form10-q.htm
UNITED
STATES OF AMERICA
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
(Mark
One)
x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the quarterly period ended June 30,
2010
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from ___ to ____
Commission
File Number: 001-32255
ANSWERS
CORPORATION
(Exact name of
Registrant as specified in its charter)
Delaware
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98-0202855
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(State or
Other Jurisdiction of Incorporation or Organization)
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(I.R.S.
Employer Identification No.)
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237
West 35th
Street, Suite 1101, New York, New York
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10001
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(Address of
principal executive offices)
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(Zip
Code)
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(646)
502-4777
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(Registrant’s
telephone number)
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(Former Name,
Former Address and Former Fiscal Year, if changed since last
report)
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Indicate by check
mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post
such files). Yes No
Indicate by check
mark whether the Registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer or a smaller reporting company. See the definitions of
“large accelerated filer", "accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated Filer
Accelerated
filer
Non-accelerated
filer
Smaller reporting
company
x
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes
No x
The number of the
registrant’s shares of common stock outstanding was 7,961,647 as of August 9,
2010.
ANSWERS
CORPORATION
FORM
10-Q
CONTENTS
PART I
— FINANCIAL INFORMATION
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PART II
— OTHER INFORMATION
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INTRODUCTORY
NOTE
This
Report on Form 10-Q for Answers Corporation (“Answers” or the “Company”)
may contain forward-looking statements. You can identify these statements
by forward-looking words such as “may,” “will,” “expect,” “intend,”
“anticipate,” "believe,” “estimate” and “continue” or similar words.
Forward-looking statements include information concerning possible or assumed
future business success or financial results. You should read statements that
contain these words carefully because they discuss future expectations and
plans, which contain projections of future results of operations or financial
condition or state other forward-looking information. We believe that it
is important to communicate future expectations to investors. The
forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties, which are discussed in other
sections of this Form 10-Q and in our other filings with the Securities and
Exchange Commission. These risks and uncertainties could cause actual
results or events to differ materially from the forward-looking statements that
we make.
Although,
there may be events in the future that we are not able to accurately
predict or control, we do not undertake any obligation to update any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future. Accordingly,
to the extent that this Form 10-Q contains forward-looking statements regarding
the financial condition, operating results, business prospects or any other
aspect of the Company, please be advised that Answers' actual financial
condition, operating results and business performance may differ materially
from that projected or estimated by the Company in forward-looking
statements.
PART
I - FINANCIAL INFORMATION
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December
31
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June
30
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2009
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2010
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$
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$
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Assets
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Current
assets:
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Cash
and cash equivalents
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22,234
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20,904
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Marketable
securities
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795
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4,334
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Short-term
deposits (restricted)
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-
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150
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Accounts
receivable
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2,350
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2,089
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Prepaid
expenses and other current assets
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907
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918
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Deferred
tax asset
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34
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34
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Total
current assets
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26,320
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28,429
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Long-term
deposits (restricted)
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276
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284
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Deposits
in respect of employee severance obligations
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1,756
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1,853
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Property
and equipment at cost, net of $2,464 and $2,423 accumulated
depreciation
as
of December 31, 2009 and June 30, 2010, respectively
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1,858
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1,959
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Other
assets:
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Intangible
assets, net of $657 and $719 accumulated amortization as of December 31,
2009
and
June 30, 2010, respectively
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797
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735
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Goodwill
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437
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437
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Prepaid
expenses, long-term, and other assets
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167
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55
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Deferred
tax asset, long-term
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14
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24
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Total
other assets
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1,415
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1,251
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Total
assets
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31,625
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33,776
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Liabilities
and stockholders' equity
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Current
liabilities:
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Accounts
payable
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403
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517
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Accrued
expenses and other current liabilities
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774
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721
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Accrued
compensation
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1,009
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999
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Capital
lease obligation – current portion
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82
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65
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Total
current liabilities
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2,268
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2,302
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Long-term
liabilities:
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Liability
in respect of employee severance obligations
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1,838
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2,015
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Capital
lease obligation, net of current portion
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24
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-
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Deferred
tax liability
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38
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39
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Series
A and Series B Warrants
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8,008
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5,925
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Total
long-term liabilities
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9,908
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7,979
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Commitments
and contingencies
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Series
A and Series B convertible preferred stock: $0.01 par value; stated
value and liquidation preference of $101.76 per share for the Series
A and $100 per share for the Series B Convertible Preferred Stock;
6% cumulative annual dividend; 130,000 shares
authorized, issued and outstanding
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2,381
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3,552
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Stockholders'
equity:
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Preferred
stock: $0.01 par value; 870,000 shares authorized, none
issued
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-
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Common
stock; $0.001 par value; 100,000,000 shares authorized; 7,951,329 and
7,961,647
shares
issued and outstanding as of December 31, 2009 and June 30, 2010,
respectively
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8
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8
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Additional
paid-in capital
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88,539
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87,630
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Accumulated
other comprehensive income (loss)
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28
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(65)
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Accumulated
deficit
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(71,507)
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(67,630)
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Total
stockholders' equity
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17,068
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19,943
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Total
liabilities and stockholders' equity
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31,625
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33,776
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The accompanying
notes are an integral part of these consolidated financial
statements.
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Three
months ended June 30
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Six
months ended June 30
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2009
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2010
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2009
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2010
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$
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$
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$
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$
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Revenues:
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Advertising
revenue:
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WikiAnswers
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3,400
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3,992
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6,562
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8,481
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ReferenceAnswers
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1,585
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1,012
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3,152
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2,230
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Answers
service licensing
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19
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16
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36
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35
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5,004
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5,020
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9,750
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10,746
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Costs
and expenses:
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Cost of
revenue
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1,166
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1,315
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2,225
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2,752
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Research
and development
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817
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1,140
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1,690
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2,201
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Community
development and marketing
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558
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660
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1,057
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1,404
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General
and administrative
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1,248
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1,115
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2,467
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2,372
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Total
operating expenses
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3,789
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4,230
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7,439
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8,729
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Operating
income
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1,215
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790
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2,311
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2,017
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Interest
income (expense), net
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(362)
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13
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(449)
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24
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Other income
(expense), net
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(9)
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12
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6
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4
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Gain (loss)
resulting from fair value adjustment of warrants
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(4,385)
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1,468
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(2,375)
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2,083
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Income
(loss) before income taxes
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(3,541)
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2,283
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(507)
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4,128
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Income tax
expense, net
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(78)
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(160)
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(72)
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(251)
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Net
income (loss)
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(3,619)
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2,123
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(579)
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3,877
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Net
income (loss) attributable to common shares:
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Basic
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$(4,055)
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$1,008
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$(1,354)
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$1,741
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Diluted
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$(4,158)
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$(127)
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$(1,457)
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$179
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Net
income (loss) per common share:
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Basic
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(0.51)
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0.13
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(0.17)
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0.22
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Diluted
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(0.53)
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(0.02)
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(0.18)
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0.02
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Number
of shares used in computing net income (loss) per common
share:
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Basic
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7,888,530
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7,960,361
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7,880,645
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7,957,343
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Diluted
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7,920,468
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8,374,212
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7,896,614
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8,707,041
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The accompanying
notes are an integral part of these consolidated financial
statements.
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Six
months ended June 30
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2009
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2010
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$
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$
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Operating
activities:
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Net
income (loss)
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(579)
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3,877
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Adjustments
to reconcile net income (loss) to net cash flows from operating
activities:
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Depreciation
and amortization
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556
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611
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Increase
in deposits in respect of employee severance obligations
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(193)
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(47)
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Increase
in liability in respect of employee severance obligations
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149
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122
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Stock-based
compensation to employees and directors
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766
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593
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Increase
in deferred tax asset
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-
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(9)
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Increase
(decrease) in deferred tax liability
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(45)
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1
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Fair
value adjustments of warrants, net
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2,375
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(2,083)
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Loss on
disposal of property and equipment
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6
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21
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Increase
in short-term deposits
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-
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(150)
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Gain
(loss) from exchange rate differences
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(16)
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6
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Changes
in operating assets and liabilities:
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Decrease
in accounts receivable, and prepaid expenses and other current
assets
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336
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197
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Decrease
in prepaid expenses, long-term, and
other assets
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20
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111
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Decrease
in accounts payable
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(231)
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(48)
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Increase
(decrease) in accrued expenses, accrued compensation and other current
liabilities
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230
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(139)
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Net
cash provided by operating activities
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3,374
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3,063
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Investing
activities:
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Capital
expenditures
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(1,078)
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(511)
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Increase
in long-term deposits
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(7)
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(9)
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Purchases
of marketable securities
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-
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(3,516)
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Net
cash used in investing activities
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(1,085)
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(4,036)
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Financing
activities:
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Repayment
of capital lease obligation
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(39)
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(41)
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Dividends
paid
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(206)
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(390)
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Exercise
of common stock options
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128
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59
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Redpoint
financing, net of issuance costs
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6,480
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-
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Net
cash provided by (used in) financing activities
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6,363
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(372)
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Effect of
exchange rate changes on cash and cash equivalents
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14
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15
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Net
increase (decrease) in cash and cash equivalents
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8,666
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(1,330)
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Cash and cash
equivalents at beginning of period
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11,739
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22,234
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Cash
and cash equivalents at end of period
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20,405
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20,904
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Supplemental
disclosures of cash flow information:
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Income
taxes paid
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76
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175
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Interest
paid on capital lease obligations
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4
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3
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Non-cash
investing activities:
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Capital
expenditures on account
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128
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160
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Exchange
of property and equipment
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-
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50
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The accompanying
notes are an integral part of these consolidated financial
statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note
1 - Business
Answers Corporation
(“the Parent”), a Delaware corporation, and GuruNet Israel Ltd., its
wholly-owned Israeli subsidiary (“the Subsidiary”) that provides
primarily research and development services to the Parent, are collectively
referred to as “the Company.” The Parent is a public company and trades on the
NASDAQ Capital Market under the symbol “ANSW”.
The Company
provides answer-based search services to users primarily through its website
Answers.com®,
which includes WikiAnswers® and
ReferenceAnswersTM. The
Company earns practically all of its revenue from advertising on its
website.
On June 10, 2009
the Company raised $7 million, before related fees and costs, from the exercise
of a second tranche warrant of a private placement offering.
As of June 30,
2010, approximately $417 thousand of the Company’s net assets were located
outside of the United States.
Note
2 - Summary of Significant Accounting Policies
Basis
of Presentation
The accompanying
consolidated financial statements include the accounts of Answers Corporation
and its Subsidiary and are presented in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”). All
significant intercompany balances and transactions have been eliminated in
consolidation.
The accompanying
unaudited consolidated financial statements were prepared in accordance with the
instructions for Form 10-Q and, therefore, do not include all disclosures
necessary for a complete presentation of financial condition, results of
operations, and cash flows in conformity with generally accepted accounting
principles. All adjustments, which are, in the opinion of management, of a
normal recurring nature and are necessary for a fair presentation of the interim
financial statements, have been included. Nevertheless, these financial
statements should be read in conjunction with the consolidated financial
statements and related notes included in the Company’s Annual Report on Form
10-K for the year ended December 31, 2009. The results of operations for the
three and six months ended June 30, 2010 are not necessarily indicative of the
results that may be expected for the entire fiscal year or any other interim
period.
Foreign
Currency Translation
The currency of the
primary economic environment in which the operations of the Company are
conducted is the U.S. dollar (“dollar”), therefore, the dollar has been
determined to be the Company’s functional currency. Transactions in foreign
currency (substantially all in New Israeli Shekels – “NIS”) are recorded at the
exchange rate as of the transaction date. Monetary assets and liabilities
denominated in foreign currency are translated on the basis of the
representative rate of exchange at the balance sheet date. Non-monetary assets
and liabilities denominated in foreign currency are stated at historical
exchange rates. All exchange gains and losses from remeasurement of monetary
balance sheet items denominated in non-dollar currencies are reflected in the
statement of operations as they arise.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note
2 - Summary of Significant Accounting Policies (cont’d)
Use
of Estimates
The preparation of
consolidated financial statements in conformity with U.S. GAAP requires
management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported results of operations during the reporting periods. The current
economic environment has increased the degree of uncertainty inherent in those
estimates and assumptions. Actual results could differ from those
estimates.
