|
(30,604
|
)
|
|
Net
(decrease) in cash and cash equivalents
|
|
|
(118,568
|
)
|
|
(301,521
|
)
|
|
Cash
and cash equivalents, beginning of year
|
|
|
119,560
|
|
|
341,359
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
992
|
|
$
|
39,838
|
|
|
|
|
Reconciliation
of net income (loss) to cash flows from operating
activities:
|
|
Net
income (loss)
|
|
$
|
1,211
|
|
$
|
(1,593,229
|
)
|
|
Adjustments
to reconcile net income (loss) to net cash
|
|
|
|
provided
by operating activities:
|
|
|
|
Software
development costs amortized
|
|
|
600,959
|
|
|
524,989
|
|
|
(Gain)
loss on fair value adjustment of derivatives
|
|
|
(1,109,548
|
)
|
|
874,992
|
|
|
Bad
debts (benefit) provision
|
|
|
(11,216
|
)
|
|
29,650
|
|
|
Depreciation
& amortization
|
|
|
435,783
|
|
|
436,903
|
|
|
Noncash
operating expenses
|
|
|
69,997
|
|
|
---
|
|
|
Loss
on disposal of property and equipment
|
|
|
1,746
|
|
|
1,869
|
|
|
Change
in assets and liabilities:
|
|
|
|
Decrease
in accounts receivable
|
|
|
146,387
|
|
|
71,786
|
|
|
Decrease
in inventories
|
|
|
63,591
|
|
|
22,231
|
|
|
Decrease
in refundable taxes
|
|
|
5,764
|
|
|
7,164
|
|
|
(Increase)
decrease in prepaid expenses
|
|
|
(7,603
|
)
|
|
55,509
|
|
|
Increase
in accrued royalties
|
|
|
101,581
|
|
|
40,831
|
|
|
Increase
in accounts payable
|
|
|
164,327
|
|
|
65,858
|
|
|
Increase
in income taxes payable
|
|
|
---
|
|
|
180
|
|
|
(Decrease)
in deferred taxes
|
|
|
(89,457
|
)
|
|
(187,362
|
)
|
|
(Decrease)
increase in other liabilities
|
|
|
(82,471
|
)
|
|
128,563
|
|
|
Net
cash provided by operating activities
|
|
$
|
291,051
|
|
$
|
479,934
|
|
|
|
|
See
accompanying notes.
|
Findex.com,
Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2006
(Unaudited)
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS
OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with Generally Accepted Accounting Principles for interim
financial information and with the instructions to Form 10-QSB and Item 310
of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by Generally Accepted Accounting Principles for complete
financial statements. The accompanying unaudited condensed consolidated
financial statements reflect all adjustments that, in the opinion of management,
are considered necessary for a fair presentation of the financial position,
results of operations, and cash flows for the periods presented. The results
of
operations for such periods are not necessarily indicative of the results
expected for the full fiscal year or for any future period. The accompanying
financial statements should be read in conjunction with the audited consolidated
financial statements of Findex.com, Inc. included in our Form 10-KSB for the
fiscal year ended December 31, 2005.
USE
OF ESTIMATES
The
preparation of consolidated financial statements in conformity with Generally
Accepted Accounting Principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
the
accompanying notes. Significant estimates used in the consolidated financial
statements include the estimates of (i) doubtful accounts, sales returns, price
protection and rebates, (ii) provision for income taxes and realizability of
the
deferred tax assets, and (iii) the life and realization of identifiable
intangible assets. The amounts we will ultimately incur or recover could differ
materially from current estimates.
INVENTORY
Inventory,
including out on consignment, consists primarily of software media, manuals
and
related packaging materials and is recorded at the lower of cost or market
value, determined on a first-in, first-out, and adjusted on a per-item, basis.
ACCOUNTING
FOR LONG-LIVED ASSETS
We
review
property and equipment and intangible assets for impairment whenever events
or
changes in circumstances indicate that the carrying amount of an asset may
not
be recoverable. Recoverability is measured by comparison of our carrying amount
to future net cash flows the assets are expected to generate. If such assets
are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds its fair market value.
Property and equipment to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
INTANGIBLE
ASSETS
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142,
Goodwill
and Other Intangible Assets,
intangible assets with an indefinite useful life are not amortized. Intangible
assets with a finite useful life are amortized on the straight-line method
over
the estimated useful lives. Our software license is amortized over a ten-year
useful life.
SOFTWARE
DEVELOPMENT COSTS
In
accordance with SFAS No. 86, Accounting
for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed,
software development costs are expensed as incurred until technological
feasibility and marketability has been established, generally with release
of a
beta version for customer testing. Once the point of technological feasibility
and marketability is reached, direct production costs (including labor directly
associated with the development projects), indirect costs (including allocated
fringe benefits, payroll taxes, facilities costs, and management supervision),
and other direct costs (including costs of outside consultants, purchased
software to be included in the software product being developed, travel
expenses, material and supplies, and other direct costs) are capitalized until
the product is available for general release to customers. We amortize
capitalized costs on a product-by-product basis. Amortization for each period
is
the greater of the amount computed using (i) the straight-line basis over the
estimated product life (generally from 12 to 18 months), or (ii) the ratio
of
current revenues to total projected product revenues. Total cumulative
capitalized software development costs were $2,973,151, less accumulated
amortization of $2,454,935 at September 30, 2006.
Capitalized
software development costs are stated at the lower of amortized costs or net
realizable value. Recoverability of these capitalized costs is determined at
each balance sheet date by comparing the forecasted future revenues from the
related products, based on management’s best estimates using appropriate
assumptions and projections at the time, to the carrying amount of the
capitalized software development costs. If the carrying value is determined
not
to be recoverable from future revenues, an impairment loss is recognized equal
to the amount by which the carrying amount exceeds the future revenues. To
date,
no capitalized costs have been written down to net realizable
value.
SFAS
No.
2, Accounting
for Research and Development Costs,
established accounting and reporting standards for research and development.
In
accordance with SFAS No. 2, costs we incur to enhance our existing products
after general release to the public (bug fixes) are expensed in the period
they
are incurred and included in research and development costs. Research and
development costs incurred prior to determination of technological feasibility
and marketability and after general release to the public and charged to expense
were $131,013 and $130,407 for the nine months ended September 30, 2006 and
2005, respectively, included in general and administrative
expenses.
We
capitalize costs related to the development of computer software developed
or
obtained for internal use in accordance with the American Institute of Certified
Public Accountants Statement of Position (“SOP”) 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal
Use.
Software obtained for internal use has generally been enterprise level business
and finance software that we customize to meet our specific operational needs.
We have not sold, leased, or licensed software developed for internal use to
our
customers and have no intention of doing so in the future.
We
capitalize costs related to the development and maintenance of our website
in
accordance with Financial Accounting Standard Board’s (“FASB’s”) Emerging Issues
Task Force (“EITF”) Issue No. 00-2, Accounting
for Website Development Costs.
Under
EITF Issue No. 00-2, costs expensed as incurred are as follows:
| |
▪
|
planning
the website,
|
| |
▪
|
developing
the applications and infrastructure until technological feasibility
is
established,
|
| |
▪
|
developing
graphics such as borders, background and text colors, fonts, frames,
and
buttons, and
|
| |
▪
|
operating
the site such as training, administration and
maintenance.
|
Capitalized
costs include those incurred to:
| |
▪
|
obtain
and register an Internet domain name,
|
| |
▪
|
develop
or acquire software tools necessary for the development
work,
|
| |
▪
|
develop
or acquire software necessary for general website
operations,
|
| |
▪
|
develop
or acquire code for web applications,
|
| |
▪
|
develop
or acquire (and customize) database software and software to integrate
applications such as corporate databases and accounting systems into
web
applications,
|
| |
▪
|
develop
HTML web pages or templates,
|
| |
▪
|
install
developed applications on the web server,
|
| |
▪
|
create
initial hypertext links to other websites or other locations within
the
website, and
|
| |
▪
|
test
the website applications.
|
We
amortize website development costs on a straight-line basis over the estimated
life of the site, generally 36 months. Total cumulative website development
costs, included in other assets on our condensed consolidated balance sheets,
were $111,034, less accumulated amortization of $67,921 at September 30,
2006.
NET
REVENUE
We
derive
revenues from the sale of packaged software products, product support and
multiple element arrangements that may include any combination of these items.
We recognize software revenue for software products and related services in
accordance with SOP 97-2, Software
Revenue Recognition,
as
modified by SOP 98-9,
Modification of SOP 97-2, With Respect to Certain Transactions.
We
recognize revenue when persuasive evidence of an arrangement exists (generally
a
purchase order), we have delivered the product, the fee is fixed or determinable
and collectibility is probable.
In
some
situations, we receive advance payments from our customers. We defer revenue
associated with these advance payments until we ship the products or offer
the
support.
In
accordance with EITF Issue No. 01-9, Accounting
for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s
Product,
we
generally account for cash considerations (such as sales incentives - rebates
and coupons) that we give to our customers as a reduction of revenue rather
than
as an operating expense.
Product
Revenue
We
typically recognize revenue from the sale of our packaged software products
when
we ship the product. We sell some of our products on consignment to a limited
number of resellers. We recognize revenue for these consignment transactions
only when the end-user sale has occurred. Revenue for software distributed
electronically via the Internet is recognized when the customer has been
provided with the access codes that allow the customer to take immediate
possession of the software on its hardware and evidence of the arrangement
exists (web order).
Some
of
our software arrangements involve multiple copies or licenses of the same
program. These arrangements generally specify the number of simultaneous users
the customer may have (multi-user license), or may allow the customer to use
as
many copies on as many computers as it chooses (a site license). Multi-user
arrangements, generally sold in networked environments, contain fees that vary
based on the number of users that may utilize the software simultaneously.
We
recognize revenue when evidence of an order exists and upon delivery of the
authorization code to the consumer that will allow them the limited simultaneous
access. Site licenses, generally sold in non-networked environments, contain
a
fixed fee that is not dependent on the number of simultaneous users. Revenue
is
recognized when evidence of an order exists and the first copy is delivered
to
the consumer.
Many
of
our software products contain additional content that is “locked” to prevent
access until a permanent access code, or “key,” is purchased. We recognize
revenue when evidence of an order exists and the customer has been provided
with
the access code that allows the customer immediate access to the additional
content. All of the programs containing additional locked content are fully
functional and the keys are necessary only to access the additional content.
