form10qsb_september302007.htm
U.
S. SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-QSB
QUARTERLY
REPORT UNDER SECTION 13 OR 15(D)
OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007
Commission
file number: 0-29963
FINDEX.COM,
INC.
(Exact
name of small business issuer as specified in its charter)
Nevada
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|
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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|
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|
620
North 129th
Street,
Omaha, Nebraska
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68154
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(Address
of principal executive offices)
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|
(Zip
Code)
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(402)
333-1900
(Issuer’s
telephone number)
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]
At
November 19, 2007, the registrant had outstanding 52,150,817 shares of common
stock, of which there is only a single class.
Transitional
Small Business Disclosure Format (check one): Yes __ No
X
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Page
Number
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F-1
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1
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10
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12
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12
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12
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12
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13
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13
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Findex.com,
Inc.
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CONDENSED
CONSOLIDATED BALANCE SHEETS
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|
|
|
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|
(Unaudited)
|
|
|
|
|
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|
September
30, 2007
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|
|
December
31, 2006
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|
Assets
|
|
Current
assets:
|
|
Cash
and cash equivalents
|
|
$ |
---
|
|
|
$ |
48,672
|
|
Accounts
receivable, trade, net
|
|
|
134,040
|
|
|
|
318,000
|
|
Inventories
|
|
|
111,635
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|
|
|
145,344
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|
Other
current assets
|
|
|
295,889
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|
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|
213,162
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|
Total
current assets
|
|
|
541,564
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|
|
|
725,178
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|
Property
and equipment, net
|
|
|
63,066
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|
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|
86,638
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|
Software
license, net
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|
|
881,138
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|
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|
1,258,769
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|
Capitalized
software development costs, net
|
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|
559,326
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|
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|
491,695
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Restricted
cash
|
|
|
40,000
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|
|
|
---
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Deferred
income taxes, net
|
|
|
577,787
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|
|
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443,600
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|
Other
assets
|
|
|
43,856
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|
|
|
49,965
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|
Total
assets
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|
$ |
2,706,737
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|
$ |
3,055,845
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|
|
|
Liabilities
and stockholders’ equity
|
|
Current
liabilities:
|
|
Cash
overdraft
|
|
$ |
22,988
|
|
|
$ |
---
|
|
Accounts
payable, trade
|
|
|
791,854
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|
|
|
693,260
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|
Accrued
royalties
|
|
|
668,769
|
|
|
|
649,763
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|
Derivative
liabilities
|
|
|
612,932
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|
|
|
526,868
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|
Other
current liabilities
|
|
|
561,268
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|
|
|
561,111
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|
Total
current liabilities
|
|
|
2,657,811
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|
|
|
2,431,002
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|
Long-term
obligations
|
|
|
16,726
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|
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|
80,568
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|
Commitments
and contingencies (Note 9)
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Stockholders’
equity:
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|
Preferred
stock, $.001 par value
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|
5,000,000
shares authorized
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|
-0-
and -0- shares issued and outstanding, respectively
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|
---
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|
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|
---
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Common
stock, $.001 par value
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|
120,000,000
shares authorized,
|
|
52,150,817
and 49,788,317 shares issued and outstanding, respectively
|
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|
52,151
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|
|
|
49,788
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|
Paid-in
capital
|
|
|
7,734,621
|
|
|
|
7,592,884
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|
Retained
(deficit)
|
|
|
(7,754,572 |
) |
|
|
(7,098,397 |
) |
Total
stockholders’ equity
|
|
|
32,200
|
|
|
|
544,275
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|
Total
liabilities and stockholders’ equity
|
|
$ |
2,706,737
|
|
|
$ |
3,055,845
|
|
|
|
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 September 30,
|
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|
Nine
Months Ended September 30,
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2007
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2006
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2007
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2006
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|
Revenues,
net of reserves and allowances
|
|
$ |
476,359
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|
$ |
826,127
|
|
|
$ |
2,234,690
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|
|
$ |
2,586,197
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|
Cost
of sales
|
|
|
192,726
|
|
|
|
391,771
|
|
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|
969,601
|
|
|
|
1,361,157
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|
Gross
profit
|
|
|
283,633
|
|
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|
434,356
|
|
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|
1,265,089
|
|
|
|
1,225,040
|
|
Operating
expenses:
|
|
Sales
and marketing
|
|
|
181,417
|
|
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|
193,223
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|
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|
519,218
|
|
|
|
580,684
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|
General
and administrative
|
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|
264,111
|
|
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|
385,658
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|
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|
1,001,920
|
|
|
|
1,310,340
|
|
Other
operating expenses
|
|
|
136,557
|
|
|
|
133,146
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|
|
|
440,206
|
|
|
|
424,567
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|
Total
operating expenses
|
|
|
582,085
|
|
|
|
712,027
|
|
|
|
1,961,344
|
|
|
|
2,315,591
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|
Loss
from operations
|
|
|
(298,452 |
) |
|
|
(277,671 |
) |
|
|
(696,255 |
) |
|
|
(1,090,551 |
) |
Other
expenses, net
|
|
|
(9,580 |
) |
|
|
47,898 |
) |
|
|
(24,855 |
) |
|
|
(57,929 |
) |
Registration
rights penalties
|
|
|
---
|
|
|
|
---
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|
|
|
---
|
|
|
|
(49,314 |
) |
Gain
(loss) on valuation adjustment of derivatives
|
|
|
(139,809 |
) |
|
|
237,009
|
|
|
|
(86,064 |
) |
|
|
1,109,548
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|
Loss
before income taxes
|
|
|
(447,841 |
) |
|
|
(88,560 |
) |
|
|
(807,174 |
) |
|
|
(88,246 |
) |
Income
tax benefit
|
|
|
140,899
|
|
|
|
114,909
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|
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|
150,999
|
|
|
|
89,457
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|
Net
income (loss)
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|
$ |
(306,942 |
) |
|
$ |
26,349
|
|
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|
(656,175 |
) |
|
|
1,211
|
|
Retained
deficit at beginning of year
|
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|
(7,098,397 |
) |
|
|
(7,752,097 |
) |
Retained
deficit at end of period
|
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|
$ |
(7,754,572 |
) |
|
$ |
(7,750,886 |
) |
|
|
Net
earnings (loss) per share:
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Basic
|
|
$ |
(0.01 |
) |
|
$ |
0.00
|
|
|
$ |
(0.01 |
) |
|
$ |
0.00
|
|
Diluted
|
|
$ |
(0.01 |
) |
|
$ |
0.00
|
|
|
$ |
(0.01 |
) |
|
$ |
0.00
|
|
|
|
Weighted
average shares outstanding:
|
|
Basic
|
|
|
51,632,339
|
|
|
|
49,558,317
|
|
|
|
50,411,806
|
|
|
|
49,294,214
|
|
Diluted
|
|
|
51,632,339
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|
|
|
51,167,410
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|
|
|
50,411,806
|
|
|
|
51,660,240
|
|
|
|
See
accompanying notes.
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|
Findex.com,
Inc.