Cash
and Cash Equivalents, and Marketable Securities
All highly liquid
investments with stated maturities of three months or less from date of purchase
are classified as cash equivalents.
All highly liquid
investments with stated maturities of greater than three months are classified
as marketable securities. The Company determines the appropriate classification
of its investments in marketable securities at the time of purchase. The
Company’s marketable securities have been classified and accounted for as
available-for-sale. After consideration of its risk versus reward objectives, as
well as its liquidity requirements, the Company may sell these securities prior
to their stated maturities. As these securities are viewed by the Company as
available to support current operations, securities with maturities beyond 12
months are classified as current assets under the caption marketable securities
in the accompanying consolidated balance sheets. These securities are carried at
fair value, with the unrealized gains and losses reported as a component of
stockholders’ equity, except for unrealized losses determined to be other than
temporary which are recorded as other income (expense), net. Any realized gains
or losses on the sale of marketable securities are determined on a specific
identification method, and such gains and losses are reflected as a component of
other income (expense), net.
The Company
considers all available information relevant to the collectibility of the
security, including past events, current conditions, and reasonable and
supportable forecasts when developing estimate of cash flows expected to be
collected. Evidence considered in this assessment includes the reasons for the
impairment, the severity and duration of the impairment and changes in value
subsequent to period-end.
Marketable
Securities
The Company’s
marketable securities are invested in debt instruments of the
U.S. government, with a contractual maturity of less than two
years.
The following table
summarizes unrealized gains and losses and the fair value related to our
investments in marketable securities designated as available-for-sale (in
thousands):
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Aggregate
cost basis
|
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Other
than temporary
impairment
|
|
Unrealized
gain (loss)
|
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Fair
value
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
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|
December
31, 2009
|
799
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|
-
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|
(4)
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|
795
|
|
|
|
|
|
|
|
|
June
30, 2010
|
4,312
|
|
-
|
|
22
|
|
4,334
|
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note
2 - Summary of Significant Accounting Policies (cont’d)
Revenue
Recognition
The Company,
through its website Answers.com, generates revenues via advertising in the form
of pay-per-performance ads and paid-for-impression advertising. In the
pay-per-performance model, the Company earns revenue based on the number of
clicks associated with such ads. In the paid-for-impression model, the Company’s
revenue is derived from the display of ads.
Almost all of the
Company’s advertising revenue is currently obtained through the efforts of third
parties and is not the result of direct contracts with advertisers. The third
party is obligated to pay the Company a portion of the revenue it receives from
advertisers, as compensation for the Company’s provision of promotional space on
its Internet properties. Amounts received from such third parties are reflected
as revenue in the period in which such advertising services are
provided.
The Company also
earns an immaterial amount of revenue from partners that pay the Company for
providing them with answer-based services that they then use in their own
products, via co-branded web pages.
Accounting
for Stock-Based Compensation
The fair value of
stock options granted to employees and directors, is estimated at the date of
grant using the Black-Scholes option-pricing model, which takes into
consideration the share price at the date of grant, the exercise price of the
option, the expected life of the option, expected interest rates and the
expected volatility. The value of stock options, as noted, is recognized as
compensation expense on a straight-line basis, over the requisite service period
of the entire award, net of estimated forfeitures.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note
2 - Summary of Significant Accounting Policies (cont’d)
Net
Earnings (Losses) per Common Share
The table below
presents the computation of basic and diluted net earnings (losses) per common
share:
|
Three
months ended June 30
|
|
Six
months ended June 30
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
(in
thousands, except share
and
per share data)
|
|
(in
thousands, except share
and
per share data)
|
Basic
earnings (losses) per common share computation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net
income (loss)
|
$(3,619)
|
|
$2,123
|
|
$(579)
|
|
$3,877
|
Series
A and Series B Convertible Preferred Stock
dividends
|
(115)
|
|
(196)
|
|
(206)
|
|
(390)
|
Amortization
of Series A and Series B Convertible Preferred Stock
discounts
|
(321)
|
|
(586)
|
|
(569)
|
|
(1,171)
|
Income
attributable to Series A and Series B Convertible Preferred
Stock
|
-
|
|
(333)
|
|
-
|
|
(575)
|
Net
income (loss) attributable to common shares (basic)
|
$(4,055)
|
|
$1,008
|
|
$(1,354)
|
|
$1,741
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding during the
period
|
7,880,530
|
|
7,960,361
|
|
7,880,645
|
|
7,957,343
|
|
|
|
|
|
|
|
|
Basic
net earnings (losses) per common share
|
$(0.51)
|
|
$0.13
|
|
$(0.17)
|
|
$0.22
|
|
|
|
|
|
|
|
|
Diluted
earnings (losses) per common share computation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net
income (loss)
|
$(3,619)
|
|
$2,123
|
|
$(579)
|
|
$3,877
|
Series
A and Series B Convertible Preferred Stock
dividends
|
(115)
|
|
(196)
|
|
(206)
|
|
(390)
|
Amortization
of Series A and Series B Convertible Preferred Stock
discounts
|
(321)
|
|
(586)
|
|
(569)
|
|
(1,171)
|
Income
resulting from fair value adjustment of Series A and Series B
Warrants
|
(103)
|
|
(1,468)
|
|
(103)
|
|
(2,083)
|
Income
attributable to Series A and Series B Convertible Preferred
Stock
|
-
|
|
-
|
|
-
|
|
(54)
|
Net
income (loss) attributable to common shares (diluted)
|
$(4,158)
|
|
$(127)
|
|
$(1,457)
|
|
$179
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding during the
period
|
7,888,530
|
|
7,960,361
|
|
7,880,645
|
|
7,957,343
|
Dilutive
shares related to Series A and Series B Warrants
|
31,938
|
|
413,851
|
|
15,969
|
|
421,483
|
Dilutive
shares related to options and stock warrants
|
-
|
|
-
|
|
-
|
|
328,215
|
Diluted
common shares outstanding
|
7,920,468
|
|
8,374,212
|
|
7,896,614
|
|
8,707,041
|
|
|
|
|
|
|
|
|
Diluted
net earnings (losses) per common share
|
$(0.53)
|
|
$(0.02)
|
|
$(0.18)
|
|
$0.02
|
|
|
|
|
|
|
|
|
Common
stock equivalents excluded because their effect would have been
anti-dilutive
|
2,366,009
|
|
2,951,591
|
|
2,343,502
|
|
2,629,513
|
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note
2 - Summary of Significant Accounting Policies (cont’d)
Derivatives
and hedging
To mitigate the
potential impact of adverse fluctuations in cash flows resulting from future new
Israeli shekels (NIS) exchange rates, the Subsidiary hedges portions of its
forecasted expenses denominated in NIS with currency forwards and options. The
Subsidiary does not speculate in these hedging instruments in order to profit
from foreign currency exchanges, nor does it enter into trades for which there
are no underlying exposures.
The Company
recognizes all derivatives on the balance sheet at fair value. If the
derivatives meet the definition of a hedge and are so designated, depending on
the nature of the hedge, the effective portion of the gain or loss on the
derivative is reported as a component of other comprehensive income and
reclassified into earnings in the same period or periods during which the hedged
transaction affects earnings. The ineffective portion of a derivative’s change
in fair value, if any, is recognized in earnings. Gains (losses) from a
derivative’s change in fair value that are not designated as hedges are
recognized in earnings.
Through April 2009,
the Subsidiary’s currency forwards and options were not designated as hedging
instruments and, therefore, the net gains (losses) that resulted from such
derivatives were recognized in earnings as they occurred.
Starting May 2009,
the Subsidiary designated all of its currency hedging activity, which currently
consists only of forward contracts, as cash flow hedges, as they were all
eligible. The Company documents all relationships between the hedging
instruments and hedged items, as well as its risk management objective for
undertaking these hedging transactions. The Company also formally assesses, both
at the inception of the hedge and on an ongoing basis, whether or not each
derivative is highly effective in offsetting changes in fair value of the hedged
items.
Gains (losses) from
forward and option contracts are included in operating expenses, as
follows:
|
Three
months
ended
June 30
|
|
Six
months
ended
June 30
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
$
(in thousands)
|
|
$
(in thousands)
|
|
|
|
|
|
|
|
|
Cost of
revenue
|
4
|
|
2
|
|
(11)
|
|
7
|
Research and
development
|
18
|
|
11
|
|
(43)
|
|
32
|
Community
development and marketing
|
5
|
|
2
|
|
(10)
|
|
6
|
General and
administrative
|
10
|
|
5
|
|
(26)
|
|
15
|
|
37
|
|
20
|
|
(90)
|
|
60
|
As of June 30, 2010, the notional
amount of the Subsidiary’s outstanding forward contracts was $2.74 million,
constituting liabilities with a fair value of $60 thousand. Such
liabilities are included in accrued expenses and other current liabilities as
the foreign exchange forward contracts mature through February 28, 2011, and the
change in fair value has been recorded as other comprehensive income (loss). The
amounts recorded as other comprehensive income (loss) will be reclassified to
earnings as the forward contracts mature or if, and to the extent that the
hedging relationship is deemed ineffective.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note
3 – Comprehensive Income (Loss)
Comprehensive
income (loss) represents net income plus any revenue, expenses, gains and losses
that are specifically excluded from net income and recognized directly as a
component of shareholders’ equity, net of tax.
The reconciliation
from net income (loss) to comprehensive income (loss) is as
follows:
|
Three
months ended
June
30
|
|
Six
months ended
June
30
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
$
(in thousands)
|
|
$
(in thousands)
|
|
|
|
|
|
|
|
|
Net Income
(loss)
|
(3,619)
|
|
2,123
|
|
(579)
|
|
3,877
|
|
|
|
|
|
|
|
|
Unrealized
gain (loss) on derivative and hedging activity, net
|
44
|
|
(121)
|
|
44
|
|
(119)
|
Unrealized
gain on marketable securities, net
|
-
|
|
23
|
|
-
|
|
26
|
|
|
|
|
|
|
|
|
Total other
comprehensive income (loss)
|
(3,575)
|
|
2,025
|
|
(535)
|
|
3,784
|
Note
4 – Redpoint Financing
On June 16,
2008, pursuant to a private placement of the Company’s securities, Redpoint
Omega, L.P. and Redpoint Omega Associates, LLC (collectively “Redpoint”)
purchased $6 million of the Company’s Series A Convertible Preferred Stock
(the “Series A Financing”), initially convertible into 1,333,333 shares of
common stock at a conversion price of $4.50 per share (the
“Series A Convertible Preferred Stock”), and common stock
purchase warrants exercisable for 666,667 shares of common stock at an exercise
price of $4.95 per share (the “Series A Warrants”). Redpoint also received a
warrant (the “Series B Unit Warrant”), exercisable until June 16, 2009, to
purchase units of up to $7 million of Series B Convertible Preferred Stock
and common stock purchase warrants. After deducting placement agent fees and
legal expenses, the Company’s net proceeds from the Series A Financing on June
16, 2008, were approximately $5.38 million.
On June 10, 2009,
Redpoint exercised its Series B Unit Warrant and purchased $7 million of the
Company’s Series B Convertible Preferred Stock (the “Series B
Financing”), initially convertible into 1,272,727 shares of common stock at a
conversion price of $5.50 per share (the
“Series B Convertible Preferred Stock”), and common stock
purchase warrants exercisable for 636,364 shares of common stock at an exercise
price of $6.05 per share (the “Series B Warrants”). After deducting placement
agent fees and legal expenses, the Company’s net proceeds from the Series B
Financing were approximately $6.48 million. The change in value of the Series B
Unit Warrant from January 1, 2009 through its exercise on June 10, 2009, has
been included in the statement of operations as loss resulting from fair value
adjustment of warrant to purchase units of Series B preferred stock and
warrants, and amounted to approximately $3.6 million and $2.1 million for the
three and six months ended June 30, 2009, respectively.