The
customer’s obligation to pay for the software is not contingent on delivery of
the “key” to access the additional content.
We
reduce
product revenue for estimated returns and price protections that are based
on
historical experience and other factors such as the volume and price mix of
products in the retail channel, trends in retailer inventory and economic trends
that might impact customer demand for our products. We also reduce product
revenue for the estimated redemption of end-user rebates on certain current
product sales. Our rebate reserves are estimated based on the terms and
conditions of the specific promotional rebate program, actual sales during
the
promotion, the amount of redemptions received and historical redemption trends
by product and by type of promotional program. We did not offer any rebate
programs to our customers during the three and nine months ended September
30,
2006 and 2005 and maintain a reserve for rebate claims remaining unpaid from
2000 and 2001.
Service
Revenue
We
offer
several technical support plans and recognize support revenue over the life
of
the plans, generally one year.
Multiple
Element Arrangements
We
also
enter into certain revenue arrangements for which we are obligated to deliver
multiple products or products and services (multiple elements). For these
arrangements, which include software products, we allocate and defer revenue
for
the undelivered elements based on their vendor-specific objective evidence
(“VSOE”) of fair value. VSOE is generally the price charged when that element is
sold separately.
In
situations where VSOE exists for all elements (delivered and undelivered),
we
allocate the total revenue to be earned under the arrangement among the various
elements, based on their relative fair value. For transactions where VSOE exists
only for the undelivered elements, we defer the full fair value of the
undelivered elements and recognize the difference between the total arrangement
fee and the amount deferred for the undelivered items as revenue (residual
method). If VSOE does not exist for undelivered items that are services, we
recognize the entire arrangement fee ratably over the remaining service period.
If VSOE does not exist for undelivered elements that are specified products,
we
defer revenue until the earlier of the delivery of all elements or the point
at
which we determine VSOE for these undelivered elements.
We
recognize revenue related to the delivered products or services only if (i)
the
above revenue recognition criteria are met, (ii) any undelivered products or
services are not essential to the functionality of the delivered products and
services, (iii) payment for the delivered products or services is not contingent
upon delivery of the remaining products or services, and (iv) we have an
enforceable claim to receive the amount due in the event that we do not deliver
the undelivered products or services.
Shipping
and Handling Costs
We
record
the amounts we charge our customers for the shipping and handling of our
software products as product revenue and we record the related costs as cost
of
sales on our condensed consolidated statements of operations.
Customer
Service and Technical Support
Customer
service and technical support costs include the costs associated with performing
order processing, answering customer inquiries by telephone and through
websites, 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 include it in cost of sales.
INCOME
TAXES
We
utilize SFAS No. 109, Accounting
for Income Taxes.
SFAS
No. 109 requires the use of the asset and liability method of accounting for
income taxes. Under this method, deferred income taxes are provided for the
temporary differences between the financial reporting basis and the tax basis
of
our assets and liabilities. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled.
EARNINGS
PER SHARE
We
follow
SFAS No. 128, Earnings
Per Share,
to
calculate and report basic and diluted earnings per share (“EPS”). Basic EPS is
computed by dividing income available to common shareholders by the weighted
average number of shares of common stock outstanding for the period. Diluted
EPS
is computed by giving effect to all dilutive potential shares of common stock
that were outstanding during the period. For us, dilutive potential shares
of
common stock consist of the incremental shares of common stock issuable upon
the
exercise of stock options and warrants for all periods, convertible notes
payable and the incremental shares of common stock issuable upon the conversion
of convertible preferred stock.
When
discontinued operations, extraordinary items, and/or the cumulative effect
of an
accounting change are present, income before any of such items on a per share
basis represents the “control number” in determining whether potential shares of
common stock are dilutive or anti-dilutive. Thus, the same number of potential
shares of common stock used in computing diluted EPS for income from continuing
operations is used in calculating all other reported diluted EPS amounts. In
the
case of a net loss, it is assumed that no incremental shares would be issued
because they would be anti-dilutive. In addition, certain options and warrants
are considered anti-dilutive because the exercise prices were above the average
market price during the period. Anti-dilutive shares are not included in the
computation of diluted EPS, in accordance with SFAS No. 128.
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 - INVENTORIES
At
September 30, 2006, inventories consisted of the following:
|
Raw
materials
|
|
$
|
95,366
|
|
|
Finished
goods
|
|
|
55,647
|
|
|
Inventories
|
|
$
|
151,013
|
|
NOTE
3 - NOTE PAYABLE
In
July
2006, we entered into a loan agreement with an individual for $150,000. The
agreement bears interest at a rate of 10% per thirty-day period and carried
an
original due date of September 18, 2006. On September 19, 2006, for additional
consideration of $750, we entered into a modification and extension agreement
which extended the repayment term of the balance of the outstanding principal
under the loan, as well as the interest payable thereon, until October 20,
2006.
The loan agreement is secured by a first priority security interest in all
of
our assets, including the intellectual property comprising the software products
upon which we are dependent for revenue, and is convertible, together with
any
accrued interest thereon, into restricted shares of our common stock at a
conversion price per share equal to $0.07 per share. In further consideration,
we issued the lender a three-year common stock purchase warrant to acquire
up to
an aggregate of 100,000 restricted shares of common stock at an exercise price
of $0.07 per share. See Note 6, Common Stock and Note 11, Subsequent
Events.
NOTE
4 - DERIVATIVES
At
September 30, 2006, our derivative liability consisted of the
following:
|
Warrant
A
|
|
$
|
12,544
|
|
|
Warrant
B
|
|
|
488,717
|
|
|
Warrant
C
|
|
|
451,653
|
|
|
Derivatives
|
|
$
|
952,914
|
|
In
May
2004, we issued a three-year warrant (Warrant A) to purchase up to 600,000
shares of our common stock to a consultant. This warrant may be exercised on
a
cashless basis at the option of the warrant holder at a price per share of
$0.15. We will receive up to $90,000 from the warrant holder upon the exercise
of this warrant. This warrant has been accounted for as a liability according
to
the guidance of EITF 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in,
a
Company’s Own Stock,
and the
fair value of the warrant has been determined using the Black-Scholes valuation
method with the assumptions listed in the table below.
In
November 2004, we issued two five-year warrants to purchase up to an aggregate
of 21,875,000 shares of our common stock in connection with a certain Stock
Purchase Agreement completed with a New York-based private investment
partnership on July 19, 2004. The first warrant (Warrant B) entitles the holder
to purchase up to 10,937,500 shares of our common stock at a price of $0.18
per
share, and the second warrant (Warrant C) entitles the holder to purchase up
to
10,937,500 additional shares of our common stock at a price of $0.60 per share.
Each warrant is subject to standard adjustment provisions and each provides
for
settlement in registered shares of our common stock and may, at the option
of
the holder, be settled in a cashless, net-share settlement. The warrant holder
is prevented from electing a cashless exercise so long as there is in effect
a
registration statement covering the shares underlying these warrants. The
maximum number of shares of our common stock to be received for each warrant
in
a net-share settlement would be 10,937,500 but the actual number of shares
settled would likely be significantly less and would vary based on the last
reported sale price (as reported by Bloomberg) of our common stock on the date
immediately preceding the date of the exercise notice. These warrants are
accounted for as a liability according to the guidance of EITF 00-19 and the
fair value of each warrant has been determined using the Black-Scholes valuation
method with the assumptions listed in the table below.
|
|
|
|
Warrant
A
|
|
|
Warrant
B
|
|
|
Warrant
C
|
|
|
Expected
term - years
|
|
|
.58
|
|
|
3.11
|
|
|
3.11
|
|
|
Stock
price at September 30, 2006
|
|
$
|
0.05
|
|
$
|
0.05
|
|
$
|
0.05
|
|
|
Expected
dividend yield
|
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
Expected
stock price volatility
|
|
|
235
|
%
|
|
212
|
%
|
|
212
|
%
|
|
Risk-free
interest rate
|
|
|
4.83
|
%
|
|
4.50
|
%
|
|
4.50
|
%
|
The
warrants are revalued at each balance sheet date by using the parameters above,
reducing the expected term to reflect the passing of time, and using the stock
price at the balance sheet date. Net fair value adjustments included in other
income and expenses on the consolidated statements of operations were income
adjustments of $237,009 and $1,109,548 for the three and nine months ended
September 30, 2006, and expense adjustments of ($328,121) and ($874,992) for
the
three and nine months ended September 30, 2005, respectively.
NOTE
5 - INCOME TAXES
The
provision (benefit) for taxes on net income for the three and nine months ended
September 30, 2006 and 2005 consisted of the following:
|
|
|
Three
months ended September 30
|
Nine
months ended September 30
|
| |
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Current:
|
|
Federal
|
|
$
|
---
|
|
$
|
---
|
|
$
|
---
|
|
$
|
---
|
|
|
State
|
|
|
---
|
|
|
---
|
|
|
---
|
|
|
180
|
|
|
|
|
|
--- |
|
|
---
|
|
|
---
|
|
|
180
|
|
|
Deferred:
|
|
Federal
|
|
|
(112,543
|
)
|
|
116,472
|
|
|
(84,655
|
)
|
|
(165,714
|
)
|
|
State
|
|
|
(2,366
|
)
|
|
(4,496
|
)
|
|
(4,802
|
)
|
|
(21,648
|
)
|
| |
|
|
(114,909
|
)
|
|
111,976
|
|
|
(89,457
|
)
|
|
(187,362
|
)
|
|
Total
tax provision (benefit)
|
|
$ |
(114,909
|
)
|
$
|
111,976
|
|
$ |
(89,457
|
)
|
$ |
(187,182
|
)
|
NOTE
6 - STOCKHOLDERS’ EQUITY
COMMON
STOCK
In
March
2006, we committed to issue a total of 146,154 restricted shares of common
stock
to each of our then outside directors (a total of 438,462 shares), at the
closing price as of March 30, 2006 ($0.13), in lieu of cash payments of amounts
accrued for their services as members of our board from the period of September
1, 2004 through March 31, 2006. This issuance was valued at
$57,000.
In
April
2006, we committed to issue a total of 500,000 restricted shares of common
stock
to a company for investor relations services, at the closing price as of April
2, 2006 ($0.13), in accordance with the terms of a twelve-month agreement.
This
issuance was valued at $65,000.