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
(Unaudited)
|
|
|
|
Nine
Months Ended September 30,
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
Cash
received from customers
|
|
$ |
2,417,172
|
|
|
$ |
2,683,215
|
|
Cash
paid to suppliers and employees
|
|
|
(2,085,968 |
) |
|
|
(2,375,960 |
) |
Other
operating activities, net
|
|
|
(17,282 |
) |
|
|
(16,204 |
) |
Net
cash provided by operating activities
|
|
|
313,922
|
|
|
|
291,051
|
|
Cash
flows from investing activities:
|
|
Software
development costs
|
|
|
(316,086 |
) |
|
|
(412,108 |
) |
Deposits
paid
|
|
|
(41,189 |
) |
|
|
---
|
|
Other
investing activities, net
|
|
|
(13,182 |
) |
|
|
(12,955 |
) |
Net
cash used by investing activities
|
|
|
(370,457 |
) |
|
|
(425,063 |
) |
Cash
flows from financing activities:
|
|
Proceeds
from note payable, net
|
|
|
---
|
|
|
|
75,000
|
|
Proceeds
from issuance of common stock
|
|
|
32,500
|
|
|
|
---
|
|
Cash
overdraft
|
|
|
22,988
|
|
|
|
---
|
|
Payments
made on long-term notes payable
|
|
|
(47,625 |
) |
|
|
(59,556 |
) |
Net
cash provided by financing activities
|
|
|
7,863
|
|
|
|
15,444
|
|
Net
decrease in cash and cash equivalents
|
|
|
(48,672 |
) |
|
|
(118,568 |
) |
Cash
and cash equivalents, beginning of year
|
|
|
48,672
|
|
|
|
119,560
|
|
Cash
and cash equivalents, end of period
|
|
$ |
---
|
|
|
$ |
992
|
|
|
|
Reconciliation
of net loss to cash flows from operating activities:
|
|
Net
(loss) income
|
|
$ |
(656,175 |
) |
|
$ |
1,211
|
|
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
|
|
Software
development costs amortized
|
|
|
248,455
|
|
|
|
600,959
|
|
(Gain)
loss on fair value adjustment of derivatives
|
|
|
86,064
|
|
|
|
(1,109,548 |
) |
Bad
debts provision (recovery)
|
|
|
17,164
|
|
|
|
(11,216 |
) |
Depreciation
& amortization
|
|
|
423,042
|
|
|
|
435,783
|
|
(Gain)
loss on sale of property and equipment
|
|
|
(1,361 |
) |
|
|
1,746
|
|
Noncash
operating expenses
|
|
|
73,600
|
|
|
|
69,997
|
|
Change
in assets and liabilities:
|
|
Decrease
in accounts receivable
|
|
|
166,796
|
|
|
|
146,387
|
|
Decrease
in inventories
|
|
|
33,709
|
|
|
|
63,591
|
|
Decrease
in refundable taxes
|
|
|
2,050
|
|
|
|
5,764
|
|
(Increase)
in prepaid expenses
|
|
|
(47,825 |
) |
|
|
(7,603 |
) |
Increase
in accrued royalties
|
|
|
19,006
|
|
|
|
101,581
|
|
Increase
in accounts payable
|
|
|
118,595
|
|
|
|
164,327
|
|
(Decrease)
in deferred taxes
|
|
|
(150,999 |
) |
|
|
(89,457 |
) |
(Decrease)
in other liabilities
|
|
|
(18,199 |
) |
|
|
(82,471 |
) |
Net
cash provided by operating activities
|
|
$ |
313,922
|
|
|
$ |
291,051
|
|
|
|
See
accompanying notes.
|
|
Findex.com,
Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2007
(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, 2006.
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, obsolete inventory,
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
$2,030,968, less accumulated amortization of $1,471,642 at September 30,
2007.
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 $76,198
and
$131,013 for the nine months ended September 30, 2007 and 2006, 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 $113,252, less accumulated amortization of $84,537 at September 30,
2007.
RESTRICTED
CASH
Restricted
cash represents cash held in reserve by our merchant banker to allow for a
potential increase in credit card charge backs from increased consumer
purchases.
REVENUE
RECOGNITION
We
derive
revenues from the sale of packaged software products, product support and
multiple element arrangements that may include any combination of these items.
We recognize software revenue for software products and related services in
accordance with 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,
2007 and 2006 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.
RECENT
ACCOUNTING PRONOUNCEMENTS
Fair
Value
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
to provide enhanced guidance for using fair value to measure assets and
liabilities. The standard also expands disclosure requirements for
assets and liabilities measured at fair value, how fair value is determined,
and
the effect of fair value measurements on earnings. The standard
applies whenever other authoritative literature requires, or permits, certain
assets or liabilities to be measured at fair value, but does not expand the
use
of fair value. SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those years. Early adoption is permitted. We plan
to adopt SFAS No. 157 as of January 1, 2008. The balance sheet items carried
at
fair value consist of derivatives and other financial
instruments. Additionally, we use fair value concepts to test various
long-lived assets for impairment and to initially measure assets and liabilities
acquired in a business combination. Management is currently
evaluating the impact of adoption on how these liabilities are currently
measured.
In
February 2007 the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, to provide companies with an
option to report selected financial assets and liabilities at fair
value. The standard’s objective is to reduce both complexity in
accounting for financial instruments and the volatility in earnings caused
by
measuring related assets and liabilities differently. The standard
requires companies to provide additional information that will help investors
and other users of financial statements to more easily understand the effect
of
the company’s choice to use fair value on its earnings. It also
requires companies to display the fair value of those assets and liabilities
for
which the company has chosen to use fair value on the face of the balance
sheet. The new standard does not eliminate disclosure requirements
included in other accounting standards, including requirements for disclosures
about fair value measurements included in SFAS 157, Fair Value
Measurements, and SFAS 107, Disclosures about Fair Value of Financial
Instruments. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. We plan to adopt SFAS No. 159 as of January
1, 2008. We are in the process of evaluating this standard and
therefore have not yet determined the impact that the adoption will have on
our
financial position, results of operations or cash flows.
RECLASSIFICATIONS
Certain
accounts in our 2006 financial statements have been reclassified for comparative
purposes to conform with the presentation in our 2007 financial
statements.
NOTE
2 – 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, 2007, we had
a
year-to-date net loss of $656,175, and negative working capital of $2,116,247
and $1,705,824, and an accumulated deficit of $7,754,572 and $7,098,397 as
of
September 30, 2007 and December 31, 2006, respectively. Although these factors
raise substantial doubt as to our ability to continue as a going concern through
December 31, 2007, we have taken several actions to mitigate against this risk.
These actions include selling some of our intangible assets (See Note 11) and
pursuing mergers and acquisitions that will provide profitable operations and
positive operating cash flow.
NOTE
3 – INVENTORIES
At
September 30, 2007, inventories consisted of the following:
Raw
materials
|
|
$ |
69,373
|
|
Finished
goods
|
|
|
61,383
|
|
Less
reserve for obsolete inventory
|
|
|
(19,121 |
) |
Inventories
|
|
$ |
111,635
|
|
NOTE
4 – RESERVES AND ALLOWANCES
At
September 30, 2007, the allowance for doubtful accounts included in Accounts
receivable, trade, net, consisted of the following:
Balance
December 31, 2006
|
|
$ |
11,000
|
|
Bad
debts provision (included in Other operating expenses)
|
|
|
17,164
|
|
Accounts
written off
|
|
|
(10,697 |
) |
Collection
of accounts previously written off
|
|
|
715
|
|
Balance
September 30, 2007
|
|
$ |
18,182
|
|
At
September 30, 2007, the reserve for obsolete inventory included in Inventories
consisted of the following:
Balance
December 31, 2006
|
|
$ |
---
|
|
Provision
for obsolete inventory
|
|
|
19,121
|
|
Obsolete
inventory written off
|
|
|
---
|
|
Balance
September 30, 2007
|
|
$ |
19,121
|
|
At
September 30, 2007, the reserve for sales returns included in Other current
liabilities consisted of the following:
Balance
December 31, 2006
|
|
$ |
98,132
|
|
Return
provision – sales
|
|
|
381,700
|
|
Return
provision – cost of sales
|
|
|
(57,255 |
) |
Returns
processed
|
|
|
(345,869 |
) |
Balance
September 30, 2007
|
|
$ |
76,708
|
|
NOTE
5 – DERIVATIVE LIABILITIES
At
September 30, 2007, our derivative liability consisted of the
following:
Warrant
A
|
|
$ |
---
|
|
Warrant
B
|
|
|
334,402
|
|
Warrant
C
|
|
|
278,530
|
|
Derivatives
|
|
$ |
612,932
|
|
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 was exercisable on
a
cashless basis at the option of the warrant holder at a price per share of
$0.15. This warrant was 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 guidance of EITF
00-19-2, Accounting for Registration Payment Arrangements. On May
1, 2007, this warrant expired unexercised. See Note 6.