The Series A and
the Series B Convertible Preferred Stock are classified as temporary equity and
the Series A and Series B Warrants are classified as a long-term liability on
the accompanying balance sheets.
On June 30, 2010,
the Company assessed the fair value of the Series A and Series B Warrants as
compared to their value as of March 31, 2010 and December 31, 2009. The change
in fair value has been included in the statement of operations as gain resulting
from fair value adjustment of warrants, and amounted to $1,468 and $2,083
thousand for the three and six months ended June 30, 2010.
On June 30, 2009,
the Company assessed the fair value of the Series A Warrants as compared to
their value as of March 31, 2009 and December 31, 2008, and also assessed the
fair value of the Series B Warrants as compared to their value as of June 10,
2009. The changes in fair value have been included in the statement of
operations as loss resulting from fair value adjustment of warrants, and
amounted to $775 and $290 thousand for the three and six months ended June 30,
2009.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note
5 - Series A and Series B Convertible Preferred Stock (Redeemable)
The following table
summarizes the changes in Series A and Series B Convertible Preferred Stock
during the six months ended June 30, 2010:
|
Series
A Convertible Preferred Stock
|
|
Series
B Convertible Preferred Stock
|
|
Total
|
|
$
(in thousands)
|
|
|
|
|
|
|
December
31, 2009
|
1,630
|
|
751
|
|
2,381
|
|
|
|
|
|
|
Amortizations
of discounts during the period
|
494
|
|
677
|
|
1,171
|
|
|
|
|
|
|
June
30, 2010
|
2,124
|
|
1,428
|
|
3,552
|
The Series A
and Series B Convertible Preferred Stock accrue cumulative dividends at a rate
of 6% per annum whether or not dividends have been declared by the Company’s
Board of Directors and whether or not there are profits, surplus or other funds
available for the payment of such dividends. Due to the Company’s decision to
pay Series A Convertible Preferred Stock dividends accrued through September 30,
2008, in the form of additional shares of Series A Convertible Preferred Stock,
the dividend accrual through such date is reflected as an increase in the stated
value of the Series A Convertible Preferred Stock from $100 per share to $101.76
per share, with a corresponding decrease in the additional paid-in capital. All
dividends on Series A and Series B Convertible Preferred Stock subsequent to
September 30, 2008, were paid in cash.
As a result of the
Redpoint Financings (see Note 4), the Company’s Amended and Restated Certificate
of Incorporation has been amended to provide for the issuance of up to 60,000
shares of Series A Convertible Preferred Stock and 70,000 shares of
Series B Convertible Preferred Stock, with a stated value of $100 per share
(the “Stated Value”) pursuant to the Certificate of Designations, Number, Voting
Powers, Preferences and Rights of Series A Convertible Preferred Stock
filed with the State of Delaware on June 16, 2008 and the Certificate of
Designations, Number, Voting Powers, Preferences and Rights of Series B
Convertible Preferred Stock filed with the State of Delaware on July 28, 2009
(the “Certificate of Designations”).
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note
6 – Fair Value Measurements
The Company
measures fair value in accordance with ASC 820-10, “Fair
Value Measurements and Disclosures” (formerly SFAS 157, “Fair
Value Measurements”). ASC 820-10 clarifies that fair value is an
exit price, representing the amount that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants. As such, fair value is a market-based measurement that should be
determined based on assumptions that market participants would use in pricing an
asset or a liability. As a basis for considering such assumptions,
ASC 820-10 establishes a three-tier value hierarchy, which prioritizes the
inputs used in the valuation methodologies in measuring fair value:
Level 1
- Observable inputs that reflect quoted prices (unadjusted) for identical assets
or liabilities in active markets.
Level 2
- Include other inputs that are directly or indirectly observable in the
marketplace.
Level 3
- Unobservable inputs which are supported by little or no market
activity.
The fair value
hierarchy also requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
The Company
measures its cash equivalents, marketable securities, foreign currency
derivative contracts and Series A and B Warrants at fair value. In accordance
with ASC 820-10, the Company’s cash equivalents and marketable securities
are classified within Level 1. This is because the cash equivalents and the
marketable securities are valued using quoted active market prices. The
Company’s foreign currency derivative contracts are classified within Level 2,
because they are valued utilizing market observable inputs. The Series A and
Series B Warrants are classified within Level 3 because they are valued using
the Black-Scholes model which utilizes significant inputs that are unobservable
in the market such as expected stock price volatility, risk-free interest rate
and the dividend yield, and remaining period of time the warrants will be
outstanding before they expire.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note
6 – Fair Value Measurements (cont’d)
The following table
presents the Company’s assets and liabilities measured at fair value on a
recurring basis as of December 31, 2009 and June 30, 2010,
aggregated by the level in the fair-value hierarchy within which those
measurements fall:
|
|
|
|
|
|
|
|
Description
|
December 31,
2009
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level
1)
|
|
Significant Other
Observable Inputs
(Level
2)
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
$
(in thousands)
|
Assets
|
|
|
|
|
|
|
|
Cash
Equivalents
|
21,287
|
|
21,287
|
|
-
|
|
-
|
Marketable
Securities
|
795
|
|
795
|
|
-
|
|
-
|
Foreign
currency derivative contracts
|
60
|
|
-
|
|
60
|
|
-
|
Total
Assets
|
22,142
|
|
22,082
|
|
60
|
|
-
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Series
A Warrants
|
4,000
|
|
-
|
|
-
|
|
4,000
|
Series
B Warrants
|
4,008
|
|
-
|
|
-
|
|
4,008
|
Total
Liabilities
|
8,008
|
|
-
|
|
-
|
|
8,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
June 30,
2010
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level
1)
|
|
Significant Other
Observable Inputs
(Level
2)
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
$
(in thousands)
|
Assets
|
|
|
|
|
|
|
|
Cash
Equivalents
|
20,291
|
|
20,291
|
|
-
|
|
-
|
Marketable
Securities
|
4,334
|
|
4,334
|
|
-
|
|
-
|
Total
Assets
|
24,625
|
|
24,625
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Foreign
currency derivative contracts
|
60
|
|
-
|
|
60
|
|
-
|
Series
A Warrants
|
3,070
|
|
-
|
|
-
|
|
3,070
|
Series
B Warrants
|
2,855
|
|
-
|
|
-
|
|
2,855
|
Total
Liabilities
|
5,985
|
|
-
|
|
60
|
|
5,925
|
|
|
|
|
|
|
|
|
In addition to the
above, the Company's financial instruments at December 31, 2009 and June 30,
2010, consisted of cash, accounts receivable, long term deposits, accrued
expenses, accrued compensation and related liabilities. The carrying amounts of
all the aforementioned financial instruments, approximate fair
value.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note
6 – Fair Value Measurements (cont’d)
The following table
summarizes the changes in the Company’s liabilities measured at fair value using
significant unobservable inputs (Level 3), during the six months ended June 30,
2010:
|
Level
3
$
(in thousands)
|
|
|
Series
A and B Warrants
|
|
|
December
31, 2009
|
8,008
|
|
|
Fair value
adjustments included in statement of operations
|
(2,083)
|
|
|
June
30, 2010
|
5,925
|
Note
7 – Stockholders’ Equity
General
The following table
summarizes the changes in the Company’s stockholders’ equity during the
six-month period ending June 30,
2010 (in thousands):
|
$
|
|
|
December
31, 2009
|
17,068
|
|
|
Stock-based
compensation
|
593
|
Amortizations
of discounts for the six months ended June 30, 2010
|
(1,171)
|
Dividends
|
(390)
|
Exercise of
stock options
|
59
|
Change in
other comprehensive income
|
(93)
|
Net income
for the period
|
3,877
|
|
|
June
30, 2010
|
19,943
|
Common
Stock
During the six
months ended June 30, 2010, the Company issued a total of 10,318 shares of
common stock due to the exercise of 10,318 outstanding stock options, for total
consideration of $59 thousand.
Stock
Warrants
As of June 30,
2010, there were 126,103 outstanding stock warrants with an exercise price of
$7.20. These warrants are exercisable immediately and will expire on January 30,
2011, if not exercised by then.
In February, 2010,
1,029,488 warrants with an exercise price of $17.27 per warrant
expired.
No warrants were
exercised during the six months ended June 30, 2010.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note
7 – Stockholders’ Equity (cont’d)
Redpoint
Warrants
In connection with
the Redpoint Financings (see Note 4), the Company issued to Redpoint Series A
Warrants, exercisable for 666,667 shares of common stock at an exercise price of
$4.95 per share, and Series B Warrants, exercisable for 636,364 shares of common
stock at an exercise price of $6.05 per share. The Series A and the Series B
Warrants are exercisable immediately and, if not exercised, they will expire on
June 16, 2014 and June 10, 2015, respectively.
Stock
Options
During the six
months ended June 30, 2010, the Company granted a total of 38,500 stock options
to its employees at an average exercise price of $8.13 per option. Additionally,
during the same period, 10,318, 8,697 and 9,950 stock options were exercised,
forfeited and expired respectively.
The total fair
value of stock options vested during the three and six months ended June 30,
2010, amounted to $280 and $593 thousand, respectively, and was recorded as
stock-based compensation expense.
As of June 30,
2010, 349,452 options were available for grant under the Company’s 2005 and 2004
option plans.
Note
8 – Income Taxes
At June 30, 2010,
the Company’s deferred tax assets were almost entirely offset by a valuation
allowance. While the Company had taxable income in 2009 and the first half of
2010, it has experienced cumulative loss in recent years and its revenue model
continues to be subject to fluctuations and volatility that impact its ability
to accurately forecast its future expected profitability. The Company continues
to view these factors as significant pieces of negative evidence that make it
difficult to support a conclusion that expected taxable income from future
operations justifies recognition of deferred tax assets. Notwithstanding, the
Company will continue to monitor its profitability as well as the extent of
fluctuations and volatility and their impact on its revenue model. As more
information accumulates and to the extent that the Company continues to
experience sustained profitability in future periods, it will consider if and
when a reversal will be appropriate. At June 30, 2010, accrued expenses include
approximately $100 thousand of unrecognized tax benefits which, if recognized,
would reduce future tax expense. At December 31, 2009 and March 31, 2010,
accrued expenses had no unrecognized tax benefits. The Company estimates that it
is reasonably possible that unrecognized tax benefits may change in the next
twelve months upon settlement of open tax years.
The Company files
federal income tax returns in the U.S., as well as various state & local and
foreign jurisdictions tax returns. The Parent is no longer subject to U.S.
federal income tax examinations by tax authorities for years prior to 2006. The
Subsidiary is no longer subject to foreign income tax examinations by tax
authorities for years prior to 2007 but is currently undergoing an audit by the
Israeli tax authorities for the tax years 2007 and 2008.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note
9 - Commitments and Contingencies
|
(a)
|
The Parent
rents its offices under operating lease agreements through June 30, 2012.