COMMON
STOCK WARRANTS
In
March
2006, we committed to issue a three-year warrant to purchase up to 300,000
restricted shares of our common stock, at a price per share of $0.13, to our
legal counsel, in lieu of cash as payment for certain accrued legal fees. This
warrant was valued at $7,958 based on the negotiated fair value of the services
provided as prescribed by SFAS No. 123(R), Share-Based
Payments,
for
share-based transactions with non-employees.
In
July
2006, we issued a three-year warrant to purchase up to 100,000 restricted shares
of our common stock, at a price of $0.07, to an individual, in connection with
the issuance of a convertible note payable. This warrant was valued at $4,997
based on the Black-Scholes method using a stock price of $0.05 per share,
volatility of 196%, an annual dividend rate of 0% and a risk-free interest
rate
of 4.91%. The value was treated as a discount on debt issued with detachable
stock purchase warrants, per APB No. 14, and amortized to interest expense
over
the original life of the note. See Note 3, Note Payable.
NOTE
7 - EARNINGS PER COMMON SHARE
Earnings
per common share are computed by dividing net income by the weighted average
number of shares of common stock and common stock equivalents outstanding during
the year. Common stock equivalents are the net additional number of shares
that
would be issuable upon the exercise of our outstanding common stock options
and
warrants, assuming that we reinvested the proceeds to purchase additional shares
at market value.
The
following table shows the amounts used in computing earnings per common share
and the effect on income and the average number of shares of dilutive potential
common stock:
|
For
the Three Months Ended September 30
|
|
|
2006
|
|
|
2005
|
|
|
Net
income (loss)
|
|
$
|
26,349
|
|
$ |
(958,392
|
)
|
|
Preferred
stock dividends
|
|
|
---
|
|
|
---
|
|
|
Net
income (loss) available to common shareholders
|
|
$
|
26,349
|
|
$ |
(958,392
|
)
|
| |
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
49,558,317
|
|
|
48,619,855
|
|
|
Dilutive
effect of:
|
|
Convertible
debt
|
|
|
1,535,714
|
|
|
---
|
|
|
Stock
options
|
|
|
---
|
|
|
---
|
|
|
Warrants
|
|
|
73,379
|
|
|
---
|
|
|
Diluted
weighted average shares outstanding
|
|
|
51,167,410
|
|
|
48,619,855
|
|
|
For
the Nine Months Ended September 30
|
|
|
2006
|
|
|
2005
|
|
|
Net
loss
|
|
$
|
1,211
|
|
$ |
(1,593,229
|
)
|
|
Preferred
stock dividends
|
|
|
---
|
|
|
---
|
|
|
Net
loss available to common shareholders
|
|
$
|
1,211
|
|
$ |
(1,593,229
|
)
|
| |
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
49,294,214
|
|
|
48,619,855
|
|
|
Dilutive
effect of:
|
|
Convertible
debt
|
|
|
1,535,714
|
|
|
---
|
|
|
Stock
options
|
|
|
676,043
|
|
|
---
|
|
|
Warrants
|
|
|
154,269
|
|
|
---
|
|
|
Diluted
weighted average shares outstanding
|
|
|
51,660,240
|
|
|
48,619,855
|
|
NOTE
8 - COMMITMENTS AND CONTINGENCIES
We
are
subject to legal proceedings and claims that arise in the ordinary course of
our
business. In the opinion of management, the amount of ultimate liability with
respect to these actions will not materially affect our financial statements
taken as a whole.
Our
employment agreements with our management team each contain a provision for
an
annual bonus equal to 1% of our net income (3% total). We accrue this bonus
on a
quarterly basis. Our management team consists of our Chief Executive Officer
(with a base annual salary of $150,000), our Chief Financial Officer (with
a
base annual salary of $110,000), and our Chief Technology Officer (with a base
annual salary of $150,000). In addition to the bonus provisions and annual
base
salary, each employment agreement provides for payment of all accrued base
salaries ($8,703 included in Other current liabilities at September 30, 2006),
bonuses ($37,033 included in other current liabilities at September 30, 2006),
and any vested deferred vacation compensation ($30,443 included in other current
liabilities at September 30, 2006) for termination by reason of disability.
The
agreements also provide for severance compensation equal to the then base salary
until the later of (i) the expiration of the term of the agreement as set forth
therein or (ii) one year, when the termination is other than for cause
(including termination by reason of disability). There is no severance
compensation in the event of voluntary termination or termination for
cause.
In
2003
and 2004, we reduced our reserve for rebates payable based, in part, on our
ability to meet the financial obligation of claims carried forward from our
last
rebate program in 2001. As such, we may have a legal obligation to pay rebates
in excess of the liability recorded.
Our
royalty agreements for new content generally provide for advance payments to
be
made upon contract signing. In addition, several new agreements provide for
additional advance payments to be made upon delivery of usable content and
publication. We accrue and pay these advances when the respective milestone
is
met.
NOTE
9 - RISKS AND UNCERTAINTIES
Our
future operating results may be affected by a number of factors. We depend
upon
a number of major inventory and intellectual property suppliers. If a critical
supplier had operational problems or ceased making material available to us,
operations could be adversely affected.
NOTE
10 - GOING CONCERN
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with Generally Accepted Accounting Principles in the
United States applicable to a going concern. As of September 30, 2006, we had
a
year-to-date net income of $1,211, and negative working capital of $2,208,344
and $3,025,697, and an accumulated deficit of $7,750,886 and $7,752,097 as
of
September 30, 2006 and December 31, 2005, respectively. Although these factors
raise substantial doubt as to our ability to continue as a going concern through
December 31, 2006, we have taken several measures to mitigate against this
risk,
including expanding our in-house telemarketing efforts to increase our
direct-to-consumer revenue while at the same time reducing commissions paid
to
third-party telemarketing firms. In addition, we are focused on distilling
both
our sales and marketing, and general and administrative expenses to include
only
those providing the most return on investment.
NOTE
11 - SUBSEQUENT EVENTS
On
October 19, 2006, we repaid the note payable in full.
On
October 26, 2006, we granted 850,000 nonqualified stock options to non-executive
employees. These options carry an exercise price of $0.10 per share, vest
immediately, and have a three-year term.
On
October 26, 2006, we committed to issue 480,000 restricted shares of common
stock to our outside director, at the closing price as of October 26, 2006
($0.025), in lieu of cash payments of amounts accrued for his service as a
member of our board from the period of April 1, 2006 through September 30,
2006.
Cautionary
Statement Regarding Forward-Looking Statements
This
quarterly report on Form 10-QSB, 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-QSB 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 I, Item
2
of this quarterly report on Form 10-QSB, entitled “Management’s Discussion and
Analysis or Plan of Operation”, and including without limitation the ”Risk
Factors” contained in our annual report on Form 10-KSB for the period ended
December 31, 2005. Except as required by law, we undertake no obligation to
update any of the forward-looking statements in this Form 10-QSB after the
date
of this report.
This
information should be read in conjunction with our unaudited condensed
consolidated financial statements and the notes thereto included in Part I,
Item
1 of this quarterly report on Form 10-QSB, and our audited financial statements
and the notes thereto and our Management’s Discussion and Analysis or Plan of
Operation contained in our annual report on Form 10-KSB for the fiscal year
ended December 31, 2005.
MANAGEMENT
OVERVIEW
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 six editions, QuickVerse®
2007
Bible Suite, QuickVerse®
2007
Essentials, QuickVerse®
2007
Standard, QuickVerse®
2007
Expanded, QuickVerse®
2007
Deluxe and QuickVerse®
2007
Platinum. These QuickVerse®
2007
editions range in retail price from $39.95 to $799.95. The
QuickVerse®
2007 new
features include web dictionary support, integrated PDF files, integrated RSS
subscriptions and integrated web pages. We believe that the unique features
of
the new QuickVerse®
2007
editions will provide us with an opportunity to broaden our customer base as
our
products appeal not only to those just beginning their journey into Bible study
but also to the scholars who are searching for an in-depth knowledge of the
Bible.
During
the second quarter of 2006 we released QuickVerse®
2006
Macintosh®
Gold
Edition, with a suggested retail price of $349.95, which offers more content
to
Mac users than ever before. This edition offers 19 Bibles and 144 reference
titles, a retail value of over $4,000 if sold separately. We also released
the
Holman Christian Standard Bible®,
with a
suggested retail price of $29.95, which is sponsored by Broadman & Holman
Publishers. This Bible translation provides English-speaking people across
the
world with an accurate, readable Bible in contemporary English and equips
serious Bible students with an accurate translation for personal study, private
devotions and memorization.
Finally,
during the first quarter of 2006, we released QuickVerse®
2006
Parable Edition, with a suggested retail price of $49.95, and
QuickVerse®
2006
Bible Suite, with a suggested retail price of $29.95. QuickVerse®
2006
Bible Suite appeals to those customers seeking their first Bible study software.
QuickVerse®
2006
Parable Edition is sold exclusively at Parable®
retail
outlets and through Parable®’s
website,
at www.parable.com, and unlike other QuickVerse®
editions, QuickVerse®
2006
Parable contains exclusive Parable®
content
such as Books
That Change Lives
and
Standing
Firm Devotional.
Comparatively,
during the third quarter of 2005, we released QuickVerse®
2006
three months earlier than our upgrade release of QuickVerse®
in 2004.
During the second quarter of 2005, and for
the
first time in our operating history,
we
introduced QuickVerse®
to the
Macintosh Operating System in two editions, QuickVerse®
Macintosh
Black Box (includes
12 Bibles and 56 reference titles),
with a
suggested retail price of $99.95 and QuickVerse®
Macintosh
White Box (includes
9 Bibles and 40 reference titles),
with a
suggested retail price of $49.95. We also released an updated version of Bible
Illustrator®
3.0
entitled Sermon Builder®
4.0,
with
a suggested retail price of $69.95.
Lastly,
during the first quarter of 2005, we released an upgrade to our top-selling
financial and data management software, Membership Plus®,
with a
suggested retail price of between $149.95 and $349.95, and introduced
QuickVerse®
2005
Essentials, with a suggested retail price of $49.95, and QuickVerse®
2005
Platinum, with a suggested retail price of $799.95.
Although
we did not release an upgrade version of Membership Plus®
during
the first three quarters of 2006, we did release one in our fourth quarter
of
2006. Furthermore, we anticipate the releases of enhanced versions of
QuickVerse®
Mobile
and QuickVerse®
Macintosh during our fourth quarter of 2006, as well as the introduction of
a
few new titles that will offer additional content to our QuickVerse®
users.