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
B
|
|
|
Warrant
C
|
|
Expected
term – years
|
|
|
2.11
|
|
|
|
2.11
|
|
Stock
price at September 30, 2007
|
|
$ |
0.04
|
|
|
$ |
0.04
|
|
Expected
dividend yield
|
|
|
0 |
% |
|
|
0 |
% |
Expected
stock price volatility
|
|
|
212 |
% |
|
|
212 |
% |
Risk-free
interest rate
|
|
|
4.10 |
% |
|
|
4.10 |
% |
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 expense
adjustments of ($139,809) and ($86,064) for the three and nine months ended
September 30, 2007, respectively, and income adjustments of $237,009 and
$1,109,548 for the three and nine months ended September 30, 2006,
respectively.
NOTE
6 – STOCKHOLDERS’ EQUITY
COMMON
STOCK
In
June
2007, we committed to issue a total of 562,500 restricted shares of common
stock
to our outside director, at the closing price as of June 29, 2007 ($0.032),
in
lieu of cash payments of amounts accrued for services as a member of our board
from the period of October 1, 2006 through June 30, 2007. This issuance was
valued at $18,000.
In
July
2007, we entered into a stock subscription agreement with a business development
consultant for the sale of 1,300,000 shares of common stock at a price of $0.025
per share. We realized $32,500 from this subscription.
In
August
2007, pursuant to settlement of an agreement with an individual for business
consulting services, we committed to issue 500,000 restricted shares of common
stock, valued at $0.04, in lieu of cash.
COMMON
STOCK OPTIONS
In
April
2007, 50,000 vested stock options with an exercise price of $0.11, related
to a
former employee, expired unexercised. We did not grant any options or other
stock-based awards to the individual for whom the options expired, during the
six months prior to and after the option expirations.
In
July
2007, 80,000 vested stock options with an exercise price of $0.10, related
to
former employees, expired unexercised. We did not grant any options
or other stock-based awards to the individuals for whom the options expired,
during the six months prior to and after the option expirations.
In
August
2007, 40,000 vested stock options with an exercise price of $0.10, related
to a
former employee, expired unexercised. We did not grant any options or
other stock-based awards to the individual for whom the options expired, during
the six months prior to and after the option expirations.
COMMON
STOCK WARRANTS
In
May
2007, a warrant to purchase up to 600,000 restricted shares of our common stock
with an exercise price of $0.15 per share expired unexercised. See Note
5.
In
June
2007, a warrant to purchase up to 250,000 restricted shares of our common stock
with an exercise price of $0.10 per share expired unexercised.
In
July
2007, we amended an agreement with a business development consultant to provide
for additional compensation of warrants to purchase up to 2,300,000 shares
of
common stock at $0.032 per share. The agreement provides that
warrants to purchase up to 1,300,000 shares of common stock vested on August
31,
2007 and warrants to purchase up to 1,000,000 shares of common stock vest on
January 1, 2008. These warrants were valued at $48,160 using the
Black-Scholes method and recorded as an expense.
NOTE
7 – INCOME TAXES
The
provision (benefit) for taxes on net loss for the three and nine months ended
September 30, 2007 and 2006 consisted of the following:
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Current:
|
|
Federal
|
|
$ |
---
|
|
|
$ |
---
|
|
|
$ |
---
|
|
|
$ |
---
|
|
State
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Deferred:
|
|
Federal
|
|
|
(140,937 |
) |
|
|
(112,543 |
) |
|
|
(151,162 |
) |
|
|
(84,655 |
) |
State
|
|
|
38
|
|
|
|
(2,366 |
) |
|
|
163
|
|
|
|
(4,802 |
) |
|
|
|
(140,899 |
) |
|
|
(114,909 |
) |
|
|
(150,999 |
) |
|
|
(89,457 |
) |
Total
tax provision (benefit)
|
|
$ |
(140,899 |
) |
|
$ |
(114,909 |
) |
|
$ |
(150,999 |
) |
|
$ |
(89,457 |
) |
NOTE
8 – EARNINGS PER COMMON SHARE
The
following table shows the amounts used in computing earnings per common share
and the average number of shares of dilutive potential common
stock:
For
the Three Months Ended September 30,
|
|
2007
|
|
|
2006
|
|
Net
income (loss)
|
|
$ |
(306,942 |
) |
|
$ |
26,349
|
|
Preferred
stock dividends
|
|
|
---
|
|
|
|
---
|
|
Net
income (loss) available to common shareholders
|
|
$ |
(306,942 |
) |
|
$ |
26,349
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
51,632,339
|
|
|
|
49,558,317
|
|
Dilutive
effect of:
|
|
Convertible
debt
|
|
|
---
|
|
|
|
1,535,714
|
|
Stock
options
|
|
|
---
|
|
|
|
---
|
|
Warrants
|
|
|
---
|
|
|
|
73,379
|
|
Diluted
weighted average shares outstanding
|
|
|
51,632,339
|
|
|
|
51,167,410
|
|
For
the Nine Months Ended September 30,
|
|
2007
|
|
|
2006
|
|
Net
loss
|
|
$ |
(656,175 |
) |
|
$ |
1,211
|
|
Preferred
stock dividends
|
|
|
---
|
|
|
|
---
|
|
Net
loss available to common shareholders
|
|
$ |
(656,175 |
) |
|
$ |
1,211
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
50,411,806
|
|
|
|
49,294,214
|
|
Dilutive
effect of:
|
|
Convertible
debt
|
|
|
---
|
|
|
|
1,535,714
|
|
Stock
options
|
|
|
---
|
|
|
|
676,043
|
|
Warrants
|
|
|
---
|
|
|
|
154,269
|
|
Diluted
weighted average shares outstanding
|
|
|
50,411,806
|
|
|
|
51,660,240
|
|
NOTE
9 – 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 income from operations adjusted for other income
and interest expense (4% 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), our Chief Technology Officer (with a base annual salary of $150,000)
and our Vice President of Sales (with a base annual salary of $110,000). In
addition to the bonus provisions and annual base salary, each employment
agreement provides for payment of all accrued base salaries ($10,873 included
in
Other current liabilities at September 30, 2007), bonuses ($30,542 included
in
other current liabilities at September 30, 2007), and any vested deferred
vacation compensation ($32,874 included in other current liabilities at
September 30, 2007) 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.
We
do not
collect sales taxes or other taxes with respect to shipments of most of our
goods into most states in the U.S. Our fulfillment center and
customer service center networks, and any future expansion of those networks,
along with other aspects of our evolving business, may result in additional
sales and other tax obligations. One or more states may seek to
impose sales or other tax collection obligations on out-of-jurisdiction
companies that engage in e-commerce. A successful assertion by one or
more states that we should collect sales or other taxes on the sale of
merchandise or services could result in substantial tax liabilities for past
sales, decrease our ability to compete with traditional retailers, and otherwise
harm our business.
Currently,
decisions of the U.S. Supreme Court restrict the imposition of obligations
to
collect state and local taxes and use taxes with respect to sales made over
the
Internet. However, a number of states, as well as the U.S. Congress,
have been considering various initiatives that could limit or supersede the
Supreme Court’s constitutional concerns and resulted in a reversal of its
current position, we could be required to collect sales and use taxes in
additional states. The imposition by state and local governments of
various taxes upon Internet commerce could create administrative burdens for
us,
put us at a competitive disadvantage if they do not impose similar obligations
on all of our online competitors and decrease our future sales.