The Subsidiary rented its offices under an operating lease agreement with
an initial term expiring in July 2010. On July 25, 2010, the Subsidiary
signed a supplement to its office lease agreement, extending the lease
through July 31, 2013, with an option to extend the term for an additional
3 years.
|
The minimum lease
payments under the aforesaid non-cancelable operating leases, including the
commitment entered into by the Subsidiary subsequent June 30, 2010 as mentioned
above, are as follows (in thousands):
Year
ending December 31
|
|
$
|
|
|
|
2010 (six
months ending December 2010)
|
|
226
|
2011
|
|
476
|
2012
|
|
395
|
2013
|
|
182
|
|
|
|
|
|
1,279
|
Rent expenses for
the office space operating leases for the three months ended June 30, 2009, and
2010 were $95 thousand, and $112 thousand, respectively. Rent expenses for the
office space operating leases for the six months ended June 30, 2009, and 2010
were $191 thousand, and $217 thousand, respectively.
|
(b)
|
The
Subsidiary leases motor vehicles for certain employees under operating
lease agreements. Lease payment commitments under operating leases for
motor vehicles, as of June 30, 2010, are as follows (in
thousands):
|
Year
ending December 31
|
|
$
|
|
|
|
2010 (six
months ending December 2010)
|
|
129
|
2011
|
|
101
|
2012
|
|
29
|
|
|
|
|
|
259
|
Additionally, as of
June 30, 2010 the payment upon cancellation of these lease agreements amounted
to $21 thousand.
Lease expenses for
motor vehicles operating leases for the three months ended June 30, 2009, and
2010 were approximately $42 thousand, and $46 thousand, respectively. Lease
expenses for motor vehicles operating leases for the six months ended June 30,
2009, and 2010 were approximately $84 thousand, and $94 thousand,
respectively
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note
9 - Commitments and Contingencies (cont’d)
|
(c)
|
Future
minimum lease payments under non-cancelable capital leases for computer
equipment, as of June 30, 2010, are as
follows:
|
|
|
Principal
|
|
Interest
|
Year
ending December 31
|
|
$
(in thousands)
|
|
|
|
|
|
2010 (six
months ending December 2010)
|
|
42
|
|
1
|
2011
|
|
17
|
|
-
|
|
|
|
|
|
|
|
59
|
|
1
|
|
(d)
|
A bank
guarantee given to the Subsidiary’s landlord, is secured by a lien on some
of the Subsidiary’s bank deposits. As of June 30, 2010, such deposits
amounted to $759 thousand, including a restricted long-term deposit of
$140 thousand.
|
|
(e)
|
The
Subsidiary’s hedging activity is secured by a lien on one of its bank
deposits in an amount of up to $200 thousand. As of June 30, 2010,
$150 thousand of such amount has been restricted and was included in short
term deposits (restricted).
|
|
(f)
|
In connection
with the Redpoint Financings the Company entered into registration rights
agreements with Redpoint, pursuant to which the Company agreed to register
with the SEC for resale the common stock underlying the Redpoint
Securities. In connection with the registration rights agreements, the
Company agreed to pay a penalty of 1.0% per month, on a daily pro rata
basis, up to a maximum of 8.0%, of the aggregate purchase price, as
partial liquidated damages, for certain default events and subject to
certain circumstances. The partial liquidated damages may trigger if the
registration statements, which the Company filed on July 30, 2008 and June
15, 2009, and which were declared effective by the SEC on September 16,
2008 and July 28, 2009, respectively, cease to remain continuously
effective.
|
|
(g)
|
In the
ordinary course of business, the Company enters into various arrangements
with vendors and other business partners, principally for content,
web-hosting, marketing and various consulting arrangements. As of June 30,
2010, the total future commitments under these arrangements amounted to
approximately $1.3 million.
|
(h)
|
In the
ordinary course of business, the Company may provide indemnifications of
varying scope and terms to customers, vendors, lessors, business partners,
and other parties with respect to certain matters, including, but not
limited to, losses arising out of its breach of agreements, services to be
provided by it, or from intellectual property infringement claims made by
third parties. Additionally, the Company has indemnified its board
members, officers, employees, and agents serving at the request of the
Company to the fullest extent permitted by applicable law. It is not
possible to determine the maximum potential amount of liability under
these indemnification agreements due to the limited history of prior
indemnification claims and the unique facts and circumstances involved in
each particular agreement. Such indemnification agreements may not be
subject to maximum loss clauses. To date, the Company has not incurred
costs as a result of obligations under these agreements and has not
accrued any liabilities related to such indemnification obligations in its
accompanying financial statements.
|
|
(i)
|
From time to
time, the Company receives various legal claims incidental to its normal
business activities, such as intellectual property infringement claims and
claims of defamation and invasion of privacy. Although the results of
claims cannot be predicted with certainty, the Company believes the final
outcome of such matters will not have a material adverse effect on its
financial position, results of operations, or cash
flows.
|
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note
10 – Risks and Uncertainties
|
(a)
|
Most of the
Company's revenue was generated through the efforts of third party
suppliers (the “Monetization Partners”). In the three and six months ended
June 30, 2010, the Company earned 83% and 86% of its revenue,
respectively, compared to 89% and 90% in the three and six months ended
June 30, 2009, through one of its Monetization Partners, Google Inc.
(“Google”). Hence, the Company’s business is dependent on the Google
Services Agreement, the agreement with Google pursuant to which the
Company obtains most of the advertisements displayed on Answers.com and
earns most of its ad revenues (“GSA”). The GSA was renewed in the fourth
quarter of 2009 for a two-year period ending January 31, 2012.
A termination by Google of the GSA, for whatever reason, would result in
the need to replace this relationship and obtain listings and
advertisements from alternative providers, and the Company may not succeed
in receiving equally favorable terms as those provided under the GSA. A
termination of the GSA and a failure to replace it on equally favorable
terms could result in a material reduction in the Company’s ad revenues
and could adversely affect the Company’s business and financial
results.
|
|
(b)
|
Search
engines serve as origination Web properties for users in search of
information, and the Company’s Websites’ topic pages often appear as one
of the top links on the pages returned by search engines in response to
users’ search queries. Thus, in addition to the ads the Company receives
through Google, its traffic is mostly driven by search engine traffic,
mostly from the Google search engine. In the three and six months ended
June 30, 2010, according to the Company’s internal estimates, search
engine traffic represented 91% of traffic. Search engines, at any time and
for any reason, could change their algorithms that direct queries to the
Company’s Web properties. On occasion the Company’s Web properties have
experienced decreases in traffic, and consequently in revenue, due to
search engine actions. The Company cannot guarantee that it will
successfully react to these actions in the future and recover lost
traffic. Accordingly, a change in algorithms that search engines use to
identify Web pages towards which traffic will ultimately be directed,
could cause a significant decrease in traffic and
revenues.
|
|
(c)
|
Close to half
of the Company’s operating expenses, excluding non-cash items such as
stock-based compensation, are denominated in New Israel Shekels (NIS). The
Company expects the amount of such NIS expenses to grow in the foreseeable
future. In recent years, the U.S. dollar-NIS exchange rate has been
volatile. If the value of the U.S. dollar weakens against the value of
NIS, there will be a negative impact on the Company’s operating costs. In
addition, to the extent the Company holds monetary assets and liabilities
that are denominated in currencies other than the U.S. dollar, the Company
will be subject to the risk of exchange rate fluctuations. The Company
uses various hedging tools, including forward contracts, to lessen the
effect of currency fluctuations on its results of
operations.
|
|
(d)
|
The Series A
Warrants and Series B Warrants are revalued each reporting date, and any
change in their fair value is recorded in the statement of operations. The
Company uses the Black-Scholes valuation model to determine the values of
the warrants. Inputs used in this model include our stock price and
risk-free interest rate. The primary reason for the change in value of the
aforesaid warrants has been the change in the market value of our common
stock on the measurement dates. To the extent that the market value of our
common stock rises or declines in future periods, the Company may continue
to experience significant gains or losses resulting from the fair value
adjustments of Series A Warrants and Series B
Warrants.
|
The
following discussion and analysis should be read in conjunction with, and is
qualified in its entirety by, our financial statements (and notes related
thereto) and other more detailed financial information appearing elsewhere in
this quarterly report. In addition to historical information, this quarterly
report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the
Exchange Act. These statements include, among other things, statements
concerning:
·
|
Our
expectations relating to the growth of our business and
revenue;
|
·
|
Our
expectations concerning future traffic
trends;
|
·
|
Our
expectations concerning future revenue per 1,000 page views (“RPM”)
trends;
|
·
|
Our
plans to continue investing resources in our core platform in areas such
as content quality, maintaining and improving search engine optimization,
performance, scalability, and usability, as well as creating an
Application Programming Interface for
Answers.com;
|
·
|
Our
plans surrounding the French, Italian, German and Spanish, or “FIGS”,
language versions of WikiAnswers and our belief that this area is
important to our growth in future
years;
|
·
|
Our
plans surrounding mobile Answers.com
access;
|
·
|
Our
plans to further address the social answers space by more tightly
integrating the question-answering process with popular social
networks;
|
·
|
Our
intention to expand and promote the amount of video content we display on
Answers.com;
|
·
|
Our
expectations concerning seasonality and traffic patterns in the
future;
|
·
|
Our
expectation that pay-per-performance, also known as cost-per-click
(“CPC”), ads will continue to generate the majority of our revenue for the
foreseeable future;
|
·
|
Our
expectations regarding future cash flows from operations;
and
|
·
|
Our
belief that we have sufficient cash and cash equivalents to meet our
working capital and operating requirements for at least the next twelve
months;
|
as
well as other statements concerning our future operations, financial condition
and prospects and business strategies. These forward-looking statements are
subject to certain risks and uncertainties that could cause our actual results
to differ materially from those reflected in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in this quarterly report, and those discussed in
other documents we file with the SEC. We undertake no obligation to revise or
publicly release the results of any revision to these forward-looking
statements. Given the risks and uncertainties, readers are cautioned not to
place undue reliance on such forward-looking statements.
Introduction
This Management
discussion
and analysis, or MD&A, is divided into sections entitled “General,”
“Results of Operations,” “Liquidity and Capital Resources,” “Off Balance Sheet
Arrangements,” “Critical Accounting Estimates,” “Quarterly Results” and "Our
Outlook". The “General” section contains information regarding our business and
recent events as well as background and commentary regarding the revenue and
expense captions that comprise our Statement of Operations. The “Results of
Operations” section is our commentary on our results of operations compared to
the same period in the preceding year. All of the sections herein should help
provide a better understanding of our performance during the three and six
months ended June 30, 2010 as compared to the same periods in
2009.
GENERAL
We own and operate
Answers.com, a leading Q&A site, dedicated to providing useful answers to
questions about anything. Answers.com includes WikiAnswers and ReferenceAnswers.
WikiAnswers is a community-generated social knowledge Q&A platform,
leveraging wiki-based technologies. Through the contributions of the community,
our questions and answers are continuously growing, improving and being updated.
ReferenceAnswers provides trusted editorial content on millions of topics
licensed from what we believe to be the world’s top reference publishers.
ReferenceAnswers provides the best results for simple questions of the who-is,
what-is variety. More complex questions are better handled by
WikiAnswers. Our goal is to become the dominant and recognized market leader for
answers on the Internet.
According to our
internal estimates, Answers.com generated 11.0 million average daily page views
in the second quarter of 2010 compared to 9.0 million average daily page views
in the same period in 2009. According to comScore, under its new hybrid audience
measurement methodology, Answers.com had 40.4 million unique visitors in the
U.S. in June 2010, ranking the site number 22 among the top U.S. Web
properties for that month. Also according to comScore, Answers.com had
approximately 68.5 million global unique visitors in June 2010, ranking us
number 41 worldwide.
References
to Web Property Usage Measurements
We gauge the
effectiveness of our monetization efforts and trends by measuring our revenue
per thousand page views, or RPM. Throughout this Quarterly Report, we refer to
estimates of traffic, or page views, whose source is HBX Analytics, a tag-based
Web analytics system offered by Omniture, Inc., (“Omniture”). Traffic
measurements from this system are generated by our placement of tags on our Web
pages. The Omniture system then independently generates traffic
metrics.
We also use Google,
Inc.’s Google Analytics measurement services to estimate the breakdown of our
traffic sources. Google Analytics measurements are generated by our
placement of tags on our Web properties’ pages, which Google Analytics uses to
count and report audience metrics independently.
In this Quarterly
Report, statistics gathered from Omniture and Google Analytics are also referred
to as “internal estimates”.