Despite
our decreased gross revenues during the nine months ended September 30, 2006,
and although there can be no assurance, we anticipate that revenues will
increase in real terms throughout the remainder of our 2006 fiscal year based
upon our development schedule for the remainder of the fiscal year and the
broadened content made available for our QuickVerse®
products.
Results
Of Operations for Quarters Ended September 30, 2006 and September 30,
2005
|
Statement
of Operations for Nine Months Ended September 30
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
%
|
|
|
Net
revenues
|
|
$
|
2,586,197
|
|
$
|
3,978,019
|
|
$
|
(1,391,822
|
)
|
|
35
|
%
|
|
Cost
of sales
|
|
|
1,361,157
|
|
|
1,410,191
|
|
|
(49,034
|
)
|
|
3
|
%
|
|
Gross
profit
|
|
$
|
1,225,040
|
|
$
|
2,567,828
|
|
$
|
(1,342,788
|
)
|
|
52
|
%
|
|
Total
operating expenses
|
|
|
(2,315,591
|
)
|
|
(3,183,446
|
)
|
|
867,855
|
|
|
27
|
%
|
|
Loss
from operations
|
|
$
|
(1,090,551
|
)
|
$
|
(615,618
|
)
|
$
|
(474,933
|
)
|
|
77
|
%
|
|
Registration
rights penalties
|
|
|
(49,314
|
)
|
|
(277,792
|
)
|
|
228,478
|
|
|
82
|
%
|
|
Gain
(loss) on fair value adjustment of derivatives
|
|
|
1,109,548
|
|
|
(874,992
|
)
|
|
1,984,540
|
|
|
227
|
%
|
|
Other
expenses, net
|
|
|
(57,929
|
)
|
|
(12,009
|
)
|
|
(45,920
|
)
|
|
382
|
%
|
|
Loss
before income taxes
|
|
$
|
(88,246
|
)
|
$
|
(1,780,411
|
)
|
$
|
1,692,165
|
|
|
95
|
%
|
|
Income
tax benefit
|
|
|
89,457
|
|
|
187,182
|
|
|
(97,725
|
)
|
|
52
|
%
|
|
Net
income (loss)
|
|
$
|
1,211
|
|
$
|
(1,593,229
|
)
|
$
|
1,594,440
|
|
|
100
|
%
|
Our
software products are highly seasonal. More than 50% of our annual sales are
expected to occur in the five months of September through January; the five
months of April through August are generally our weakest, historically
generating only approximately 29% of our annual sales.
Our
gross
profit decreased approximately $1,343,000 from a gross profit of approximately
$2,568,000 for the nine months ended September 30, 2005 to a gross profit of
approximately $1,225,000 for the nine months ended September 30, 2006. Further,
we incurred a loss from operations of approximately $1,091,000 for the nine
months ended September 30, 2006, representing an increase of approximately
$475,000 in our loss from operations of approximately $616,000 for the nine
months ended September 30, 2005. These negative results of operations are
primarily attributable to the following:
For
the
nine months ended September 30, 2006:
| |
▪
|
our
gross revenues decreased approximately $1,951,000 to approximately
$
2,794,000 for the nine months ended September 30, 2006 from approximately
$4,745,000 for the nine months ended September 30, 2005. This decrease
is
primarily attributable to the following:
|
| |
|
|
|
| |
|
▪
|
an
overall net decrease in unit sales of our QuickVerse®
product line due to a reduction in the perceived value on the part
of
customers of certain upgrades based on the relative frequency
thereof;
|
| |
|
|
|
| |
|
▪
|
the
lack of product releases during the nine months ended September 30,
2006
as compared to the nine months ended September 30, 2005, including
our
annual release of Membership Plus®;
and
|
| |
|
|
|
| |
|
▪
|
the
decreased suggested retail price in those products that were released
during the nine months ended September 30, 2006 compared to those
released
during the nine months ended September 30, 2005;
|
| |
|
|
|
| |
▪
|
our
cost of sales remained relatively high, only decreasing approximately
$49,000 from approximately $1,410,000 for the nine months ended September
30, 2005 to approximately $1,361,000 for the nine months ended September
30, 2006 due to the increased amortization of software development
costs;
|
| |
|
|
| |
▪
|
we
incurred liquidated damage penalties of approximately $49,000 in
connection with our failure to meet certain contractual registration
obligations; and
|
| |
|
|
| |
▪
|
our
interest expense increased approximately $45,000 for the nine months
ended
September 30, 2006 due to a loan agreement that was entered into
in order
to fund our working capital
deficit.
|
Our
net
income increased approximately $1,594,000 from a net loss of approximately
$1,593,000 for the nine months ended September 30, 2005 to a net income of
approximately $1,000 for the nine months ended September 30, 2006. This increase
is mainly attributed to the valuation gain of approximately $1,110,000 we
recognized from the fair value adjustment of our derivative liabilities during
the nine months ended September 30, 2006. We do anticipate, however, this
valuation gain to be temporary. If our stock price rebounds during the fourth
quarter of 2006 to a level consistent with our stock price at December 2005,
the
fair value of the derivative liabilities will increase and therefore, the
valuation gain recognized during the nine months ended September 30, 2006 will
reverse and we will again reflect a year-to-date valuation loss (see
Derivatives).
Offsetting
to some degree the negative results of operations detailed above were three
positive developments during the nine months ended September 30, 2006. First,
our registration statement on Form SB-2, originally filed on November 22, 2004,
was declared effective by the SEC on February 1, 2006, and therefore, the
liquidated damage penalties have stopped accruing. Second, we released our
annual upgrade of our QuickVerse®
(Windows) product line which will reach the retail stores prior to the holiday
season beginning. Third, we were able to remain operating cash positive despite
our decrease in gross revenues for the nine months ended September 30, 2006.
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 61% of our 2005 fiscal year revenue. We account for cash
considerations (such as sales incentives - rebates and coupons) that we give
our
customers as a reduction of revenue rather than as an operating expense. Product
revenue is also reduced for the estimated redemption of end-user rebates on
certain current product sales. We did not have any rebate programs during the
nine months ended September 30, 2005 and 2006, respectively.
Trends
that our returns typically follow include (i) the seasonality of sales, and
(ii)
the fact that, generally, relatively higher return rates occur during periods
of
new title or title version releases. Historically, actual returns have been
within management’s prior estimates, however, we cannot be certain that any
future write-offs exceeding reserves will not occur or that amounts written
off
will not have a material adverse effect on our business, our financial
condition, including liquidity and profitability, and our results of operations.
Management continually monitors and adjusts these allowances to take into
account actual developments and sales results in the marketplace. In the past,
particularly during title and title version transitions, we have had to increase
price concessions to our retail customers.
Product
returns from distributors and Christian bookstores are allowed primarily in
exchange for new products or for credit towards purchases as part of a
stock-balancing program. These returns are subject to certain limitations that
may exist in the contract. Under certain circumstances, such as termination
or
when a product is defective, distributors and bookstores could receive a cash
refund if returns exceed amounts owed. Returns from sales made directly to
the
consumer are accepted within 45 days of purchase and are issued a cash refund.
Product returns, price protections or price concessions that exceed our reserves
could materially adversely affect our business and operating results and could
increase the magnitude of quarterly fluctuations in our operating and financial
results. Although we released QuickVerse®
2007 in
late August 2006 to the Christian Booksellers Association retail channel, we
did
not implement a price protection program within the three months ended September
30, 2006 on our QuickVerse®
2006
titles. Furthermore, we do no anticipate implementing a price protection program
in the near future.
Software
products are sold separately, without an obligation of future performance such
as upgrades, enhancements or additional software products, and are sold with
post contract customer support services such as customer service and technical
support assistance. In connection with the sale of certain products, we provide
a limited amount of free technical support assistance to our customers. We
do
not defer the recognition of any revenue associated with sales of these
products, since the cost of providing this free technical support is
insignificant. The technical support is provided within one year after the
associated revenue is recognized and free product enhancements (bug fixes)
are
minimal and infrequent. We accrue the estimated cost of providing this free
support upon product shipment and include it in cost of sales.
Shipping
and handling costs in connection with our software products are expensed as
incurred and included in cost of sales.
|
Revenues
for Three Months Ended September 30
|
|
|
2006
|
|
|
%
to Sales
|
|
|
|
2005
|
|
|
%
to Sales
|
|
|
|
Change
|
|
|
%
|
|
|
Gross
revenues
|
|
$
|
910,896
|
|
|
100
|
%
|
|
$
|
1,233,389
|
|
|
100
|
%
|
|
$
|
(322,493
|
)
|
|
26
|
%
|
|
Add
rebate adjustment
|
|
|
---
|
|
|
0
|
%
|
|
|
4,910
|
|
|
0
|
%
|
|
|
(4,910
|
)
|
|
100
|
%
|
|
Less
reserve for sales returns and allowances
|
|
|
(84,769
|
)
|
|
-9
|
%
|
|
|
(214,690
|
)
|
|
-17
|
%
|
|
|
129,921
|
|
|
61
|
%
|
|
Net
revenues
|
|
$
|
826,127
|
|
|
91
|
%
|
|
$
|
1,023,609
|
|
|
83
|
%
|
|
$
|
(197,482
|
)
|
|
19
|
%
|
|
Revenues
for Nine Months Ended September 30
|
|
|
2006
|
|
|
%
to Sales
|
|
|
|
2005
|
|
|
%
to Sales
|
|
|
|
Change
|
|
|
%
|
|
|
Gross
revenues
|
|
$
|
2,793,594
|
|
|
100
|
%
|
|
$
|
4,744,759
|
|
|
100
|
%
|
|
$
|
(1,951,165
|
)
|
|
41
|
%
|
|
Add
rebate adjustment
|
|
|
---
|
|
|
0
|
%
|
|
|
14,730
|
|
|
0
|
%
|
|
|
(14,730
|
)
|
|
100
|
%
|
|
Less
reserve for sales returns and allowances
|
|
|
(207,397
|
)
|
|
-7
|
%
|
|
|
(781,470
|
)
|
|
-16
|
%
|
|
|
574,073
|
|
|
73
|
%
|
|
Net
revenues
|
|
$
|
2,586,197
|
|
|
93
|
%
|
|
$
|
3,978,019
|
|
|
84
|
%
|
|
$
|
(1,391,822
|
)
|
|
214
|
%
|
Gross
revenues decreased approximately $322,000 from approximately $1,233,000 for
the
three months ended September 30, 2005 to approximately $911,000 for the three
months ended September 30, 2006 and decreased approximately $1,951,000 from
approximately $4,745,000 for the nine months ended September 30, 2005 to
approximately $2,794,000 for the nine months ended September 30, 2006. We
believe that this decrease was primarily attributable to the lack of product
releases during the nine months ended September 30, 2006 as compared to the
nine
months ended September 30, 2005, and most notably the prolonged delay in our
annual release of Membership Plus®.