NOTE
10 – 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 materials available to us,
operations could be adversely affected.
NOTE
11 – SUBSEQUENT EVENTS
In
October 2007, we entered into an unsecured 10-day note agreement with a
shareholder for $25,000. The agreement called for interest at 6% and
provided for a $2,000 origination fee. The note was repaid in
full.
In
October 2007, we entered into and consummated an Asset Purchase Agreement with
an unrelated company for the sale of our Membership Plus product line for
$1,675,000 cash. We have not classified this asset as “held for sale”
at September 30, 2007 as we are currently in the process of determining the
total unamortized historical cost of the product line and have engaged a third
party expert to assist us in that determination. The historical cost
of the Membership Plus product line was originally lumped, along with the
historical cost of our other software product lines, into the total software
license and is included on the balance sheet in Software license,
net. In addition, $9,788 included in Inventories and $91,879 included
in Capitalized software development, net are additional costs associated with
the Membership Plus product line. Finally, the Asset Purchase
Agreement included open accounts receivable directly related to the Membership
Plus product line (approximately $20,000 included in Accounts receivable, trade,
net at September 30, 2007).
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 the company’s annual report on Form 10-KSB for
the period ending December 31, 2006. 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 Item 1
of
Part I of this quarterly report, 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, 2006.
MANAGEMENT
OVERVIEW
During
the third quarter of 2007, we continued to concentrate on our core products,
QuickVerse®
and Membership Plus®
(which we have since divested, as more specifically detailed
below), and their respective features in order to prepare for annual
upgrade releases for these product lines. We also continued to focus
on expanding the content available for our QuickVerse® products
which
resulted during the period in the release of the following two new reference
collections for QuickVerse®
(Windows) users:
|
▪
|
The
Pulpit Commentary®,
which includes 23 original volumes, over 23,000 pages, and 95,000
entries
with a retail price of $99.95; and
|
|
▪
|
The
Biblical Illustrator®,
which includes 56 volumes and 34,752 pages from hundreds of authors
with a
retail price of $99.95.
|
As
of
September 2007, we reacquired certain content publishing rights to
Zondervan’s New International Version® (NIV),
heralded by
many Bible enthusiasts as the most widely read and universally respected Bible
translation currently in publication. The NIV content had been
incorporated into our QuickVerse®
product lines for a number of years prior to 2001 when we were required to
remove it as a result of a now long-since settled dispute with the holder of
its
primary publishing rights. Our newly acquired NIV rights entitle us
to resell the NIV to both existing customers and new customers across all
currently offered software platforms. In early September 2007, we began offering
the NIV Family®
package
which includes the New International Version® (NIV),
the New
International Readers Version® (NIrV)
and Today's
New International Version® (TNIV)
at a retail
price of $39.95. The NIV Family® is available
for
each QuickVerse® platform
including
Windows, Mac, Palm and Pocket PC.
During
the second quarter of 2007, we released other reference collections for
QuickVerse®
(Windows) users, including:
|
▪
|
Theological
Dictionary of the New Testament: Abridged®,
commonly known as “Little Kittel”, which details more than 2,300
theologically significant New Testament words with a retail price
of
$59.95; and
|
|
▪
|
Word
Studies in the Greek New Testament®,
which comes in a three volume set and provides a wealth of knowledge
and
insight on the majority of the Greek New Testament with a retail
price of
$59.95.
|
During
the first quarter of 2007, as part of our ongoing partnership with Thomas Nelson
Publishers®,
we released the Nelson Reference Collection®
for QuickVerse®
(Windows) users at a retail price of $129.95. In addition, we
released QuickVerse® 2007 Macintosh,
available in each of the following three editions:
|
▪
|
QuickVerse®
Macintosh
White Box Edition, which includes 10 Bibles and 45 reference titles
with a
retail price of $59.95;
|
|
▪
|
QuickVerse®
Macintosh
Black Box Edition, which includes 15 Bibles and 66 reference titles
with a
retail price of $129.95; and
|
|
▪
|
QuickVerse®
Macintosh
Gold Box Edition, which includes 22 Bibles and 158 reference titles
with a
retail price of $349.95.
|
Comparatively,
during the first nine months of 2006, we released the following:
|
▪
|
QuickVerse®
2007 in six different editions with a range in retail price from
$39.95 to
$799.95;
|
|
▪
|
QuickVerse®
2006 Macintosh Gold Edition with a retail price of
$349.95;
|
|
▪
|
Holman
Christian Standard Bible®
with a retail price of $29.95;
|
|
▪
|
QuickVerse®
2006 Parable Edition with a retail price of $49.95; and
|
|
▪
|
QuickVerse®
2006 Bible Suite with a retail price of
$29.95.
|
Despite
our decreased net revenues during the nine months ended September 30, 2007,
we
were able to considerably decrease our total operating expenses while reducing
our sales and marketing costs as well as our general and administrative costs.
Furthermore, during the third quarter of 2006 we had released our annual upgrade
to our QuickVerse®
product line whereas we had no annual upgrade release during the third quarter
of 2007. Although there can be no assurance, we currently anticipate
releasing the QuickVerse®
2008 annual upgrade during the fourth quarter of 2007.
Statement
of Operations for Nine Months Ending September 30
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
Net
revenues
|
|
$ |
2,234,690
|
|
|
$ |
2,586,197
|
|
|
$ |
(351,507 |
) |
Cost
of sales
|
|
|
(969,601 |
) |
|
|
(1,361,157 |
) |
|
|
391,556
|
|
Gross
profit
|
|
$ |
1,265,089
|
|
|
$ |
1,225,040
|
|
|
$ |
40,049
|
|
Total
operating expenses
|
|
|
(1,961,344 |
) |
|
|
(2,315,591 |
) |
|
|
354,247
|
|
Loss
from operations
|
|
$ |
(696,255 |
) |
|
$ |
(1,090,551 |
) |
|
$ |
394,296
|
|
Other
expenses
|
|
|
(24,855 |
) |
|
|
(57,929 |
) |
|
|
33,074
|
|
Registration
rights penalties
|
|
|
---
|
|
|
|
(49,314 |
) |
|
|
49,314
|
|
Gain
(loss) on fair value adjustment of derivatives
|
|
|
(86,064 |
) |
|
|
1,109,548
|
|
|
|
(1,195,612 |
) |
Loss
before income taxes
|
|
$ |
(807,174 |
) |
|
$ |
(88,246 |
) |
|
$ |
(718,928 |
) |
Income
tax benefit
|
|
|
150,999
|
|
|
|
89,457
|
|
|
|
61,542
|
|
Net
income (loss)
|
|
$ |
(656,175 |
) |
|
$ |
1,211
|
|
|
$ |
(657,386 |
) |
The
differing results of operations are primarily attributable to the
following:
|
▪
|
a
decrease in net revenues for the nine months ended September 30,
2007
partly contributed to the timing difference of our annual upgrade
release
of our flagship product QuickVerse®;
|
|
▪
|
a
decrease in cost of sales for the nine months ended September 30,
2007 due
primarily to decreased amortization of software development
costs;
|
|
▪
|
a
decrease in total operating expenses for the nine months ended September
30, 2007 arising from our continuous efforts to decrease sales, marketing,
general and administrative costs;
|
|
▪
|
a
decrease in registration rights penalties for the nine months ended
September 30, 2007 as our registration statement on Form SB-2, originally
filed by us on November 22, 2004 was declared effective by the SEC
on
February 1, 2006; and
|
|
▪
|
most
notably, the recognition of a loss related to the fair value adjustment
of
derivatives for the nine months ended September 30, 2007 due to expired
warrants and a decrease in the estimated life of the remaining warrants
compared to a significantly large gain on the fair valued adjustment
of
derivatives for the nine months ended September 30, 2006 resulting
from
fluctuation in our stock price.
|
Our
software products are highly seasonal. More than 50% of our annual sales are
expected to occur in the five months of September through January; the five
months of April through August are generally our weakest, generating less than
30% of our annual sales.