We also follow and
report certain measurements performed by comScore, Inc., a global leader in
measuring the digital world and one of the preferred sources of digital
marketing intelligence. comScore’s “unique visitors” data to which we subscribe
is based on a new solution introduced by comScore in mid-2009, Media Metrix 360,
a ‘panel-centric hybrid’ solution to digital audience measurement. The new
approach combines person-level measurement from comScore’s proprietary global
panel with Web site server metrics. Our focus on comScore’s unique visitors
metric – in the U.S. and worldwide – helps us understand and analyze our
progress vis-à-vis other Web properties in general and in the context of the
competitive Q&A space, in particular.
Certain comScore
clients have moved to a full-hybrid measurement methodology, while others have
moved to partial hybrid status, or have yet to implement hybrid measurement.
Direct comparison of a ranking post-hybrid implementation vs. pre-hybrid
implementation may not reflect the actual change in the site's ranking or
audience size over time. The comScore data presented in this report for
Answers.com is based on full hybrid measurement.
Third party
services measuring traffic audiences may provide different estimates than the
estimates reported by other similar services and our internal estimates. These
discrepancies may result from differences in methodologies applied or the
sampling approaches used by each measuring service.
New
Answers.com: Integration of WikiAnswers and ReferenceAnswers
In September 2009
we announced the launch of the new Answers.com, in recognition of the
integration of our two Web properties, culminating a process that began several
quarters earlier. Answers.com is the name we now use for our combined site, as
well as our umbrella brand, and is comprised of two properties or sub-brands,
WikiAnswers and ReferenceAnswers. The product strategy guiding the integration
was our desire to give users one address for the best answers to all types of
questions – be they community-generated from WikiAnswers or editorially licensed
from ReferenceAnswers.
FIGS
Language Versions of WikiAnswers
In the third
quarter of 2009 we launched FIGS language versions of WikiAnswers. Our strategy
will capitalize on the needs of users around the globe who are searching for
answers online and will leverage our core strengths: community building and
Q&A space. Our largest competitor already has successful international sites
and receives much of its traffic from those sites, thus we view this area as an
opportunity for future growth.
How
we Generate Revenue
Traffic
Our revenue is
driven by the traffic generated by Answers.com and our ability to effectively
monetize that traffic. Search engines, primarily Google, are responsible for
most of the traffic to Answers.com. Users submit queries and search engines
respond by generating a list of Web pages that they deem likely to offer the
most relevant content. When an Answers.com page ranks high in the algorithmic
systems of search engines, our results are more likely to be accessed by users.
For the three months ended June 30, 2009 and 2010, according to our internal
estimates, this source of traffic represented approximately 84% and 91%,
respectively, of Answers.com’s traffic. For the six months ended June 30, 2009
and 2010, according to our internal estimates, this source of traffic
represented approximately 83% and 91%, respectively, of Answers.com’s
traffic.
The balance of the
traffic arriving at Answers.com in those periods originated from direct usage,
i.e., users visiting our home page and/or navigating within Answers.com, and,
additionally, in 2009, from users who clicked on Google’s Definition Link
feature, which has since been discontinued.
Search engines
could change their algorithms that direct search queries to Answers.com or other
web properties. We have previously experienced decreases in traffic, and
consequently in revenue, in response to such search engine action.
Our efforts to
maintain and increase the volume of this traffic are commonly referred to by the
industry as search engine optimization, or SEO. We often refer to traffic from
search engines as “SEO traffic”.
Search algorithms
used by search engines are designed to offer users the best results to the
queries searched. For this reason, the level of quality of content offered by
Websites plays an important role in determining whether a search engine will
include links to any given Website on its result page. Particularly in light of
the enormous amount of user-generated content offered on Answers.com via the
WikiAnswers component, in the event the perceived quality of content on
Answers.com pages does not improve and/or if it deteriorates, our pages may rank
lower in the algorithmic systems of search engines. Lower ranking content could
cause Answers.com’s results to be less likely to be accessed by users, resulting
in traffic declines.
Seasonality
Our results of
operations have historically been affected by seasonal traffic patterns and
advertising demand. Many of our users are students who utilize Answers.com as
reference sources. Our traffic fluctuates with the academic school year, rising
from January through May, falling to lower levels during the summer months,
rising again in September through November, and falling again in December,
coinciding with school breaks and the holiday season. We expect traffic to
Answers.com to continue to fluctuate seasonally in the future. This seasonal
fluctuation in traffic results in a fluctuation in our quarterly revenues, since
lower traffic to Answers.com translates into fewer users clicking on or
viewing the advertisements we display. Our current seasonal patterns may
become more pronounced or may change as we grow Answers.com. Further, our
foreign-language versions of WikiAnswers are not yet material to our overall
traffic, however, as those versions grow, we may find that our current seasonal
patterns will change.
Monetization
Advertising
Revenue. We earn practically all of our revenue from advertising.
There are two primary categories of Internet advertising: pay-per-performance,
also known as cost-per-click (“CPC”), and pay-per-impression display ads or cost
per 1,000 impressions (“CPM”). In the CPC model, we earn revenue based on the
number of clicks associated with an ad; in the CPM model, we derive revenue from
the display of ads. The overwhelming majority of our advertising revenue is
earned from CPC advertising. We obtain all of our CPC, and most of our CPM
advertisements from third-party ad networks. These ad networks compensate us by
paying us a portion of the revenue they earn from advertisers for our provision
of promotional space on our Web properties.
Our primary third
party ad network, Google, accounted for approximately 83% of our total revenue
in the three months ended June 30, 2010, as compared to approximately 89% of our
total revenue for the same period in 2009. Google accounted for approximately
86% of our total revenue in the six months ended June 30, 2010, as compared to
approximately 90% of our total revenue for the same period in 2009. We obtain
practically all our CPC ads from Google. We utilize the services of other third
party ad networks that provide us with CPM ads. We expect that for the
foreseeable future, CPC ads will continue to generate the majority of our
revenue.
Our relationship
with Google is governed by our Google Services Agreement, or GSA, which
terminates January 31, 2012. We participate in two Google AdSense programs,
“AdSense for Search” or “AFS” and “AdSense for Content” or “AFC”. AFS is the
online service for distributing relevant ads from Google’s advertisers for
search results on Google Network members’ sites. AFC, on the other hand, is
Google’s online service for distributing ads from its advertisers that are
relevant to content on its Network members’ web sites. Under this program,
Google uses automated technology to analyze the meaning of the content on the
web page and serve relevant ads based on the meaning of such content.
WikiAnswers pages are almost always monetized via AFC ads, while
ReferenceAnswers pages are mostly monetized via AFS ads.
Licensing
Revenue. We earn a negligible portion of our revenues from partners that
pay us for providing them with our answer-based services that they then use in
their own products, via co-branded Web pages.
Costs
and Expenses
Cost
of Revenue
Cost of revenue
consists of compensation, travel and overhead costs relating to personnel who
are engaged in production operations, direct content creation, editing and
integration. Additionally, this expense line includes fees to third parties to
license and translate content, data center costs, including depreciation of
information technology assets, Web search service fees, ad serving fees,
amortization of the cost of acquired software used in our products, and
contractual revenue sharing fees to various Web property operators for visitors
directed to our Web properties, or traffic acquisition costs.
Research
and Development Expenses
Research and
development expenses consist of compensation, travel and overhead costs of
personnel conducting research and development of our products and services, and
consulting costs. Our research and development team works primarily on projects
to improve and enhance product functionality, quality, performance, scalability,
user interface, and monetization.
Community
Development and Marketing Expenses
Community
development and marketing expenses consist of compensation, travel and overhead
costs of personnel in charge of developing and encouraging the WikiAnswers
community of users asking and answering questions, product management and
marketing. Additionally, this expense line includes fees for
marketing and market information services, public relations and promotional
costs.
General
and Administrative Expenses
General and
administrative expenses consist primarily of compensation, travel and overhead
costs for general executive, financial, legal, human resources, and other
administrative personnel, professional services, including investor relations,
legal, accounting, payroll and other consulting services, insurance fees,
amortization of domain names, and other general corporate expenses.
Overhead
Costs
Overhead costs
consist primarily of rent, telecommunications, utilities and depreciation
expenses.
Stock-Based
Compensation
New employees
typically receive stock option awards within three months of their employment
date. We also grant additional stock option awards to existing employees and
directors. We account for stock-based awards under Accounting Standards
Codification (“ASC”) 718, “Compensation
– Stock Compensation” , which requires measurement of compensation cost
for all stock-based awards at fair value on date of grant and recognition of
compensation over the service period awards are expected to vest. Costs
resulting from stock-based compensation are part of our compensation expense and
are included in the operating expense categories in our Statements of
Operations.
Impact
of Foreign Currency Fluctuations
The dollar cost of
our operations is heavily influenced by changes in the value of the dollar in
relation to the New Israeli Shekel (“NIS”), mostly due to the NIS-based salaries
of our Israel-based employees. Close to half of our operating expenses,
excluding stock-based compensation, are denominated in New Israel Shekels. We
enter into forward contracts to hedge much of our NIS-based expenses. Prior to
May 2009, these derivatives were not designated as hedging instruments under the
rules of ASC 815,
“Derivatives and Hedging”, and therefore, the net gains (losses) arising
from these derivatives were recognized in operating expenses as they occurred.
Starting May 2009, we designated all of our currency hedging activities as cash
flow hedges as they were all eligible. Thus, the changes in those hedges are
recorded as other comprehensive income (loss), and are reclassified to earnings
as the forward contracts mature or if, and to the extent that the hedging
relationship is deemed ineffective.
In the three months
ended June 30, 2010, compensation, excluding stock-based compensation
(thereafter, “Cash-Based Compensation”), to employees amounted to $2,126
thousand compared to $1,714 thousand during the same period in 2009, a net
increase of $412 thousand or 24%. Approximately $351 thousand of such increase
was due to increases in headcount and raises, while approximately $61 thousand
resulted from the weakening of the dollar as compared to the NIS.
In the six months
ended June 30, 2010, Cash-Based Compensation to employees amounted to $4,307
thousand compared to $3,442 thousand during the same period in 2009, a net
increase of $865 thousand or 25%. Approximately $675 thousand of such increase
was due to increases in headcount and raises, while approximately $190 thousand
resulted from the weakening of the dollar as compared to the NIS.
Our
period-over-period discussion regarding operating expenses includes the impact
of foreign currency on such expenses. If the dollar continues to fluctuate as
compared to the NIS, we will experience fluctuation in the dollar amount of our
NIS-based expenses.
Interest
Income (Expense), Net
Interest income
(expense), net, is comprised of interest income earned on cash, cash equivalents
and marketable securities, and interest expense on capital leases, transaction
costs we incurred in connection with the issuance of the Series B Warrants in
June 2009 and amortization of deferred costs we incurred in connection with the
issuance of the Series B Unit Warrant, in June 2008.
Other
Income (Expense), Net
Other income
(expense), net, is comprised of foreign currency gains and losses.
Gain
(Loss) Resulting from Fair Value Adjustment of Warrants
The Series A
Warrants, the Series B Warrants and the Series B Unit Warrant (prior to its
exercise in June 2009), which are components of transactions with Redpoint
Omega, L.P. and Redpoint Omega Associates, LLC (collectively, “Redpoint”) are
revalued each reporting date. Any change to their fair value is recorded as a
gain or loss in the Statement of Operations. Background regarding the
transaction with Redpoint follows.
Redpoint
Financings
On June 16,
2008, pursuant to a private placement of our securities, Redpoint purchased $6
million of our Series A Convertible Preferred Stock (60,000 shares),
initially convertible into 1,333,333 shares of common stock at a conversion
price of $4.50 per share, along with Common Stock Purchase Warrants exercisable
for 666,667 shares of common stock at an exercise price of $4.95 per share
(“Series A Warrants”). In conjunction therewith, Redpoint also received a
warrant, referred to as the “Series B Unit Warrant”, exercisable until
June 16, 2009, to purchase units of up to $7 million of Series B
Convertible Preferred Stock (70,000 shares) and Common Stock Purchase Warrants
exercisable for 636,364 shares of common stock (“Series B Warrants”). The
Series B Convertible Preferred Stock is initially convertible into
1,272,727 shares of common stock at an initial conversion price of $5.50 per
share. The Series B Warrants have an exercise price of $6.05 per
share. On June 10, 2009, Redpoint exercised the Series B Unit Warrant, in
full.