During
2005 and 2006, the following products were released during our first, second
and
third quarters, respectively:
First
Quarter 2005
| |
▪
|
an
enhanced version of our top financial and data management product,
Membership Plus®,
including Membership Plus®
Standard Edition, with a suggested retail price of $149.95, and Membership
Plus®
Deluxe Edition, with a suggested retail price of
$349.95;
|
| |
▪
|
an
enhanced version of QuickVerse®
2005 Essentials, with a suggested retail price of $49.95; and
|
| |
▪
|
QuickVerse®
2005 Platinum Edition, with a suggested retail price of
$799.95.
|
Second
Quarter 2005
| |
▪
|
QuickVerse®
2006 Macintosh, including QuickVerse®
2006 Macintosh Black Box Edition, with a suggested retail price of
$99.95,
and QuickVerse®
2006 Macintosh White Box Edition, with a suggested retail price of
$49.95;
and
|
| |
▪
|
an
enhanced version of Bible
Illustrator®
3.0
entitled Sermon Builder®
4.0,
with a suggested retail price of
$69.95.
|
Third
Quarter 2005
| |
▪
|
an
enhanced version of our flagship product, QuickVerse®,
including QuickVerse®
2006 Essentials with a suggested retail price of $49.95,
QuickVerse®
2006 Standard with a suggested retail price of $99.95,
QuickVerse®
2006 Expanded with a suggested retail price of $199.95,
QuickVerse®
2006 Deluxe with a suggested retail price of $299.95 and
QuickVerse®
2006 Platinum with a suggested retail price of
$799.95.
|
First
Quarter 2006
| |
▪
|
QuickVerse®
2006 Parable Edition, with a suggested retail price of $49.95;
and
|
| |
▪
|
QuickVerse®
2006 Bible Suite, with a suggested retail price of
$29.95.
|
Second
Quarter 2006
| |
▪
|
QuickVerse®
2006 Macintosh Gold Box Edition, with a suggested retail price of
$349.95;
and
|
| |
▪
|
Holman
Christian Standard Bible®,
with a suggested retail price of
$29.95.
|
Third
Quarter 2006
| |
▪
|
an
enhanced version of our flagship product, QuickVerse®,
including QuickVerse®
2007 Bible Suite with a suggested retail price of $39.95,
QuickVerse®
2007 Essentials with a suggested retail price of $59.95,
QuickVerse®
2007 Standard with a suggested retail price of $129.95,
QuickVerse®
2007 Expanded with a suggested retail price of $249.95,
QuickVerse®
2007 Deluxe with a suggested retail price of $349.95 and
QuickVerse®
2007 Platinum with a suggested retail price of $799.95.
|
Of
note,
and generally, the retail price points for our products released during the
nine
months ended September 30, 2006 were significantly less than those released
during the nine months ended September 30, 2005. Furthermore, due to
the
unexpected loss of our primary developer for Membership Plus®
in May
2005, we have experienced a delay in our annual release of Membership
Plus®,
which
typically is released in the month of February. Membership Plus®
2007 was
released in October 2006, following the close of our third quarter. Finally,
we
believe we experienced a decrease in gross revenues due to the annual early
releases of our flagship product, QuickVerse®,
which
in turn has resulted in an overall net decrease in unit sales.
QuickVerse®
2007
Windows was released in August 2006, eleven months following our 2005
QuickVerse®
upgrade
release and QuickVerse®
2006
Windows was released in September 2005, nine months following our 2004
QuickVerse®
upgrade
release. In the past, we have experienced greater sales within the first and
second quarter of the fiscal year due to the then recent upgrade releases of
our
two main product lines, QuickVerse®
and
Membership Plus®.
During
each of the quarters ended September 30, 2005 and 2006, our sales efforts were
focused on directly targeting end-users through telemarketing and Internet
sales. Due to the consistency in our development schedule and the annual
releases of our flagship product, QuickVerse®,
upgrade
sales are not increasing at a rapid rate. However, we anticipate that revenues
will increase through 2006 as we continue to expand the content available for
our QuickVerse®
products, develop new products for multiple platforms, and offer our products
at
a range of price points intended to appeal to various market sub-segments.
Sales
returns and allowances decreased approximately $130,000 from approximately
$215,000 for the three months ended September 30, 2005 to approximately $85,000
for the three months ended September 30, 2006, and decreased approximately
$574,000 from approximately $781,000 for the nine months ended September 30,
2005 to approximately $207,000 for the nine months ended September 30 2006.
Sales returns and allowances also decreased as a percentage of gross sales
from
approximately 17% for the nine months ended September 30, 2005 to approximately
7% for the nine months ended September 30, 2006. While this decrease reflects
lower actual returns during the nine months ended September 30, 2006, it is
mainly attributable to our relative lack of product releases during the nine
months ended September 30, 2006. Typically after a new product release, sales
returns and allowances trend upward as distributors and retail stores will
return old product in exchange for the new product release. With
QuickVerse®
2006
Windows shipping in September 2005 as compared to QuickVerse®
2005
Windows in December 2004, just nine months earlier, we experienced a greater
increase in sales returns and allowances during the fourth quarter of 2005.
Furthermore, sales returns and allowance for the nine months ended September
30,
2005 reflect the release of Membership Plus®
2005
compared to no release of the Membership Plus®
product
line for the nine months ended September 30, 2006. In addition, due to the
extended time-line between the releases of the Membership Plus®
product
line, we have experienced fewer returns from retail stores as there is no new
product to exchange the old product with. During the nine months ended September
30, 2005 the following items contributed to the sales returns and allowances:
| |
▪
|
price
protections afforded to consumers and retailers who had purchased
prior
versions of Membership Plus®
and
QuickVerse®
within
one year or less of our release of upgraded versions of each of Membership
Plus®,
in February 2005, and QuickVerse®,
in September 2005. Historically, our product upgrades have extended
over
two to three years and therefore, price protections were not issued;
|
| |
▪
|
increased
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 Nine Months Ended September 30
|
|
|
2006
|
|
|
%
to Sales
|
|
|
|
2005
|
|
|
%
to Sales
|
|
|
|
Change
|
|
|
%
|
|
|
Direct
costs
|
|
$
|
372,033
|
|
|
13
|
%
|
|
$
|
485,674
|
|
|
10
|
%
|
|
$
|
(113,641
|
)
|
|
23
|
%
|
|
Less
reserve for sales returns and allowances
|
|
|
(30,810
|
)
|
|
-1
|
%
|
|
|
(116,940
|
)
|
|
-2
|
%
|
|
|
86,130
|
|
|
74
|
%
|
|
Amortization
of software development costs
|
|
|
600,959
|
|
|
22
|
%
|
|
|
524,989
|
|
|
11
|
%
|
|
|
75,970
|
|
|
14
|
%
|
|
Royalties
|
|
|
256,737
|
|
|
9
|
%
|
|
|
300,000
|
|
|
6
|
%
|
|
|
(43,263
|
)
|
|
14
|
%
|
|
Freight-out
|
|
|
76,218
|
|
|
3
|
%
|
|
|
111,188
|
|
|
2
|
%
|
|
|
(34,970
|
)
|
|
31
|
%
|
|
Fulfillment
|
|
|
86,020
|
|
|
3
|
%
|
|
|
105,280
|
|
|
2
|
%
|
|
|
(19,260
|
)
|
|
18
|
%
|
|
Cost
of sales
|
|
$
|
1,361,157
|
|
|
49
|
%
|
|
$
|
1,410,191
|
|
|
30
|
%
|
|
$
|
(49,034
|
)
|
|
3
|
%
|
Cost
of
sales consists primarily of royalties paid to third party providers of
intellectual property and the direct costs and manufacturing overhead required
to reproduce, package, fulfill and ship our software products. Direct costs
and
manufacturing overhead also include amortized software development costs and
non-capitalized technical support wages. The direct costs and manufacturing
overhead decreased approximately $6,000 from approximately $1,110,000 for the
nine months ended September 30, 2005 to approximately $1,104,000 for the nine
months ended September 30, 2006 and increased as a percentage of gross revenues
approximately 16% for the nine months ended September 30, 2006. The overall
percentage increase resulted directly from amortization of software development
costs. The amortization recognized during the nine months ended September 30,
2006 resulted from several new software releases in 2005 and 2006 including
Membership Plus®
2005,
QuickVerse®
2006
Macintosh, Sermon Builder®
4.0,
QuickVerse®
2006
Windows, QuickVerse®
2006
Mobile, QuickVerse®
2006
Bible Suite, QuickVerse®
2006
Macintosh Gold Edition, Holman Christian Standard Bible®
and
QuickVerse 2007®
Windows.
The shorter timeframes between our product upgrades along with the increased
amount of product releases during the fiscal year 2005 led to the increased
amount of amortization recognized. During the nine months ended September 30,
2005 we continued to amortize the December 2004 release of
QuickVerse®
2005
Windows, the February 2005 release of Membership Plus®
2005,
the June 2005 releases of QuickVerse®
Macintosh and Sermon Builder®
4.0, the
late September 2005 release of QuickVerse®
2006 and
the remainder of QuickVerse®
8.0 and
Membership Plus®
8.0. The
direct costs and manufacturing overhead percentage are expected to continue
at
these levels as more development projects are implemented in a shortened
timeframe.
Fulfillment
costs from a third-party warehouse and included in the manufacturing overhead
costs noted above decreased approximately $19,000 from approximately $105,000
for the nine months ended September 30, 2005 to approximately $86,000 for the
nine months ended September 30, 2006. This decrease is a direct result of
decreased sales volume. Furthermore, our fulfillment center continues to improve
its efficiency which has led to the lower rate in fulfillment
costs.
Similar
to the fulfillment costs, freight costs, included in the manufacturing overhead
costs noted above, decreased approximately $35,000 from approximately $111,000
for the nine months ended September 30, 2005 to approximately $76,000 for the
nine months ended September 30, 2006. This decrease, too, is related to the
decrease in sales volume.