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. 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. Shipping
and handling costs in connection with our software products are expensed as
incurred and included in cost of sales.
Nine
Months Ending September 30
|
|
2007
|
|
|
%
to Sales
|
|
|
2006
|
|
|
%
to Sales
|
|
|
Change
|
|
|
%
|
|
Gross
revenues
|
|
$ |
2,614,382
|
|
|
|
100 |
% |
|
$ |
2,793,594
|
|
|
|
100 |
% |
|
$ |
(179,212 |
) |
|
|
6 |
% |
Less estimated
sales returns and allowances
|
|
|
(379,692 |
) |
|
|
15 |
% |
|
|
(207,397 |
) |
|
|
7 |
% |
|
|
(172,295 |
) |
|
|
83 |
% |
Net
revenues
|
|
$ |
2,234,690
|
|
|
|
85 |
% |
|
$ |
2,586,197
|
|
|
|
93 |
% |
|
$ |
(351,507 |
) |
|
|
14 |
% |
Gross
revenues decreased for the nine months ended September 30, 2007, which was
primarily attributable to the timing difference of our annual upgrade release
for our flagship product QuickVerse®. QuickVerse®
2007, last year’s upgrade release, was released in late August of
2006. We anticipate releasing the QuickVerse®
2008 annual upgrade during the first part of the fourth quarter of
2007. Despite the decrease in gross revenues for the nine months
ended September 30, 2007, we have consistently released and will continue to
attempt to release new content each quarter for our QuickVerse®
products.
During
each of the nine months ended September 30, 2006 and 2007, our sales efforts
were focused on directly targeting end-users through telemarketing and Internet
sales. However, due to increased frequency and consistency in our development
schedule, and the annual releases of our flagship product, QuickVerse®, upgrade
sales have
not been increasing at as rapid a rate as they have in previous
years. Although there can be no assurance, we anticipate that our
revenues related to the QuickVerse® product
line will
increase in the future at rates generally consistent with our industry sector
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.
Due
to
the sale of our Membership Plus® product
line at the
beginning of our current fourth quarter (see Part II, Item 5, Other
Information), we anticipate that our reported revenues will substantially
decrease in the near future. However, we are currently pursuing
opportunities for strategic product line acquisitions which we believe are
likely to result in reported revenues that are commensurate with or potentially
even greater than our historic revenues generated by the Membership Plus® product
line. Our divestiture of our Membership Plus® product
line was
driven by a combination of our need to raise much needed cash and a strategic
determination to begin a long-term shift in our product lines away from those
in
the business-to-business segment and more towards those in the
consumer segment.
Our
reserves for sales returns and allowances (estimated at gross sales price)
increased very significantly for the nine months ended September 30, 2007 in
both amount and as a percentage of gross revenues. Typically, actual sales
returns trend upward after a new product is released as distributors and retail
stores return old product in exchange for the new product
release. For the nine months ended September 30, 2007, our reserves
for sales returns increased in anticipation of our upcoming annual release
of
QuickVerse®
2008, of at which time distributors and retails stores will begin to return
the
QuickVerse®
2007 product line. Further, for the nine months ended September 30,
2007, we experienced a significant increase in actual returns due to the return
of liquidated product sold during the first and second quarter of
2007. This liquidated product was sold as non-returnable product;
however, due to a determination on our part as to the difficulty and probability
of collection of the receivables originally generated from the sale of the
liquidated product, we accepted a return of the product. The return
of this product resulted in a significant decrease in accrued royalties that
were otherwise payable to certain of our content providers, as well as prevented
a significant increase in bad debt. Finally, as a result of the
return of the liquidated product, we created a reserve for obsolete
inventory. If we are unable to sell this product to another
liquidator in the near future, the liquidated product will ultimately become
obsolete and therefore discontinued and destroyed, and this, in turn, will
necessitate an inventory write-off and related non-cash operating
charge.
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
Nine
Months Ending September 30
|
|
2007
|
|
|
%
to Sales
|
|
|
2006
|
|
|
%
to Sales
|
|
|
Change
|
|
|
%
|
|
Direct
costs
|
|
$ |
339,813
|
|
|
|
13 |
% |
|
$ |
372,033
|
|
|
|
13 |
% |
|
$ |
(32,220 |
) |
|
|
9 |
% |
Less
estimated cost of sales returns and allowances
|
|
|
(57,255 |
) |
|
|
2 |
% |
|
|
(30,810 |
) |
|
|
1 |
% |
|
|
(26,445 |
) |
|
|
86 |
% |
Amortization
of software development costs
|
|
|
248,455
|
|
|
|
10 |
% |
|
|
600,959
|
|
|
|
22 |
% |
|
|
(352,504 |
) |
|
|
59 |
% |
Royalties
|
|
|
261,100
|
|
|
|
10 |
% |
|
|
256,737
|
|
|
|
9 |
% |
|
|
4,363
|
|
|
|
2 |
% |
Freight-out
|
|
|
113,470
|
|
|
|
4 |
% |
|
|
76,218
|
|
|
|
3 |
% |
|
|
37,252
|
|
|
|
49 |
% |
Fulfillment
|
|
|
64,018
|
|
|
|
2 |
% |
|
|
86,020
|
|
|
|
3 |
% |
|
|
(22,002 |
) |
|
|
26 |
% |
Cost
of sales
|
|
$ |
969,601
|
|
|
|
37 |
% |
|
$ |
1,361,157
|
|
|
|
49 |
% |
|
$ |
(391,556 |
) |
|
|
29 |
% |
Cost
of
sales consists primarily of direct costs, amortization of capitalized software
development costs, non-capitalized technical support wages, royalties accrued
to
third party providers of intellectual property and the costs associated with
reproducing, packaging, fulfilling and shipping our products.
The
net
decrease in cost of sales as between the nine month period ending September
30,
2007 and the corresponding period during 2006 is predominantly attributable
to
decreased amortization of capitalized software development costs. The
large amount of amortization recognized during the nine months ended September
30, 2006 resulted primarily from the continued amortization of QuickVerse® 2006 Macintosh
(released June 2005) and QuickVerse® 2006 Windows
(released September 2005). QuickVerse® 2006 Macintosh
was
our first product produced on the Macintosh platform and the amount of
capitalized development cost recognized for that development project was
therefore quite significant as compared to our development projects on the
Windows platform. Furthermore, since QuickVerse® 2007 was
released
in late August of 2006, the amortization on this product is also recognized
for
the nine months ended September 30, 2006, whereas there was no corresponding
upgrade release of QuickVerse® during
the nine
months ended September 30, 2007.
Software
Development Costs For
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Beginning
balance
|
|
$ |
522,712
|
|
|
$ |
487,849
|
|
|
$ |
491,695
|
|
|
$ |
707,067
|
|
Capitalized
|
|
|
124,636
|
|
|
|
173,728
|
|
|
|
316,086
|
|
|
|
412,108
|
|
Amortized
(Cost of sales)
|
|
|
(88,022 |
) |
|
|
(143,361 |
) |
|
|
(248,455 |
) |
|
|
(600,959 |
) |
Ending
Balance
|
|
$ |
559,326
|
|
|
$ |
518,216
|
|
|
$ |
559,326
|
|
|
$ |
518,216
|
|
Research
and development expense (General and administrative)
|
|
$ |
15,630
|
|
|
$ |
47,393
|
|
|
$ |
76,198
|
|
|
$ |
131,013
|
|
Our
software development costs for the three and nine months ended September 30,
2007 and 2006 are summarized in the table above. The relative
decrease in capitalized costs reflects an increased efficiency from our
development staff (including internal and external developers) as our
development projects for the nine months ended September 30, 2007 focused on
the
annual releases of QuickVerse®, Membership
Plus® and new
content for our QuickVerse®
products. The relative decrease in amortization reflects the overall
reduction in the number of products released during the year ended December
31,
2006 as well as the amortization recognized for QuickVerse® 2006 Macintosh,
our
first product produced on the Macintosh platform, brought to an
end.