After deducting
placement agent fees and legal expenses, our net proceeds from the private
placement, in June 2008, were $5.38 million, while our net proceeds from the
exercise of the Series B Unit warrant, in June 2009, were $6.48 million. The
transaction that took place on June 16, 2008 is referred to as the “Series A
Financing”. The transaction that took place on June 10, 2009 is
referred to as the “Series B Financing”. The two transactions, in aggregate, are
collectively referred to as the “Redpoint Financings”. The Series A Convertible
Preferred Stock, the Series B Convertible Preferred Stock, the Series A Warrants
and the Series B Warrants are collectively referred to as the “Redpoint
Securities”.
The Series A
Convertible Preferred Stock has the rights and preferences set forth in our
Certificate of Designations, Number, Voting Powers, Preferences and Rights of
Series A Convertible Preferred Stock, which, amended our Amended and Restated
Certificate of Incorporation on June 16, 2008. The Series B Convertible
Preferred Stock has the rights and preferences set forth in the Company’s
Certificate of Designations, Number, Voting Powers, Preferences and Rights of
Series B Convertible Preferred Stock which amended the Company’s Amended and
Restated Certificate of Incorporation on June 9, 2009. For a detailed
description of the rights and preferences of the Series A Convertible Preferred
Stock and the Series B Convertible Preferred Stock, we refer you to the notes to
the financial statements contained in our annual report.
In connection with
the Redpoint Financings, Redpoint received and exercised their right to appoint
two individuals to serve as voting members of our board of
directors.
Income
Tax Benefit (Expense), Net
Our effective tax
rate differs from the statutory federal rate primarily due to differences
between income and expense recognition prescribed by income tax regulations and
Generally Accepted Accounting Principles. We utilize different methods and
useful lives for depreciating and amortizing property, equipment and intangible
assets and different methods and timing for certain expenses. Furthermore,
permanent differences arise from certain income and expense items recorded for
financial reporting purposes but not recognizable for income tax purposes, and
from certain income and expense items recorded for income tax purposes but not
recognizable for financial reporting purposes. In addition, our income tax
expense has been adjusted for the effect of state and local taxes and foreign
income from our wholly owned subsidiary. At June 30, 2010, our deferred tax
assets were almost entirely offset by a valuation allowance. While we had
taxable income in 2009 and the first half of 2010, we have experienced a
cumulative loss in recent years and our revenue model continues to be subject to
fluctuations and volatility that impact our ability to accurately forecast our
future expected profitability. We continue to view these factors as
significant pieces of negative evidence that make it difficult to support a
conclusion that expected taxable income from future operations justifies
recognition of deferred tax assets. Notwithstanding, we will continue to monitor
our profitability as well as the extent of fluctuations and volatility and their
impact on our revenue model. As more information accumulates and to the extent
that we continue to experience sustained profitability in future periods, we
will consider if and when a reversal will be appropriate.
Our Israeli
subsidiary had net income in 2009 and the six months ended June 30, 2010,
resulting from services we received from the Israeli subsidiary. The Israeli
subsidiary charges us for research & development services it provides us,
plus a profit margin, currently 8.3%. However, the subsidiary operates primarily
through plans recognized as “approved enterprises” (and a “beneficiary
enterprise” as later amended in amendment No. 60 to the Israeli Law for
Encouragement of Capital Investments - 1959) under Israeli law, which means that
income arising from the subsidiary’s approved research & development
activities, is subject to zero percent tax under the “alternative benefit” path
for a period of ten years. Currently, the subsidiary operates under two separate
“approved enterprise” plans, the first one which ended on December 31, 2009 and
the second ending December 31, 2014, and a “beneficiary enterprise” plan ending
December 31, 2017. After the close of the first approved enterprise
plan in 2009, the subsidiary will pay taxes at the regular corporate income tax
rate on the relative proportion of taxable income attributable to the first
approved enterprise plan.
Additionally, the
Israeli subsidiary provides Answers Corporation with certain management services
which it charges at cost plus a profit margin, currently 8.3%. Income derived
from such services is taxable at the Israeli corporate tax rate in effect at the
time (26% and 25% in 2009 and 2010, respectively).
In the event of
distributions by our Israeli subsidiary to Answers Corporation, the Israeli
subsidiary would have to pay a 10% corporate tax on the amount distributed, and
Answers Corporation would have to pay a 15% tax to be withheld at source on the
amounts of such distributions received. Furthermore, Answers Corporation would
be subject to a 35% federal tax on dividends received, before applying any
credits possibly allowed for NOL carryforwards or by the income tax treaty
between the United States and Israel. At present, we do not plan on having the
subsidiary distribute a dividend to Answers Corporation.
RESULTS
OF OPERATIONS
Revenue
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
2009
|
|
2010
|
|
Change
|
|
2009
|
|
2010
|
|
Change
|
|
($
- in thousands)
|
|
($
- in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
WikiAnswers
advertising revenue
|
3,400
|
|
3,992
|
|
592
|
|
6,562
|
|
8,481
|
|
1,919
|
ReferenceAnswers
advertising revenue
|
1,585
|
|
1,012
|
|
(573)
|
|
3,152
|
|
2,230
|
|
(922)
|
Licensing
revenue
|
19
|
|
16
|
|
(3)
|
|
36
|
|
35
|
|
(1)
|
|
5,004
|
|
5,020
|
|
16
|
|
9,750
|
|
10,746
|
|
996
|
Revenue increased
$16 thousand from $5,004 thousand for the three months ended June 30, 2009 to
$5,020 thousand for the same period in 2010. Revenue increased $996 thousand, or
10%, from $9,750 thousand for the six months ended June 30, 2009 to $10,746
thousand for the same period in 2010.
WikiAnswers’
advertising revenue in the three months ended June 30, 2010 increased $592
thousand, or 17%, compared to the same period in 2009, due to increased traffic,
offset to some extent by lower RPM. WikiAnswers’ average daily page views in the
three months ended June 30, 2010 were 8,578,000, an increase of 41% compared to
the average daily page views of 6,082,000 in the same period in 2009. We believe
that the traffic growth that WikiAnswers experienced in the three months ended
June 30, 2010 as compared to the same period in 2009 has been primarily due to
the dynamics of the property. As our database of questions and answers has
grown, we have drawn new traffic, primarily from SEO, which in turn has resulted
in the creation of new questions and answers, or new content, which in turn has
driven additional growth. The growth in revenue from the aforesaid traffic
growth was partially offset by a decrease in our RPM. The average WikiAnswers
RPM in the three months ended June 30, 2010 was $5.11, a decrease of 17%
compared to the average RPM of $6.14 in the same period in 2009. The decrease in
RPM resulted from a decrease in our CPC-based RPM, offset, to a minor extent, by
higher RPM from CPM ads. A very minor portion of the decline in CPC-based RPM is
attributable to the terms of our renewed GSA, which became effective in February
2010, while most of that decline is attributable to any or a combination of a
number of possible factors, including, changes we made to the site, changes that
Google may have made to the AdSense algorithm that connects advertisers and
publishers, click-through rates, the perceived quality of our content, and
changes in how advertisers may have managed their advertising costs in response
to uncertain economic conditions.
WikiAnswers’
advertising revenue in the six months ended June 30, 2010 increased $1,919
thousand, or 29%, compared to the same period in 2009, due to increased traffic,
offset to some extent by lower RPM. WikiAnswers average daily page views in the
six months ended June 30, 2010 were 8,785,000, an increase of 54% compared to
the average daily page views of 5,712,000 in the same period in 2009. We believe
that the traffic growth that WikiAnswers experienced in the six months ended
June 30, 2010 as compared to the same period in 2009 has been primarily due to
the dynamics of the property. As our database of questions and answers has
grown, we have drawn new traffic, primarily from SEO, which in turn has resulted
in the creation of new questions and answers, or new content, which in turn has
driven additional growth. The growth in revenue from the aforesaid traffic
growth was partially offset by a decrease in our RPM. The average WikiAnswers
RPM in the six months ended June 30, 2010 was $5.33, a decrease of 16% compared
to the average RPM of $6.35, in the same period in 2009. The decrease in RPM
resulted from a decrease in our CPC-based RPM, offset, to a minor extent, by
higher RPM from CPM ads. A very minor portion of the decline in
CPC-based RPM is attributable to the terms of our renewed GSA, which became
effective in February 2010, while most of that decline is attributable to any or
a combination of a number of possible factors, including, changes we made to the
site, changes that Google may have made to the AdSense algorithm that connects
advertisers and publishers, click-through rates, the perceived quality of our
content, and changes in how advertisers may have managed their advertising costs
in response to uncertain economic conditions.
ReferenceAnswers’
advertising revenue in the three months ended June 30, 2010 decreased $573
thousand, or 36%, compared to the same period in 2009, due to lower traffic and
RPM. ReferenceAnswers average daily page views in the three months ended June
30, 2010 were 2,399,000, 19% less than average daily page views of 2,965,000
during the same period in 2009. The loss of the Google definition link in the
fourth quarter of 2009 can be attributed as the primary cause of that decline.
ReferenceAnswers RPM in the three months ended June 30, 2010 was $4.64, a
decrease of 21%, compared to the RPM of $5.87, in the same period in 2009. The
decrease in RPM resulted from a decrease in our CPC-based RPM, offset, to a
minor extent, by higher RPM from CPM ads. We attribute the decline in CPC-based
RPM to the same factors that may have also played a role in determining
WikiAnswers’ CPC-based RPM, noted above in our WikiAnswers discussion, as well
as the terms of our renewed GSA. Since most of ReferenceAnswers revenue is
earned via AFS rather than AFC, it was impacted differently than WikiAnswers by
the GSA’s modified terms.
ReferenceAnswers’
advertising revenue in the six months ended June 30, 2010 decreased $922
thousand, or 29%, compared to the same period in 2009, due to lower traffic and
RPM. ReferenceAnswers average daily page views in the six months ended June 30,
2010 were 2,567,000, 14% less than average daily page views of 2,973,000 during
the same period in 2009. The loss of the Google definition link in the fourth
quarter of 2009 can be attributed as the cause of that decline. ReferenceAnswers
RPM in the six months ended June 30, 2010 was $4.80, a decrease of 18%, compared
to the RPM of $5.86 in the same period in 2009. The decrease in RPM resulted
from a decrease in our CPC-based RPM, offset, to a minor extent, by higher RPM
from CPM ads. We attribute the decline in CPC-based RPM to the same factors that
may have also played a role in determining WikiAnswers’ CPC-based RPM, noted
above in our WikiAnswers discussion, as well as the terms of our renewed GSA.
Since most of ReferenceAnswers revenue is earned via AFS rather than AFC, it was
impacted differently than WikiAnswers by the GSA’s modified terms.
As described in
further detail above, in September 2009, we announced the launch of the new
Answers.com, in recognition of our integration of WikiAnswers and
ReferenceAnswers. The product strategy guiding such integration was our desire
to give users a common address for the best answers to all types of questions –
be they community-generated from WikiAnswers, or editorially licensed from
ReferenceAnswers. In September 2009, we took our final step in this integration
by creating a new unified Answers.com home page and login, integrating features
from both properties, and making other changes in our user interface to
strengthen our positioning as having one dominant product and brand,
Answers.com, comprised by two properties, WikiAnswers and ReferenceAnswers.