Royalties
paid to third party providers of intellectual property decreased approximately
$43,000 from approximately $300,000 for the nine months ended September 30,
2005
to approximately $257,000 for the nine months ended September 30, 2006 and
increased approximately 3% as a percentage of gross revenues for the nine months
ended September 30, 2006. The overall percentage increase in royalties paid
for
the nine months ended September 30, 2006 reflects the following:
| |
▪
|
sales
of QuickVerse®
2005 editions to a liquidator in the first and third quarters of
2006 and
no sales to a liquidator in the first and third quarters of
2005;
|
| |
▪
|
our
increased sales focus on the QuickVerse®
product line which have associated royalty fees;
|
| |
▪
|
an
increase in retail sales for the QuickVerse®
2007 product line during the month of September 2006 compared to
only
upgrade sales for the QuickVerse®
2006 product line during the same time frame in 2005; and
|
| |
▪
|
our
decreased sales focus on the Membership Plus®
product line, which has no associated royalty fees. We have experienced
a
delay in our annual upgrade release of Membership Plus®
2007 and, during the first quarter of 2005, we released an upgrade
to
Membership Plus®
in
February 2005.
|
The
royalty rate as a percentage of gross sales is expected to increase in the
future as sales to new users are expected to increase, more development projects
are implemented for new and/or enhanced products, and as we continue to expand
the content available for our QuickVerse®
line of
products. Upgrade sales will remain only subject to royalties on their content
additions.
We
expect
all cost of sales will increase in the future as we also anticipate revenues
will increase throughout the remainder of our 2006 fiscal year based upon our
development schedule for the remainder of the fiscal year and the broadened
content made available for our QuickVerse®
products.
Software
development costs are expensed as incurred as research and development until
technological feasibility and marketability have been established, at which
time
development costs are capitalized until the software title is available for
general release to customers. Software development is segregated by title and
technology platform. Once a product has been successfully released, subsequent
revisions and upgrades are deemed to constitute development, and, accordingly,
the costs of the revision and upgrade are capitalized. Capitalized costs are
amortized on a product-by-product basis using the greater of (i) straight-line
amortization over the estimated life of the product or (ii) the ratio of current
revenues from the product to the total projected revenue over the life of the
product. Generally, we consider technological feasibility to have been
established with the release of a “beta” version for testing.
Our
software development costs for the three and nine months ended September 30,
2005 and 2006 are summarized in the table below. These costs, consisting
primarily of direct and indirect labor and related overhead charges, capitalized
during the three months ended September 30, 2005 and 2006, were approximately
$172,000 and approximately $174,000, respectively, and during the nine months
ended September 30, 2005 and 2006, were approximately $766,000 and approximately
$412,000, respectively. Accumulated amortization of these development costs,
which were included in cost of sales, totaled approximately $161,000 and
approximately $143,000 for the three months ended September 30, 2005 and 2006,
respectively, and approximately $525,000 and approximately $601,000 for the
nine
months ended September 30, 2005 and 2006, respectively. The overall increase
in
the amortization is a result of the shorter timeframes between our product
upgrades along with the increased amount of product releases. Furthermore,
the
overall decrease in the capitalized costs reflects the decreased amount of
product releases for the nine months ended September 30, 2006 as well as that
during the nine months ended September 30, 2005 we were capitalizing the
development costs related to our QuickVerse®
Macintosh product line which was our first product line for the Macintosh
platform.
|
Software
Development Costs for
|
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
| |
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Beginning
balance
|
|
$
|
487,849
|
|
$
|
931,103
|
|
$
|
707,067
|
|
$
|
701,289
|
|
|
Capitalized
|
|
|
173,728
|
|
|
171,990
|
|
|
412,108
|
|
|
766,151
|
|
|
Amortized
(Cost of sales)
|
|
|
143,361
|
|
|
160,642
|
|
|
600,959
|
|
|
524,989
|
|
|
Ending
Balance
|
|
$
|
518,216
|
|
$
|
942,451
|
|
$
|
518,216
|
|
$
|
942,451
|
|
|
Research
and development expense (General and administrative)
|
|
$
|
47,393
|
|
$
|
63,164
|
|
$
|
131,013
|
|
$
|
130,407
|
|
Sales,
General and Administrative
|
Sales,
General and Administrative Costs for Nine Months Ended September
30
|
|
|
2006
|
|
|
%
to Sales
|
|
|
|
2005
|
|
|
%
to Sales
|
|
|
|
Change
|
|
|
%
|
|
|
Selected
expenses:
|
|
Commissions
|
|
$
|
151,499
|
|
|
5
|
%
|
|
$
|
611,653
|
|
|
13
|
%
|
|
$
|
(460,154
|
)
|
|
75
|
%
|
|
Advertising
and direct marketing
|
|
|
156,537
|
|
|
6
|
%
|
|
|
419,217
|
|
|
9
|
%
|
|
|
(262,680
|
)
|
|
63
|
%
|
|
Sales
and marketing wages, reclassified
|
|
|
272,648
|
|
|
10
|
%
|
|
|
266,966
|
|
|
6
|
%
|
|
|
5,682
|
|
|
2
|
%
|
|
Total
sales and marketing
|
|
$
|
580,684
|
|
|
21
|
%
|
|
$
|
1,297,836
|
|
|
27
|
%
|
|
$
|
(717,152
|
)
|
|
55
|
%
|
|
Research
and development
|
|
|
131,013
|
|
|
5
|
%
|
|
|
130,407
|
|
|
3
|
%
|
|
|
606
|
|
|
0
|
%
|
|
Personnel
costs
|
|
|
564,825
|
|
|
20
|
%
|
|
|
572,688
|
|
|
12
|
%
|
|
|
(7,863
|
)
|
|
1
|
%
|
|
Legal
|
|
|
83,539
|
|
|
3
|
%
|
|
|
157,970
|
|
|
3
|
%
|
|
|
(74,431
|
)
|
|
47
|
%
|
|
Accounting
|
|
|
48,505
|
|
|
2
|
%
|
|
|
22,031
|
|
|
0
|
%
|
|
|
26,474
|
|
|
120
|
%
|
|
Rent
|
|
|
74,260
|
|
|
3
|
%
|
|
|
57,387
|
|
|
1
|
%
|
|
|
16,873
|
|
|
29
|
%
|
|
Telecommunications
|
|
|
28,967
|
|
|
1
|
%
|
|
|
42,605
|
|
|
1
|
%
|
|
|
(13,638
|
)
|
|
32
|
%
|
|
Corporate
services
|
|
|
54,000
|
|
|
2
|
%
|
|
|
73,972
|
|
|
2
|
%
|
|
|
(19,972
|
)
|
|
27
|
%
|
|
Investor
services
|
|
|
55,000
|
|
|
2
|
%
|
|
|
---
|
|
|
0
|
%
|
|
|
55,000
|
|
|
0
|
%
|
|
Other
general and administrative costs
|
|
|
270,231
|
|
|
10
|
%
|
|
|
361,997
|
|
|
8
|
%
|
|
|
(91,766
|
)
|
|
25
|
%
|
|
Total
general and administrative
|
|
$
|
1,310,340
|
|
|
47
|
%
|
|
$
|
1,419,057
|
|
|
30
|
%
|
|
$
|
(108,717
|
)
|
|
8
|
%
|
With
gross revenues decreasing approximately $1,951,000 from our nine months ended
September 30, 2005 to our nine months ended September 30, 2006, total sales,
general and administrative costs also decreased approximately $826,000 from
approximately $2,717,000 for the nine months ended September 30, 2005 to
approximately $1,891,000 for the nine months ended September 30, 2006. Of the
total sales, general and administrative costs, sales and marketing expenses
decreased approximately $717,000 from approximately $1,298,000 for the nine
months ended September 30, 2005 to approximately $581,000 for the nine months
ended September 30, 2006. Included in sales expenses, third-party telemarketing
commissions decreased approximately $460,000 from approximately $612,000 for
the
nine months ended September 30, 2005 to approximately $152,000 for the nine
months ended September 30, 2006, and decreased as a percentage of gross revenues
from approximately 13% to approximately 5% for the nine months ended September
30, 2005 and 2006, respectively. This decrease is mainly attributed to the
lack
of product releases during the nine months ended September 30, 2006, as well
as
the use of our own in-house direct telemarketing sales team which was developed
specifically to reduce our reliance on third-party telemarketing services.
Advertising
and direct marketing costs decreased approximately $263,000 from approximately
$419,000 for the nine months ended September 30, 2005 to approximately $156,000
for the nine months ended September 30, 2006 and decreased as a percentage
of
gross revenues from approximately 9% to approximately 6% for the nine months
ended September 30, 2005 and 2006, respectively. The decrease in advertising
and
direct marketing costs reflect that there was no upgrade release to the
Membership Plus®
product
line in the nine months ended September 30, 2006 as compared to the Membership
Plus®
2005
release in the nine months ended September 30, 2005, as well as an overall
decrease in the number of product releases during the nine months ended
September 30, 2006 compared to that of the nine months ended September 30,
2005.
Advertising and direct marketing costs are expected to increase in future
periods as we continue to enhance our product visibility online, increase and
focus more on our direct marketing efforts, and increase the scope and frequency
of our print advertising campaigns in order to maximize sales associated with
new products and product enhancements throughout the coming year. Wages
associated with our sales team and marketing team have been reclassified and
are
included in the total sales and marketing costs. The reclassified sales and
marketing wages increased approximately $6,000 from approximately $267,000
for
the nine months ended September 30, 2005 to approximately $273,000 for the
nine
months ended September 30, 2006. This increase is attributed to our recent
expansion of our marketing team, and we expect these wages to increase in future
periods as we expand our in-house direct telemarketing sales team.
Research
and development costs include direct production costs (including labor directly
associated with the development projects), indirect costs (including allocated
fringe benefits, payroll taxes, facilities costs and management supervision),
and other direct costs (including costs of outside consultants, purchased
software to be included in the software product being developed, travel
expenses, material and supplies, and other direct costs). Software development
costs related to third-party developers and direct labor expensed as research
and development (see table above) amounted to approximately $63,000 for the
three months ended September 30, 2005 compared to approximately $47,000 for
the
three months ended September 30, 2006 and approximately $130,000 for the nine
months ended September 30, 2005 compared to approximately $131,000 for the
nine
months ended September 30, 2006. The slight increase in 2006 reflects the
capitalization of less research and development costs for the nine months ended
September 30, 2006 as compared to the nine months ended September 30, 2005.