Freight
costs increased for the nine months ended September 30, 2007 as a direct result
from the overall increase in retail sales, which carry higher shipping costs
for
us than direct and/or upgrade sales, coupled with escalating per unit freight
costs attributable to industry-wide rising fuel costs. Fulfillment
costs decreased for the nine months ended September 30, 2007 as a direct result
of our deliberate initiatives to decrease our reliance on a third-party
warehouse as we began operating our own fulfillment center as of June
2007.
Royalties
accrued to third party providers of intellectual property increased slightly
for
the nine months ended September 30, 2007 as a result of continuously expanding
the content made available for our QuickVerse® line of
products. Our royalty accruals are expected to increase in the future
in real terms as sales to new users 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.
On
a
percentage basis, we anticipate that direct costs and manufacturing overhead
will remain relatively stable as we continue to keep pace with a more intensive
development schedule than we had generally maintained in the past.
Despite
the sale in the early part of our fourth fiscal quarter of our Membership
Plus® product
line, we expect our cost of sales in real terms to increase over time consistent
with anticipated overall increases in revenues due to our aggressive product
development and release schedules as well as the acquisitions of new product
lines.
Sales,
General and Administrative
Nine
Months Ending September 30
|
|
2007
|
|
|
%
to Sales
|
|
|
2006
|
|
|
%
to Sales
|
|
|
Change
|
|
|
%
|
|
Selected
expenses:
|
|
Commissions
|
|
$ |
146,930
|
|
|
|
6 |
% |
|
$ |
151,499
|
|
|
|
5 |
% |
|
$ |
(4,569 |
) |
|
|
3 |
% |
Advertising
and direct marketing
|
|
|
144,175
|
|
|
|
6 |
% |
|
|
156,537
|
|
|
|
6 |
% |
|
|
(12,362 |
) |
|
|
8 |
% |
Sales
and marketing wages, reclassified
|
|
|
228,113
|
|
|
|
9 |
% |
|
|
272,648
|
|
|
|
10 |
% |
|
|
(44,535 |
) |
|
|
16 |
% |
Total
sales and marketing
|
|
$ |
519,218
|
|
|
|
20 |
% |
|
$ |
580,684
|
|
|
|
21 |
% |
|
$ |
(61,466 |
) |
|
|
11 |
% |
Research
and development
|
|
$ |
76,198
|
|
|
|
3 |
% |
|
$ |
131,013
|
|
|
|
5 |
% |
|
$ |
(54,815 |
) |
|
|
42 |
% |
Personnel
costs
|
|
|
463,213
|
|
|
|
18 |
% |
|
|
564,825
|
|
|
|
20 |
% |
|
|
(101,612 |
) |
|
|
18 |
% |
Legal
|
|
|
37,578
|
|
|
|
1 |
% |
|
|
83,539
|
|
|
|
3 |
% |
|
|
(45,961 |
) |
|
|
55 |
% |
Accounting/Auditing
|
|
|
67,553
|
|
|
|
3 |
% |
|
|
48,505
|
|
|
|
2 |
% |
|
|
19,048
|
|
|
|
39 |
% |
Corporate
services
|
|
|
54,400
|
|
|
|
2 |
% |
|
|
54,000
|
|
|
|
2 |
% |
|
|
400
|
|
|
|
1 |
% |
Investor
services
|
|
|
(7,875 |
) |
|
|
0 |
% |
|
|
55,000
|
|
|
|
2 |
% |
|
|
(62,875 |
) |
|
|
114 |
% |
Storage
|
|
|
1,275
|
|
|
|
0 |
% |
|
|
10,005
|
|
|
|
0 |
% |
|
|
(8,730 |
) |
|
|
87 |
% |
Insurance
|
|
|
23,545
|
|
|
|
1 |
% |
|
|
16,934
|
|
|
|
1 |
% |
|
|
6,611
|
|
|
|
39 |
% |
Other
general and administrative costs
|
|
|
286,033
|
|
|
|
11 |
% |
|
|
346,519
|
|
|
|
12 |
% |
|
|
(60,486 |
) |
|
|
17 |
% |
Total
general and administrative
|
|
$ |
1,001,920
|
|
|
|
38 |
% |
|
$ |
1,310,340
|
|
|
|
47 |
% |
|
$ |
(308,420 |
) |
|
|
24 |
% |
Total
sales, marketing, general and administrative
|
|
$ |
1,521,138
|
|
|
|
58 |
% |
|
$ |
1,891,024
|
|
|
|
68 |
% |
|
$ |
(369,886 |
) |
|
|
20 |
% |
As
gross
revenues decreased for the nine months ended September 30, 2007, total sales,
general and administrative costs also decreased. The decrease in the
sales and marketing expenses for the nine months ended September 30, 2007 is
mainly attributable to a decrease in the sales and marketing wages as a result
of streamlining our CBA sales team. However, we expect this reduction
to be only temporary as our sales and marketing wages increase in future periods
due to our expanding in-house direct telemarketing sales team as well as our
other marketing and related personnel. Commissions decreased slightly
for this period , and we anticipate further decreases in the future as we expand
our in-house direct telemarketing sales team and therefore become less dependent
on a third party for telemarketing services. Advertising and direct
marketing costs also decreased as we continually monitor these items in relation
to our gross revenues. We anticipate advertising and direct marketing
costs to increase in future periods as we enter the holiday season, 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, product
enhancements and potential new product lines.
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). The
decrease in software development costs related to third-party developers and
direct labor expensed as research and development reflects the capitalization
of
research and development costs for the nine months ended September 30,
2007. Furthermore, the decrease reflects the increased efficiency
from our development staff as our development projects for the nine months
ended
September 30, 2007 focused on the annual releases of our two main product lines
and new content for our QuickVerse®
products. Research and development expenses are expected to increase
in future periods as we anticipate expansion of our internal development team,
add new products, product versions and product lines, and as we continue to
expand the amount of content made available to our QuickVerse® users.
In
addition to the decrease in total net personnel costs, gross direct salaries
and
wages, before adjustments of capitalized wages and reclassifications, decreased
approximately $179,000, from approximately $1,148,000 for the nine months ended
September 30, 2006 to approximately $969,000 for the nine months ended September
30, 2007. The decrease in direct salaries and wages was a result of streamlining
our CBA sales team and the departure of our marketing manager. Due to a cost
cutting initiative in late 2006, we were able to shed compensation expenses
associated with maintaining certain management level and product development
staff. Further, as a percentage of gross revenues, direct salaries
and wages decreased approximately 4% from approximately 41% for the nine months
ended September 30, 2006 to approximately 37% for the nine months ended
September 30, 2007. We do anticipate direct salaries and wages to increase
in
the future given our continued focus on expanding our direct telemarketing
sales
team, marketing staff and product development staff.
As
a
result of having restructured our health benefits plans in October 2006 and
the
continual decrease in our direct salaries and wages, our employment-related
healthcare costs decreased approximately $15,000 from approximately $85,000
for
the nine months ended September 30, 2006 to approximately $70,000 for the nine
months ended September 30, 2007. In July 2005, we initiated a Simple
IRA retirement plan for our employees and, for those who participated, we chose
to match up to 3% of the employee’s annual gross pay. We anticipate
that our costs related to this benefit will increase in future periods as more
employees take advantage of the retirement plan.