Since the new unified Answers.com home page was designed to give prominence to
WikiAnswers and to encourage users to enter their questions into the site’s
query bar, beginning September 2009, visits to that page, which, at such time,
averaged approximately 175,000 per day, are being recorded as a WikiAnswers
page-view rather than a ReferenceAnswers page-view, contrary to the previous
practice.
WikiAnswers’ FIGS
language versions are still in their infancy and thus accounted for only $7
thousand and $13 thousand of our WikiAnswers revenue during the three and six
months ended June 30, 2010.
Traffic
and Revenue Discussion
The following table
illustrates the historical trends of our two Web properties’ revenues, average
daily page views and RPMs, by quarter, beginning the first quarter of
2009.
|
2009
|
|
2010
|
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
Q1
|
|
Q2
|
|
Ad
Revenue ($
- in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
WikiAnswers
|
3,162
|
|
3,400
|
|
3,422
|
|
4,470
|
|
4,489
|
|
3,992
|
|
ReferenceAnswers
|
1,567
|
|
1,585
|
|
1,548
|
|
1,530
|
|
1,218
|
|
1,012
|
|
Total
|
4,729
|
|
4,985
|
|
4,970
|
|
6,000
|
|
5,707
|
|
5,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WikiAnswers
|
67%
|
|
68%
|
|
69%
|
|
75%
|
|
79%
|
|
80%
|
|
ReferenceAnswers
|
33%
|
|
32%
|
|
31%
|
|
25%
|
|
21%
|
|
20%
|
|
Total
|
100%
|
|
100%
|
|
100%
|
|
100%
|
|
100%
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traffic
Average
Daily Page Views
|
|
|
|
|
|
|
|
|
|
|
|
WikiAnswers
|
5,337,000
|
|
6,082,000
|
|
6,336,000
|
|
8,199,000
|
|
8,995,000
|
|
8,578,000
|
|
ReferenceAnswers
|
2,982,000
|
|
2,965,000
|
|
2,857,000
|
|
2,737,000
|
|
2,737,000
|
|
2,399,000
|
|
Total
|
8,319,000
|
|
9,047,000
|
|
9,193,000
|
|
10,936,000
|
|
11,732,000
|
|
10,977,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WikiAnswers
|
64%
|
|
67%
|
|
69%
|
|
75%
|
|
77%
|
|
78%
|
|
ReferenceAnswers
|
36%
|
|
33%
|
|
31%
|
|
25%
|
|
23%
|
|
22%
|
|
Total
|
100%
|
|
100%
|
|
100%
|
|
100%
|
|
100%
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RPM
|
|
|
|
|
|
|
|
|
|
|
|
|
WikiAnswers
|
$6.58
|
|
$6.14
|
|
$5.87
|
|
$5.93
|
|
$5.55
|
|
$5.11
|
|
ReferenceAnswers
|
$5.84
|
|
$5.87
|
|
$5.89
|
|
$6.08
|
|
$4.94
|
|
$4.64
|
|
The traffic and RPM
trend discussion that follows pertains to our Answers.com English site and not
the FIGS sites that are currently in their infancy.
Since we purchased
WikiAnswers in November 2006, the Web property has grown significantly, both in
terms of traffic and revenue. We believe that the growth that WikiAnswers
experienced was primarily due to the dynamics of the property. As our database
of questions and answers grew, we drew new traffic, primarily from SEO, which in
turn resulted in the creation of new questions and answers, or new content,
which drove additional growth. However, WikiAnswers’ growth has, over time
decelerated. We are in the midst of many initiatives, including the development
of a robust reputation system intended to improve the quality of the content in
WikiAnswers, that we hope will enable us to at least slow our deceleration or,
better yet, accelerate our growth.
ReferenceAnswers
average daily page views in the three months ended June 30, 2010 were 19% lower
than the average daily page views for the same period in 2009. Although most of
that loss can be attributed to the loss of the Google definition link in the
fourth quarter of 2009, we estimate that part of the decline was not related to
the loss of the Google definition link. We are in the midst of many initiatives,
including adding more licensed text content and video content to
ReferenceAnswers, with the goal of returning this web property to traffic
growth.
ReferenceAnswers
and WikiAnswers RPM for July 2010 were approximately $5.15 and $4.55,
respectively. As noted earlier, 83% of our revenue in the three months ended
June 30, 2010 was earned via Google AdSense. We are currently searching for
additional monetization partners in the area of CPM ads, in an effort to reduce
our dependence on Google AdSense. Notwithstanding, we expect that for the
foreseeable future we will continue to be dependent on Google AdSense for the
majority of our revenue, thus, our RPM will mostly be a function of the revenue
we earn from Google AdSense. We renewed our GSA in October 2009, extending the
agreement through January 2012, at financial terms that are slightly less
favorable to our overall business than the terms we had for the two-year period
ending January 31, 2010, therefore, that event, in of
itself, resulted in a slightly lower Google AdSense RPM. However, we
believe that there are many other factors, any one of which or a combination
thereof, that may further impact our Google AdSense revenue, including changes
we make to the site, positioning of ads, click-through rates, the perceived
quality of our content, the geographic mix of our traffic, the growing
percentage of returning visitors and changes that Google may make to the
algorithm that connects advertisers and publishers. In addition, advertisers may
lower or increase their bids for keywords in response to how much they are able
to make per paid click. Finally, the increasing maturity of the online
advertising market and weak economic conditions could negatively affect the
growth rate of our RPM. As a result of the multiple possible factors, many of
which are not under our control, we cannot predict whether the RPM declines we
have generally seen since the beginning of 2009 will continue during the rest of
2010.
Costs
and Expenses
Cost
of Revenue
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
2009
|
|
2010
|
|
Change
|
|
2009
|
|
2010
|
|
Change
|
|
($
- in thousands)
|
|
($
- in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
revenue
|
1,166
|
|
1,315
|
|
149
|
|
2,225
|
|
2,752
|
|
527
|
Cost of revenue
increased $149 thousand, or 13%, from $1,166 thousand in the three months ended
June 30, 2009, to $1,315 thousand for the same period in 2010. The change in
cost of revenue was due primarily to the following factors: compensation costs,
excluding stock based compensation, increased $33 thousand due to increased
headcount and raises, data center costs and outside services increased $66
thousand and $11 thousand, respectively, and overhead expenses increased $18
thousand. Additionally, at the end of 2009 we started translating WikiAnswers
into FIGS language versions of WikiAnswers. Thus, we incurred translation
expenses of $49 thousand in the three months ended June 30, 2010, an expense we
did not incur during the same period in 2009. The aforesaid increases were
partially offset by decreases in traffic acquisition costs of $20 thousand, and
a decrease of $11 thousand in stock-based compensation.
Cost of revenue
increased $527 thousand, or 24%, from $2,225 thousand in the six months ended
June 30, 2009, to $2,752 thousand for the same period in 2010. The change in
cost of revenue was due primarily to the following factors: compensation costs,
excluding stock based compensation, increased $145 thousand due to increased
headcount and raises, data center costs and outside services
increased $197 thousand and $30 thousand, respectively, and overhead
expenses increased $47 thousand. Additionally, at the end of 2009 we
started translating WikiAnswers into FIGS language versions of WikiAnswers.
Thus, we incurred translation expenses of $300 thousand in the six months ended
June 30, 2010, an expense we did not incur during the same period in 2009. The
aforesaid increases were partially offset by decreases in content licensing,
recruiting fees, use taxes, amortization and traffic acquisition costs, which,
in aggregate, amounted to $167 thousand and a decrease of $17 thousand in
stock-based compensation.
Research
and Development Expenses
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30
|
|
2009
|
|
2010
|
|
Change
|
|
2009
|
|
2010
|
|
Change
|
|
($
- in thousands)
|
|
($
- in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and
development
|
817
|
|
1,140
|
|
323
|
|
1,690
|
|
2,201
|
|
511
|
Research and
development expenses increased $323 thousand, or 40%, from $817 thousand in the
three months ended June 30, 2009, to $1,140 thousand for the same period in
2010. The change in research and development expenses was due primarily to the
following factors: compensation related expenses, excluding stock based
compensation, increased $250 thousand, due to increased headcount and raises,
training and consulting expenses increased $52 thousand, and overhead expenses
increased $41 thousand. The aforesaid increases were partially offset by a
decrease of $20 thousand in stock-based compensation.
Research and
development expenses increased $511 thousand, or 30%, from $1,690 thousand in
the six months ended June 30, 2009, to $2,201 thousand for the same period in
2010. The change in research and development expenses was due primarily to the
following factors: compensation related expenses increased $426 thousand,
excluding stock based compensation, due to increased headcount and raises,
training and consulting expenses increased $52 thousand, and overhead expenses
increased $63 thousand. The aforesaid increases were partially offset by a
decrease of $30 thousand in stock-based compensation.
Community
Development and Marketing Expenses
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
2009
|
|
2010
|
|
Change
|
|
2009
|
|
2010
|
|
Change
|
|
($
- in thousands)
|
|
($
- in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Community
development and marketing
|
558
|
|
660
|
|
102
|
|
1,057
|
|
1,404
|
|
347
|
Community
development and marketing expenses increased $102 thousand, or 18%, from $558
thousand in the three months ended June 30, 2009, to $660 thousand, for the same
period in 2010. The primary factor that caused this increase was that
compensation related expenses, excluding stock based compensation, increased $99
thousand, due to increased headcount and raises. Stock based compensation
increased $5 thousand.
Community
development and marketing expenses increased $347 thousand, or 33%, from $1,057
thousand in the six months ended June 30, 2009, to $1,404 thousand, for the same
period in 2010. The primary factors that caused this increase was that
compensation related expenses, excluding stock based compensation, increased
$218 thousand, due to increased headcount and raises, and promotional and
marketing costs increased $95 thousand. Stock based compensation increased $6
thousand.
General
and Administrative Expenses
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
2009
|
|
2010
|
|
Change
|
|
2009
|
|
2010
|
|
Change
|
|
($
- in thousands)
|
|
($
- in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
General and
administrative
|
1,248
|
|
1,115
|
|
(133)
|
|
2,467
|
|
2,372
|
|
(95)
|
General and
administrative expenses decreased $133 thousand, or 11%, from $1,248 thousand in
the three months ended June 30, 2009, to $1,115 thousand for the same period in
2010. The change in general and administrative expenses was due primarily to the
following factors: Stock-based compensation decreased $73 thousand, investor
relations related expenses decreased $13 thousand, accounting and legal fees
decreased $22 thousand, travel decreased $27 thousand, and amortization of
intangible assets decreased $23 thousand, since a covenant not to compete
in connection with the acquisition of WikiAnswers was fully amortized in October
2009. The aforesaid decreases were partially offset by an increase of $30
thousand in compensation expense, excluding stock-based
compensation.
General and
administrative expenses decreased $95 thousand, or 4%, from $2,467 thousand in
the six months ended June 30, 2009, to $2,372 thousand for the same period in
2010. The change in general and administrative expenses was due primarily to the
following factors: Stock-based compensation decreased $132 thousand, accounting
and legal fees decreased $42 thousand, travel decreased $27 thousand, and
amortization of intangible assets decreased $46 thousand, since a WikiAnswers
covenant not to compete was fully amortized in October 2009. The aforesaid
decreases were partially offset by increases of $76 thousand and $50 thousand in
compensation expense, excluding stock-based compensation, and non-income related
taxes, respectively.
Interest
Income (Expense), Net
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
2009
|
|
2010
|
|
Change
|
|
2009
|
|
2010
|
|
Change
|
|
($
- in thousands)
|
|
($
- in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income (expense), net
|
(362)
|
|
13
|
|
375
|
|
(449)
|
|
24
|
|
473
|
Interest income
(expense), net decreased $375 thousand from $(362) thousand expense,
net, in the three months ended June 30, 2009 to $13 thousand income, net in the
same period in 2010, and decreased $473 thousand from $(449) thousand expense,
net, in the six months ended June 30, 2009 to $24 thousand income, net in the
same period in 2010. The change in interest income (expense), net,
resulted mostly from the following two matters: Firstly, in the three and six
months ended June 30, 2009, we recorded $76 thousand and $167 thousand of
amortization, respectively, relating to $363 thousand of transaction costs that
we incurred in connection with the issuance of the Series B Unit Warrant in June
2008, and which were fully amortized by the end of the second quarter of 2009.