During the nine months ended September 30, 2005, we were capitalizing the
development costs related to our QuickVerse®
Macintosh product line, which was our first product line for the Macintosh
platform. In addition, during the nine months ended September 30, 2005 we had
more development projects underway compared to the nine months ended September
30, 2006 as well as more research and development costs associated with
maintenance issues on titles after they are released to the general public.
Research and development expenses are expected to increase in future periods
as
we continue to expand our internal development team, add new products and
product versions, and as we continue to expand the array of platforms upon
which
our products are made available.
Total
personnel costs decreased approximately $8,000, from approximately $573,000
for
the nine months ended September 30, 2005, to approximately $565,000 for the
nine
months ended September 30, 2006. In addition, direct salaries and wages
decreased approximately $60,000, from approximately $1,208,000 to approximately
$1,148,000, over the same period. The decrease in direct salaries and wages
was
a result of losing our main developer for our Membership Plus®
product
line as well as the loss of our marketing manager. Due to a cost cutting
initiative, we also lost our Vice President of Sales and Marketing and an
individual on our product development staff. However, we do anticipate direct
salaries and wages to increase in the future, as we are still focused on
expanding our sales team, including additions to our own telemarketing sales
team, our marketing staff and further expansion of our product development
staff. As a percentage of gross revenues, direct salaries and wages increased
approximately 16% from approximately 25% for the nine months ended September
30,
2005 to approximately 41% for the nine months ended September 30, 2006.
As
a
result of having restructured our health benefits plans in October 2005, our
employment-related health care costs have decreased approximately $20,000 from
approximately $105,000 for the nine months ended September 30, 2005 to
approximately $85,000 for the nine months ended September 30, 2006. In July
2005, we initiated a Simple IRA retirement plan for our employees and for those
who participated we decided to match up to 3% of the employee’s annual gross
pay. Therefore, we anticipate that our costs related to this benefit will
increase in future periods as more employees take advantage of the retirement
plan.
The
capitalization of direct and indirect labor and related overhead charges as
software development costs (see “Cost of Sales” above) decreased by
approximately $144,000 from approximately $370,000 for the nine months ended
September 30, 2005 to approximately $226,000 for the nine months ended September
30, 2006. This decrease reflects the development of our QuickVerse®
Macintosh product line during the nine months ended September 30, 2005, which
was our first product line for the Macintosh platform. It is anticipated that
personnel costs will continue to increase in future periods as operating capital
is available and deployed to further fund the staffing requirements of our
product development, direct sales teams and marketing staff.
Direct
legal costs decreased approximately $74,000 for the nine months ended September
30, 2006 as a result of our registration statement on Form SB-2, originally
filed on November 22, 2004, having been declared effective by the SEC on
February 1, 2006. It is anticipated that legal costs will increase in future
periods as we continue to meet our ongoing SEC reporting and corporate
governance obligations, possibly raise additional capital, and pursue our
business plan for growth by potentially acquiring other companies or product
lines.
Accounting
and audit related expenses increased approximately $26,000 for the nine months
ended September 30, 2006 as a result of engaging a new principal accounting
firm
for our fiscal year end 2005 audit. It is anticipated that accounting costs
will
continue to increase in the future as we expect that our fees payable to the
new
principal accounting firm, which we expect to utilize on an ongoing basis,
will
generally be higher than those payable to our former accounting
firm.
Rent
costs increased approximately $17,000 for the nine months ended September 30,
2006 as a result of periodic percentage increase provisions in our leases
agreements. It is anticipated that rent cost will continue to increase in the
future as our lease agreement for our office/warehouse facilities in Omaha,
Nebraska extends through May 2007 and our lease agreement for our office space
in Naperville, Illinois extends through March 2007.
Telecommunications
costs decreased approximately $14,000 for the nine months ended September 30,
2006 as a result of our having switched our local and long-distance carriers
beginning in February 2005. Our call volume enabled us to change our service
to
dedicated T-1 lines which in turn reduced our long-distance charges. We also
invested in internet protocol phones for our remote locations which reduced
the
overall local and long distance charges in our Illinois and Iowa locations.
Furthermore, we experienced a decrease in call volume in the technical support
and customer service departments for the nine months ended September 30, 2006
due to the delayed Membership Plus®
upgrade
release. We anticipate our call volume to increase during the fourth quarter
of
2006 and the first quarter of 2007 as Membership Plus®
2007 was
released in October 2006.
Corporate
service fees decreased approximately $20,000 for the nine months ended September
30, 2006 resulting from the expiration of an independent consulting agreement
and the resultant ability on our part to cease carrying the associated expense
for a 2004 issuance to such consultant of a warrant to purchase 600,000 shares
of common stock which had been allocated over the term of the agreement. We
currently engage the services of an independent consultant for purposes of
investor relations and therefore expect these fees to increase in future
periods.
Finally,
investor services fees increased approximately $55,000 for the nine months
ended
September 30, 2006 as we entered into an investor relations service agreement
in
April 2006. These fees are related to the hiring of an investor relations firm
and the expense for the issuance of a total of 500,000 restricted shares of
common stock allocated over the term of the investor relations contract. We
anticipate these fees to increase in future periods.
Registration
Rights Penalties
As
of
September 30, 2006, and in connection with a July 19, 2004 private placement
with Barron Partners, LP and a certain Registration Rights Agreement, as
amended, we had accrued a total of approximately $490,000 (284 days at $1,726
per day) in penalties under the terms of the Registration Rights Agreement,
of
which we paid $150,000 prior to April 7, 2006. On April 7, 2006, we signed
a
two-year promissory note for $336,000 together with simple interest at the
rate
of 8% per annum with Barron Partners for the unpaid registration rights
penalties. The note agreement calls for monthly installments for the first
twelve months of $10,000, beginning May 1, 2006 and $20,000 per month
thereafter. The accrual of and payment on the registration rights penalties
has
had a material adverse effect on our business, our financial condition,
including liquidity and profitability, and our results of operations, including
a corresponding decrease in our net income of approximately $49,000 for the
nine
months ended September 30, 2006.
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 September 30, 2006, the fair value
of
the derivative liability was approximately $953,000, fair value adjustments
of
approximately $328,000 and approximately $875,000 have been included in other
expenses for the three and nine months ended September 30, 2005, respectively,
and fair value adjustments of approximately $237,000 and approximately
$1,110,000 have been included in other income for the three and nine months
ended September 30, 2006, respectively. If our stock price rebounds during
the
fourth quarter of 2006 to a level consistent with our stock price at December
2005, the fair value of the derivative liability will increase and therefore,
the valuation gain recognized during the three and nine months ended September
30, 2006 will decrease and/or reverse and we could potentially reflect a
year-to-date valuation loss.
Amortization
Amortization
expenses remained steady at approximately $133,000 and approximately $399,000
for the three and nine months ended September 30, 2005 and 2006, respectively.
The software license acquired from TLC in July of 1999 (the “1999 license”) is
amortized over a 10 year useful life. Amortization expenses for 2005 and 2006
reflect the continual amortization of the software license as well as the
amortization of our website, www.quickverse.com, which we launched during the
second quarter of 2004.
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 an expense for financial reporting but are not
deductible for income tax purposes.
We
have
recognized a net deferred tax asset whose realization depends on generating
future taxable income. At September 30, 2006, management adjusted the amount
of
valuation allowance based on the assessment that we will produce sufficient
income in the future to realize our net deferred tax asset. The resulting
deferred tax liability reflects income taxes payable in future periods on the
net deductible differences related to the 1999 license. We currently have net
operating loss carryforwards, for income tax purposes, of approximately
$8,468,000. The carryforwards are the result of income tax losses generated
in
2000 ($2,086,000 expiring in 2020), 2001 ($5,191,000 expiring in 2021), 2002
($235,000 expiring in 2022) and 2005 ($956,000 expiring in 2025). We will need
to achieve a minimum annual taxable income, before deduction of operating loss
carryforwards, of approximately $527,000 to fully utilize the current loss
carryforwards. Although there can be no assurance, we believe this is achievable
through careful expense management and continued introduction of new products
and enhanced versions of our existing products.
Although
there can be no assurance, management expects the deductible temporary
differences (reserves) to reverse sometime beyond the next fiscal year.
Our
primary needs for liquidity and capital resources are the funding of our
continued operations, which includes the ongoing internal development of new
products, expansion and upgrade of existing products, and marketing and sales.
We believe our future cash provided by operations will be sufficient to fund
our
continued operations. However, our pursuit of future strategic product line
and/or corporate acquisitions and licensing will require funding from outside
sources. Funding from outside sources may include but is not limited to the
exercise of outstanding warrants and pursuit of other financing options such
as
commercial loans, common stock and/or preferred stock issuances and convertible
notes. At this time, we have no legally committed funds for future capital
expenditures including software development.
|
Working
Capital at September 30
|
|
|
2006
|
|
|
Current
assets
|
|
$
|
658,101
|
|
|
Current
liabilities
|
|
$
|
2,866,445
|
|
|
Retained
deficit
|
|
$
|
(7,750,886
|
)
|
As
of
September 30, 2006, we had approximately $658,000 in current assets,
approximately $2,866,000 in current liabilities and a retained deficit of
approximately $7,751,000. We had net income of approximately $26,000 for the
three months ended September 30, 2006 and net income of approximately $1,000
for
the nine months ended September 30, 2006, respectively. For the three and nine
months ended September 30, 2006, we had registration rights penalties of $-0-
and approximately $49,000, respectively, and a related gain of approximately
$237,000 and approximately $1,110,000, respectively, from the fair value
adjustment of derivatives. See “Results Of Operations” above.
|
Cash
Flows for Nine Months Ended September 30
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
%
|
|
|
Cash
flows provided by operating activities
|
|
$
|
291,051
|
|
$
|
479,934
|
|
$
|
(188,883
|
)
|
|
39
|
%
|
|
Cash
flows (used) by investing activities
|
|
$
|
(425,063
|
)
|
$
|
(750,851
|
)
|
$
|
325,788
|
|
|
43
|
%
|
|
Cash
flows provided (used) by financing activities
|
|
$
|
15,444
|
|
$
|
(30,604
|
)
|
$
|
46,048
|
|
|
150
|
%
|
Net
cash
provided by operating activities was approximately $291,000 for the nine months
ended September 30, 2006, and approximately $480,000 for the nine months ended
September 30, 2005. The decrease was primarily due to a decrease in the amounts
received from customers resulting from decreased sales and a temporary decrease
in payments to trade vendors and content providers.