Direct
legal costs decreased for the nine months ended September 30, 2007 as a result
of our having concluded certain ongoing registration and related securities
matters in February 2006. It is anticipated that legal costs will increase
in
future periods in direct relation to the level of our capital-raising
initiatives, acquisition and/or divestiture-related initiatives, and other
transactional activity.
Accounting
and audit related expenses increased for the nine months ended September 30,
2007, which is attributable principally to an increased fee from our principal
accounting firm as compared to our previous principal accounting firm as well
as
our recent completion of our 2006 annual audit. It is anticipated that
accounting costs will continue at these levels and increase substantially on
an
ongoing basis as we meet with our responsibilities as a smaller reporting
company over the next twelve months to become fully compliant with the internal
controls over financial reporting mandate of Section 404 of The Sarbanes-Oxley
Act of 2002.
Corporate
service fees increased slightly for the nine months ended September 30, 2007.
We
expect consulting-related expenses to increase in future periods based on our
having engaged the services of an independent consultant who began performing
business development related advisory services for us in March 2007 and who
is
expected to continue providing such services through June 2008.
Investor
services fees decreased for the nine months ended September 30, 2007 as a result
of our having terminated an investor relations service agreement originally
entered into in April 2006, and pursuant to which we incurred fees for the
period from April 2006 through March 2007 and an expense for the issuance of
a
total of 250,000 restricted shares of common stock allocated over the term
of
the agreement. As of August 2006, fees payable to this service
provider had ceased. Furthermore, in August 2007, we committed to
issue shares of common stock in lieu of cash as a settlement with a previous
consultant who had provided investor relations and business development services
during 2005.
Storage
costs for inventory decreased for the nine months ended September 30,
2007. This reduction was directly related to our having opened our
own fulfillment center in June 2007 and our ceasing to have to rely, as a
result, on a third party facility. We anticipate that storage costs
will continue to decrease in the future.
Finally,
insurance costs increased for the nine months ended September 30, 2007 as a
result of our having procured an errors and omissions insurance policy for
the
benefit of our officers and directors. We anticipate that insurance
costs will increase in the future as we continue our search efforts in order
to
expand our executive level management team and board of directors.
Registration
Rights Penalties
The
results of operations for the nine months ended September 30, 2006 include
an
increase in our net loss due to having accrued registration rights penalties
that were in connection with a 2004 private placement
transaction. For the comparable period during 2007, no similar
accrual was recorded.
Derivatives
At
September 30, 2007 and 2006, the fair value of the derivative liability
associated with warrants issued in November 2004 was approximately $613,000
and
$527,000, respectively. A non-cash fair value adjustment of
approximately $86,000 has been included in other expenses for the nine months
ended September 30, 2007, and a similar fair value adjustment of approximately
$1,110,000 has been included in other income for the nine months ended September
30, 2006. If the market trading price of our stock rises, it could
potentially have a materially adverse effect on our derivative liability which,
in turn, could have a materially adverse effect on our reportable net
income.
Amortization
Amortization
expenses, included in other operating expenses, decreased approximately $9,000
from approximately $399,000 for the nine months ended September 30, 2006 to
approximately $390,000 for the nine months ended September 30, 2007. The
software license we acquired in 1999 from which we derive our base intellectual
property rights associated with the products that are responsible for generating
the overwhelming majority of our revenues (the “1999 license”) is being
amortized over a 10 year useful life and will have been fully amortized by
the
close of the year ending December 31, 2009. Amortization expense for 2007 and
2006 reflect the continual amortization of the 1999 license, as well as the
amortization of our website, www.quickverse.com, the most recent version of
which we launched during the second quarter of 2004. However, the
decrease in the amortization expense for the nine months ended September 30,
2007 reflects the conclusion of the amortization of our website.
Income
Tax Benefits
Our
effective tax rate differs from the statutory federal rate due to the following
differences between income and expense recognition prescribed by the Internal
Revenue Code and Generally Accepted Accounting Principles:
|
▪
|
Different
methods and useful lives for depreciating property and equipment;
and
|
|
▪
|
changes
in estimates (reserves) recognized as expense for financial reporting
but
not deductible for income tax
purposes.
|
We
have
recognized deferred tax assets from estimated future tax benefits related to
the
timing of income tax deductions primarily from the following items:
|
▪
|
Sales
returns and allowances;
|
|
▪
|
accrued
payroll; and
|
|
▪
|
net
operating loss carryforwards.
|
We
have
established a valuation allowance against the deferred tax assets based on
our
estimate of how much benefit we will eventually realize in future periods,
primarily from the net operating loss carryforwards.
We
have
recognized deferred tax liabilities from estimated future tax liabilities
related to the timing of income tax deductions primarily from the following
items:
|
▪
|
Software
license fees; and
|
|
▪
|
capitalized
software development costs.
|
We
have
reported our deferred tax assets and liabilities in a net current and a net
non-current amount as follows:
|
▪
|
Net
current deferred tax asset – Federal and State (approximately $116,000
included in other current assets);
|
|
▪
|
net
non-current deferred tax asset – Federal (approximately $578,000 included
in other assets); and
|
|
▪
|
net
non-current deferred tax liability – State (approximately $1,200 included
in long-term obligations).
|
Realization
of our net deferred tax assets, and the benefits associated with those in terms
of after-tax reportable income, depends on our generating future taxable
income.
Our
net
income tax benefit of approximately $151,000 for the nine months ended September
30, 2007 results primarily from our anticipated utilization of net operating
loss carryforwards, and the related effect in the valuation allowance for future
tax benefits, and management’s estimate of changes to the book and tax basis
differences of the following items from their December 31, 2006 basis
differences:
|
▪
|
Reserve
for sales returns;
|
|
▪
|
accrued
payroll;
|
|
▪
|
software
license fees; and
|
|
▪
|
capitalized
software development costs.
|
Liquidity
And Capital Resources
Our
primary needs for liquidity and capital resources are the funding of our
continued operations, which includes the ongoing internal development of new
products, expansion and upgrade of existing products, and marketing and
sales. Although there can be no assurance, we believe cash generated
through our continuing operations will be at least minimally sufficient to
sustain our operations, albeit with very limited growth. However, our
pursuit of an aggressive growth plan, whether based on internally developed
products or strategic product line acquisitions and/or licensing opportunities,
will likely require funding from outside sources or the divestiture of one
or
more existing product lines as recently occurred with respect to our Membership
Plus® product
line. 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
|
|
2007
|
|
Current
assets
|
|
$ |
541,564
|
|
Current
liabilities
|
|
$ |
2,657,811
|
|
Retained
deficit
|
|
$ |
7,754,572
|
|
While
liquidity remains an ongoing concern for us, and while there can be no
continuing assurance, given the combined facts that (i) a substantial portion
of
our net sales – 53% of which we collected during our last fiscal year through
credit card processing transactions – are able to be collected in a much shorter
timeframe (several days) than that in which we must generally pay our trade
payables (30 days) and our accrued royalties (quarterly, semi-annually, or
annually), and (ii) our derivative liability is an item that does not
necessitate actual cash payout, the situation suggested by our notably and
consistently low ratio of our current assets to current liabilities has
historically been manageable.
Cash
Flows for Nine Months Ended September 30
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
%
|
|
Cash
flows provided by operating activities
|
|
$ |
313,922
|
|
|
$ |
291,051
|
|
|
$ |
22,871
|
|
|
|
8 |
% |
Cash
flows (used) by investing activities
|
|
$ |
(370,457 |
) |
|
$ |
(425,063 |
) |
|
$ |
54,606
|
|
|
|
13 |
% |
Cash
flows provided by financing activities
|
|
$ |
7,863
|
|
|
$ |
15,444
|
|
|
$ |
(7,581 |
) |
|
|
49 |
% |
The
increase in net cash provided by operating activities for the nine months ended
September 30, 2007 was primarily due to a short-term imbalance as between
payments made to content providers and vendors, on the one hand, and receivables
collected, on the other.
The
decrease in net cash used by investing activities for the nine months ended
September 30, 2007 was mainly the result of our having capitalized fewer costs
associated with software development. Offsetting this to some extent,
however, was the fact that, during the nine months ended September 30, 2007,
our
credit card financing service insisted on retaining a $40,000 cash reserve
imposed during the first quarter of 2007 to enable a potential increase in
credit card chargebacks from increased consumer purchases during the fourth
quarter of 2006.
The
decrease in net cash provided by financing activities for the nine months ended
September 30, 2007 was the result of several events. During the nine
months ended September 30, 2006, we received proceeds from a note payable of
approximately $75,000. Comparatively, during the nine months ended
September 30, 2007, we received proceeds of approximately $33,000 from the
issuance of common stock along with a cash overdraft of approximately $23,000.
Finally, there was a decrease in payments made on long-term notes payable during
the nine months ended September 30, 2007 as principal balances
decreased.
Due
to our negative cash balance at the end of September 2007, normal check runs
were delayed until our available cash balance increased in October
2007. Normal check runs refers to weekly payments to vendors and
content providers.
Financing
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. However, it may be possible
to secure financing on our open accounts receivable in order to satisfy our
future financing needs. Equity financing, too, remains an
option for us, though no definitive prospects have been specifically
identified.
Contractual
Liabilities
In
May
2007, we secured a new operating lease with a third-party for our corporate
office facility in Omaha, Nebraska with terms extending through May
2012. We also secured a new operating lease with a third-party for a
warehouse facility in Omaha, Nebraska with terms extending through June 2010.
In
accordance with the terms of these leasehold agreements, we are responsible
for
all associated taxes, insurance and utility expenses.
We
lease
office space in Naperville, Illinois under an operating lease with a third-party
with terms extending through March 2009. We are responsible for all insurance
expenses associated with this lease.
At
September 30, 2007, the future minimum annual rental payments required under
these leases are as follows:
2007
|
|
$ |
22,509
|
|
2008
|
|
|
90,034
|
|
2009
|
|
|
78,993
|
|
2010
|
|
|
63,883
|
|
2011
|
|
|
54,339
|
|
2012
|
|
|
23,335
|
|
Total
future minimum rental payments
|
|
$ |
333,093
|
|
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, 2007 for each of the next three years and in the aggregate
are:
2007
|
|
$ |
3,431
|
|
2008
|
|
|
13,726
|
|
2009
|
|
|
12,582
|
|
Total
minimum lease payments
|
|
$ |
29,739
|
|
(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
committee and provided to the 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,
2007, 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
|
|
Footnotes
|
Common
Stock Issuances
|
Sold
for cash
|
7/14/2007
|
Common
Stock
|
Gordon
Landies
|
|
|
1,300,000
|
|
|
$ |
32,500
|
|
(A)
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
as settlement with consultant
|
8/28/2007
|
Common
Stock
|
Joseph
Abrams
|
|
|
500,000
|
|
|
$ |
20,000
|
|
(B)
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
$32,500 ($0.025 per share) total offering price.
|
|
|
|
|
|
|
|
|
|
(B)
Consideration is calculated to be the value of the security at
the date of
issuance.
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Warrant Issuances
|
Issued
for compensation to independent contractor
|
7/9/2007
|
Common
Stock
|
GL
Ventures, LLC
|
|
|
2,300,000
|
|
|
$ |
48,160
|
|
(C)
|
|
|
|
|
|
|
|
|
|
|
|
|
(C)
Issued as compensation for corporate business planning, financing
and
merger and acquisition
assistance.
|
For
these
unregistered sales, 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, 2007.
No
matters were submitted to a vote of our stockholders during the quarterly period
ended September 30, 2007.
On
October 18, 2007, we entered into and
consummated an Asset Purchase Agreement with an unrelated entity for all of
the
assets and liabilities associated with our Membership Plus® product
line for
$1,675,000 in cash. The Membership Plus® product
line had
accounted for approximately 27% of our 2006 aggregate revenues. The specific
assets conveyed included, among others, the underlying software source code,
existing product inventories, online marketing channels, registered trade names,
and accounts receivable. For more detailed information, please refer to our
Current Report on Form 8-K filed on October 24, 2007
There
were no reportable events under this Item 5 during the quarterly period ended
September 30, 2007.
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.
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|
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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.
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|
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10.12
|
Registration
Rights Agreement between Findex.com, Inc. and Barron Partners, LP
dated
July 26, 2004, incorporated by reference to Exhibit 10.2 on Form
8-K filed
July 28, 2004.
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|
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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.
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|
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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.
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|
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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.
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|
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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.
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|
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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.
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|
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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.
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|
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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.
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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.
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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.
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|
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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.
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|
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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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|
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10.24
|
Employment
Agreement Extension Amendment between Findex.com, Inc. and Steven
Malone
dated April 13, 2007, incorporated by reference to Exhibit 10.24
on Form
10-KSB filed April 17, 2007.
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|
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10.25
|
Employment
Agreement Extension Amendment between Findex.com, Inc. and William
Terrill
dated April 13, 2007, incorporated by reference to Exhibit 10.25
on Form
10-KSB filed April 17, 2007.
|
|
|
10.26
|
Employment
Agreement Extension Amendment between Findex.com, Inc. and Kirk R.
Rowland
dated April 13, 2007, incorporated by reference to Exhibit 10.25
on Form
10-KSB filed April 17, 2007.
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|
|
10.27
|
Asset
Purchase Agreement between Findex.com, Inc. and ACS Technologies
Group,
Inc. dated October 18, 2007, incorporated by reference to Exhibit
10.27 on
Form 8-K filed October 24, 2007.
|
|
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10.28
|
Partial
Assignment of License Agreement Among Findex.com, Inc., Riverdeep,
Inc.,LLC and ACS Technologies Group, Inc. dated October 11, 2007,
incorporated by reference to Exhibit 10.28 on Form 8-K filed October
24,
2007.
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|
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31.1
|
Certification
of Findex.com, Inc. Chief Executive Officer, Steven Malone, required
by
Rule 13a-14(a) or Rule 15d-14(a), and dated November 19, 2007. FILED
HEREWITH.
|
|
|
31.2
|
Certification
of Findex.com, Inc. Chief Financial Officer, Kirk R. Rowland, required
by
Rule 13a-14(a) or Rule 15d-14(a), and dated November 19, 2007. FILED
HEREWITH.
|
|
|
32.1
|
Certification
of Findex.com, Inc. Chief Executive Officer, Steven Malone, required
by
Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of
Title
18 of the United States Code (18 U.S.C. 1350), and dated November
19,
2007. FILED HEREWITH.
|
|
|
32.2
|
Certification
of Findex.com, Inc. Chief Financial Officer, Kirk R. Rowland, required
by
Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of
Title
18 of the United States Code (18 U.S.C. 1350), and dated November
19,
2007. 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.
|
|
FINDEX.COM,
INC.
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|
|
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Date:
November 19, 2007
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By
|
/s/
Steven Malone
|
|
|
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Steven
Malone
|
|
|
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President
and Chief Executive Officer
|
|
|
|
|
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Date:
November 19, 2007
|
By
|
/s/
Kirk R. Rowland
|
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|
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Kirk
R. Rowland, CPA
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|
|
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Chief
Financial Officer
|
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