Net
cash
used in investing activities was approximately $425,000 for the nine months
ended September 30, 2006 and approximately $751,000 for the nine months ended
September 30, 2005. The decrease was mainly the result of capitalizing fewer
costs associated with software development.
Net
cash
provided by financing activities was approximately $15,000 for the nine months
ended September 30, 2006, and net cash used by financing activities was
approximately $31,000 for the nine months ended September 30, 2005. Both years
reflect payments made on long-term notes payable. However, the nine months
ended
September 30, 2006 reflect proceeds received from a note payable.
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 nine months ended September 30, 2006.
On
July
20, 2006, we entered into a loan agreement with an individual, for the principal
sum of $150,000, to fund an existing working capital deficit. The loan was
evidenced by a convertible secured promissory note bearing interest at a rate
of
10% per thirty-day period with the principal, together with all accrued
interest, due on or before September 18, 2006. In further consideration of
the
loan, we issued the lender a three-year common stock purchase warrant to acquire
up to an aggregate of 100,000 shares of our common stock at an exercise price
of
$0.07 per share. On September 19, 2006, we entered into a Modification and
Extension Agreement in connection with this note. As of the original maturity
date and in accordance with the original terms of the loan agreement, we repaid
fifty percent of the original principal ($75,000). This Modification and
Extension Agreement extended the repayment term of the balance of the
outstanding principal under the loan agreement ($75,000), as well as the
interest payable thereon and on the principal previously repaid, until October
20, 2006. In consideration for the extension of the maturity date, we agreed
to
pay an amount equal to one percentage point on the principal that remains
outstanding ($750). On October 19, 2006, in connection with the above-mentioned
loan, we repaid in full the remaining principal ($75,000), the interest payable
on the original principal amount of $150,000 ($35,416.67) and the consideration
payable for the extension of the maturity date ($750).
We
have
been unsuccessful in previous attempts to secure bank financing due to our
internal financial ratios and negative working capital position and do not
expect that we will be successful in securing any such financing unless and
until our ratios in this regard improve. Although we have, in the past, secured
financing on our open accounts receivable, we were unable to pursue that option
because of a lien placed upon our accounts receivable, together with all of
our
other assets, in connection with the security interest granted to the lender
for
the July 20, 2006 loan. As of October 19, 2006, however, this loan was retired
in full and financings secured against our open accounts receivable may once
again, therefore, be a possible option for us in satisfying our future financing
needs.
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 2007. We are responsible for all insurance
expenses associated with this lease.
At
September 30, 2006, the future minimum rental payments required under these
leases are as follows:
|
2006
|
|
$
|
20,333
|
|
|
2007
|
|
|
31,248
|
|
|
Total
future minimum rental payments
|
|
$
|
51,581
|
|
We
lease
telephone equipment under a capital lease 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 September 30, 2006 for each
of
the next five years and in the aggregate are:
|
2006
|
|
$
|
3,432
|
|
|
2007
|
|
|
13,726
|
|
|
2008
|
|
|
13,726
|
|
|
2009
|
|
|
12,582
|
|
|
2010
|
|
|
---
|
|
|
Total
minimum lease payments
|
|
|
43,466
|
|
|
Less:
Amount representing interest
|
|
|
7,282
|
|
|
Total
obligations under capital lease
|
|
|
36,184
|
|
|
Less:
Current installments of obligations under capital lease
|
|
|
10,023
|
|
|
Long-term
obligation under capital lease
|
|
$
|
26,161
|
|
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. This new standard
became effective for us in the first quarter of fiscal year 2006.
In
February 2006, the FASB issued Statement No. 155, Accounting
for Certain Hybrid Financial Instruments - an amendment of FASB Statements
No.
133 and 140.
The
Statement permits fair value remeasurement for any hybrid financial instrument
that contains an embedded derivative that otherwise would require bifurcation.
The new Statement also requires companies to identify interests in securitized
financial assets that are freestanding derivatives or contain embedded
derivatives that would have to be accounted for separately. This new Statement
is effective for fiscal years beginning after September 15, 2006 with early
adoption permitted. We do not expect the adoption of SFAS 155 to have a material
impact on our business, our financial condition, including liquidity and
profitability, or our results of operations.
In
March
2006, the FASB issued Statement No. 156, Accounting
for Servicing of Financial Assets, an amendment of Statement No. 14 (SFAS
156).
SFAS
156 requires all separately recognized servicing assets and servicing
liabilities to be initially measured at fair value, if practicable, and permits
an entity to subsequently measure those servicing assets and servicing
liabilities at fair value. SFAS 156 is effective for fiscal years beginning
after September 15, 2006. We do not expect the adoption of SFAS 156 to have
a
material impact on our business, our financial condition, including liquidity
and profitability, or our results of operations.
In
April
2006, the FASB issued Staff Position FIN 46(R)-6, Determining
Variability to be Considered in Applying FIN 46(R).
FIN
46(R)-6 states that the variability to be considered in applying FIN 46(R)
shall
be based on an analysis of the design of the entity following a two-step
process. The first step is to analyze the nature of the risks in the entity.
The
second step would be to determine the purpose(s) for which the entity was
created and determine the variability (created by the risks identified in Step
1) the entity is designed to create and pass along to its interest holders.
The
guidance in this FASB Staff Position is effective prospectively beginning July
1, 2006, although companies have until December 31, 2006 to elect retrospective
applications. We do not expect FIN 46(R)-6 to have a material impact on our
business, our financial condition, including liquidity and profitability, or
our
results of operations.
In
July
2006, the FASB released FIN 48, Accounting
for Uncertainty in Income Taxes - an interpretation of SFAS 109.
This
interpretation clarifies the accounting for uncertainty in income taxes
recognized in accordance with SFAS 109. This interpretation prescribes a
recognition threshold and measurement attribute for financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. It also provides guidance on derecognition, classification, interest
and penalties, interim periods and disclosure. FIN 48 is effective for fiscal
years beginning after December 15, 2006. We will adopt FIN 48 as of January
1,
2007 and we do not expect the adoption to have a material impact on our
business, our financial condition, including liquidity and profitability, or
our
results of operations.
In
September 2006, the FASB issued Statement No. 157, Fair
Value Measurements, which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. This Statement applies under other accounting pronouncements
that require or permit fair value measurements, but does not require any new
fair value measurements. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007. We are currently assessing
the potential impact that adoption of SFAS 157 will have on our financial
statements.
In
September 2006, the FASB issued Statement No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans—an
amendment of FASB Statements No. 87, 88, 106, and 132(R) (“SFAS
158”).
This
Statement requires an employer to recognize the overfunded or underfunded status
of a defined benefit postretirement plan (other than a multiemployer plan)
as an
asset or liability in its statement of financial position and to recognize
changes in that funded status in the year in which the changes occur through
comprehensive income of a business entity or changes in unrestricted net assets
of a not-for-profit organization. This Statement also requires an employer
to
measure the funded status of a plan as of the date of its year-end statement
of
financial position, with limited exceptions. SFAS 158 is effective for financial
statements issued for fiscal years ending after December 15, 2006. We do not
expect the adoption of SFAS 158 to have a material impact on our business,
our
financial condition, including liquidity and profitability, or our results
of
operations.
(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 any time 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 quarterly
report on Form 10-QSB. 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.
As
of the
date of this quarterly report on Form 10-QSB for the period ended September
30,
2006, there were no pending material legal proceedings to which we were a party
and we were 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, and including liquidity and profitability,
and our results of operations.
|
Date
Securities Issued
|
|
|
Securities
Title
|
|
|
Issued
to
|
|
|
Number
of Securities Issued
|
|
|
Consideration
*
|
|
|
Common
Stock Issuances
|
|
10/26/2006
|
|
|
Common
Stock
|
|
|
Independent
Board of Director
|
|
|
480,000
|
|
$
|
12,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Warrant Issuances
|
|
Promissory
Notes Convertible into Common Stock
|
|
7/20/2006
|
|
|
Common
Stock
|
|
|
W.
Sam Chandoha
|
|
|
100,000
|
|
$
|
4,997
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Option Issuances
|
|
10/26/2006
|
|
|
Common
Stock
|
|
|
Non-Executive
Employees
|
|
|
850,000
|
|
$
|
21,250
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Consideration is calculated to be the value of the security at the
date of
issuance.
|
|
|
|
For
the
unregistered sale, we relied on the private offering exemption of Section 4(2)
of the Securities Act and/or the private offering safe harbor provision of
Rule
506 of Regulation D promulgated thereunder based on the following factors:
(i)
the number of offerees or purchasers, as applicable, (ii) the absence of general
solicitation, (iii) representations obtained from the acquirors relative to
their accreditation and/or sophistication (or from offeree or purchaser
representatives, as applicable), (iv) the provision of appropriate disclosure,
and (v) the placement of restrictive legends on the certificates reflecting
the
securities coupled with investment representations obtained from the
acquirors.
There
were no reportable events under this Item 3 during the quarterly period ended
September 30, 2006.
No
matters were submitted to a vote of our stockholders during the quarterly period
ended September 30, 2006.
Our
Annual Meeting of the Stockholders of Findex.com, Inc., previously scheduled
to
be held on September 14, 2006, has been rescheduled for May 4,
2007.
There
were no reportable events under this Item 5 during the quarterly period ended
September 30, 2006.
|
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.
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31.1
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Certification
of Findex.com, Inc. Chief Executive Officer, Steven Malone, required
by
Rule 13a-14(a) or Rule 15d-14(a), and dated November 20, 2006. FILED
HEREWITH.
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31.2
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Certification
of Findex.com, Inc. Chief Financial Officer, Kirk R. Rowland, required
by
Rule 13a-14(a) or Rule 15d-14(a), and dated November 20, 2006. FILED
HEREWITH.
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32.1
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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 November
20,
2006. FILED HEREWITH.
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32.2
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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 November
20,
2006. FILED HEREWITH.
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Signatures
In
accordance with the requirements of the Exchange Act, the registrant caused
this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
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FINDEX.COM,
INC.
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Date:
November 20, 2006
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By
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/s/
Steven Malone
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Steven
Malone
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President
and Chief Executive Officer
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Date:
November 20, 2006
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By
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/s/
Kirk R. Rowland
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Kirk
R. Rowland, CPA
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Chief
Financial Officer
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