Secondly, in the second quarter of 2009 we recorded $290 thousand transaction
costs that we incurred in connection with the issuance of the Series B Warrants
in June 2009.
Other
Income (Expense), Net
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
2009
|
|
2010
|
|
Change
|
|
2009
|
|
2010
|
|
Change
|
|
($
- in thousands)
|
|
($
- in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
(expense), net
|
(9)
|
|
12
|
|
21
|
|
6
|
|
4
|
|
(2)
|
Other income
(expense), net, changed $21 thousand, from $(9) thousand net expense in the
three months ended June 30, 2009, to $12 thousand net income in the same period
in 2010. Other income (expense), net, changed $2 thousand, from $6
thousand net income in the six months ended June 30, 2009, to $4 thousand net
income in the same period in 2010. Other income (expense), net, results from
foreign currency net gains and losses.
Gain
(Loss) Resulting from Fair Value Adjustments of Warrants
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
2009
|
|
2010
|
|
Change
|
|
2009
|
|
2010
|
|
Change
|
|
($
- in thousands)
|
|
($
- in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss)
resulting from fair value adjustment of warrants
|
(4,385)
|
|
1,468
|
|
5,853
|
|
(2,375)
|
|
2,083
|
|
4,458
|
The Series A
Warrants and Series B Warrants are revalued each reporting date, and any change
to their fair value is recorded in the statement of operations. The Warrant to
Purchase Units of Series B Preferred Stock and Warrants was, up to its exercise
in June 2009, also revalued each reporting period and the change in its fair
value was recorded in the statement of operations.
The primary reason
for the change in value of the aforesaid warrants is the market price of our
common stock on the reporting dates. An increase in the price of our common
stock on the reporting date, as compared to its price on the preceding reporting
date, increases the value of the warrants and thus results in a loss on our
statement of operations. Conversely, a decline in the price of our common stock
decreases the value of the warrants and thus results in a gain on our statement
of operations.
Income
Tax Expense, Net
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
2009
|
|
2010
|
|
Change
|
|
2009
|
|
2010
|
|
Change
|
|
($
- in thousands)
|
|
($
- in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax
expense, net
|
(78)
|
|
(160)
|
|
(82)
|
|
(72)
|
|
(251)
|
|
(179)
|
Income tax expense,
net, changed by $82 thousand, from $78 thousand in the three months ended June
30, 2009 to $160 thousand in the same period in 2010. The change in tax expense
was primarily the result of an increase of approximately $100 thousand in
unrecognized tax benefits compared to the same period last
year.
For the six months
ended June 30, 2009, Income tax expense, net, changed by $179 thousand, from $72
thousand to $251 thousand in the same period in 2010. The change in tax expense
was primarily the result of the increase in unrecognized tax benefits of
approximately $100 thousand, as well as an estimated increase of $41 thousand
for current Israeli income taxes due to the expiration of the first of the
approved enterprise programs of our Israeli subsidiary, and reversals in
deferred tax assets of approximately $39 thousand by our Israeli
subsidiary.
We had net
operating loss (“NOL”) carryforwards for federal income tax purposes of
approximately $53 million at December 31, 2009. The federal NOLs will expire if
not utilized on various dates from 2021 through 2028. Section 382 of the
Internal Revenue Code of 1986 (“Section 382”) generally imposes an annual
limitation on the amount of NOL carryforwards that may be used to offset taxable
income where a corporation has undergone significant changes in its stock
ownership. We estimate two ownership changes, as defined under Section 382, have
occurred, that would trigger this limitation. Based on our current estimates and
assumptions, as of December 31, 2009, we may use approximately $36 million of
our accumulated NOLs. The remaining approximate $17 million NOL is
available to offset taxable income in an amount of approximately $1.4
million per year. Any unused portion of the $1.4 million is available for use in
future years until such NOL is scheduled to expire. The Subsidiary has capital
loss carryforwards of approximately $790 thousand, which can be applied to
future capital gains for an unlimited period of time under current tax
rules.
We file federal
income tax returns in the U.S., as well as various state & local and foreign
jurisdictions tax returns. We are no longer subject to U.S. federal income tax
examinations by tax authorities for years prior to 2006. Our Israeli subsidiary
is no longer subject to foreign income tax examinations by tax authorities for
years prior to 2007 but is currently undergoing an audit by the Israeli tax
authorities for the tax years 2007 and 2008. While we have accrued certain
amounts in reference to those periods, as a settlement has not been reached
there is no certainty that amounts accrued will be the final
amounts.
LIQUIDITY
AND CAPITAL RESOURCES
Our principal
ongoing source of operating liquidity is the cash generated by our advertising
revenue. In addition, we are highly liquid due to the $11.9 million we raised
from the Redpoint Financings that took place in June 2008 and June
2009.
|
Six
Months Ended June 30,
|
|
2009
|
|
2010
|
|
($
- in thousands)
|
|
|
|
|
Net cash
provided by operating activities
|
3,374
|
|
3,063
|
Net cash used
in investing activities
|
(1,085)
|
|
(4,036)
|
Net cash
provided by (used in) financing activities
|
6,363
|
|
(372)
|
Operating
Activities
Despite a net loss
of $579 thousand in the six months ended June 30, 2009, the net cash provided by
operations was $3,374 thousand. The adjustments to reconcile the two amounts,
including changes to the balances of our various operating assets and
liabilities, are noted in detail on the accompanying statement of cash flows.
The largest reconciling items are the non-cash loss resulting from the fair
value adjustment of the Series A Warrants, Series B Warrants and warrants to
purchase units of Series B preferred stock and warrants of $2,375 thousand, and
stock-based compensation of $766 thousand.
Net income in the
six months ended June 30, 2010 was $3,877 thousand, and net cash provided by
operations was $3,063 thousand. The adjustments to reconcile the two amounts,
including changes to the balances of our various operating assets and
liabilities, are noted in detail on the accompanying statement of cash flows.
The largest reconciling items are the non-cash gain resulting from the fair
value adjustment of the warrants of $2,083 thousand, stock-based compensation of
$593 thousand, and depreciation and amortization of $611 thousand.
Investing
Activities
Net cash used in
investing activities of $1,085 thousand, in the six months ended June 30,
2009, is attributable to cash used for capital expenditures of $1,078 thousand,
and cash used to increase long-term deposits of $7 thousand. Capital
expenditures were higher than usual due the establishment of our second
colocation facility in the second quarter of 2009.
Net cash used in
investing activities of $4,186 thousand, in the six months ended June 30, 2010,
is almost entirely attributable to cash used to purchase marketable securities
of $3,516 thousand and capital expenditures of $511 thousand.
Financing
Activities
Net cash flow from
financing activities in the six months ended June 30, 2009 resulted almost
entirely from the Series B Financing.
Cash flow used in
financing activities of $372 thousand in the six months ended June 30, 2010,
stems from $390 thousand of dividend payments and a $41 thousand repayment of a
capital lease obligation, less $59 thousand of proceeds from the exercise of
stock options.
Future
Operations
Based on our
current cash and cash equivalents, marketable securities and expected cash flow
from operations, we believe we have sufficient cash and cash equivalents to meet
our working capital and operating requirements for at least the next twelve
months.
We assess
acquisition opportunities as they arise. Financing in excess of our current cash
and cash equivalents may be required if we decide to make additional
acquisitions. There can be no assurance, however, that any such opportunities
may arise, or that any such acquisitions may be consummated. Additional
financing may not be available on satisfactory terms when required. To the
extent that we raise additional funds by issuing equity securities, our
stockholders may experience significant dilution.
The Series A
Convertible Preferred Stock and the Series B Convertible Preferred Stock issued
in connection with the Redpoint Financings, contain redemption provisions which
allow the holders of a majority of the Series A Convertible Preferred Stock and
the Series B Convertible Preferred Stock to request redemption, at any time on
or after June 16, 2014, of all or any part of their stock.
OFF-BALANCE
SHEET ARRANGEMENTS
As of June 30,
2010, there were no off-balance sheet arrangements.
CRITICAL
ACCOUNTING ESTIMATES
While our
significant accounting policies are more fully described in the notes to our
audited consolidated financial statements for the years ended December 31,
2008 and 2009, and our unaudited financial statements for the three and six
months ended June 30, 2009 and 2010, we believe the following accounting
policies to be the most critical in understanding the judgments and estimates we
use in preparing our consolidated financial statements.
Goodwill,
Intangibles and Other Long-Lived Assets
We account for our
purchases of acquired companies in accordance with ASC 805, “Business
Combinations )formerly SFAS 141(, and for goodwill and other
identifiable definite and indefinite-lived acquired intangible assets in
accordance with ASC 350, “Intangibles
– Goodwill and Other” (formerly SFAS 142, “Goodwill
and Other Intangible Assets”). Additionally, we review our long-lived
assets for recoverability in accordance with ASC 360, “Property,
Plant and Equipment” (formerly SFAS 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets”).
The identification
and valuation of intangible assets and the determination of the estimated useful
lives at the time of acquisition are based on various valuation methodologies
including reviews of projected future cash flows. The use of alternative
estimates and assumptions could increase or decrease the estimated fair value of
our goodwill and other intangible assets, and potentially result in a different
impact to our results of operations. Further, changes in business strategy
and/or market conditions may significantly impact these judgments thereby
impacting the fair value of these assets, which could result in an impairment of
the goodwill and acquired intangible assets.
We evaluate our
long-lived tangible and intangible assets for impairment in accordance with
ASC 350, with the annual goodwill impairment testing date set at September
30. Further, in accordance with ASC 360 and ASC 350, we also evaluate our
long-lived tangible and intangible assets, respectively, for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. 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 assets exceeds the fair value of the assets. While we use
available information to prepare our estimates and to perform impairment
evaluations, the completion of annual impairment tests requires significant
management judgments and estimates.
As of June 30,
2010, we determined that there were no events or changes in circumstances
indicating that the carrying amount of our intangible and other long-lived
assets may not be recoverable; therefore, there was no need to evaluate the
recoverability or compute impairment of any of the aforesaid
assets.
Accounting
for Stock-based Compensation
We account for
stock-based awards under ASC 718, “Compensation
– Stock Compensation” (formerly SFAS 123R, “Share-Based
Payment”), which requires measurement of compensation cost for
stock-based awards at fair value on date of grant and recognition of
compensation over the service period awards are expected to vest. The estimation
of stock-based awards that will ultimately vest requires judgment, and to the
extent actual results differ from our estimates, such amounts will be recorded
as a cumulative adjustment in the period estimates are revised. We consider
various factors when estimating expected forfeitures, including historical
experience. Actual results may differ substantially from these
estimates.
We determine the
fair value of stock options granted to employees and directors using the
Black-Scholes valuation model, which requires significant assumptions regarding
the expected stock price volatility, the risk-free interest rate and the
dividend yield, and the estimated period of time option grants will be
outstanding before they are ultimately exercised. We estimate our expected stock
volatility based on our own historical stock volatility rates. Had we made
different assumptions about our stock price volatility or the estimated time
option and warrant grants will be outstanding before they are ultimately
exercised, the related stock based compensation expense, and our net income
(loss) and net earnings (loss) per share amounts could have been significantly
different than reported amounts.
Accounting
for Income Taxes
As part of the
process of preparing our consolidated financial statements, we are required to
estimate our income taxes in each of the jurisdictions in which we operate. This
process involves management estimating our actual current tax exposure together
with assessing temporary differences resulting from differing treatment of items
for tax and accounting purposes. These differences result in deferred tax assets
and liabilities, which are included within our consolidated balance sheet. We
must then assess the likelihood that our deferred tax assets will be recovered
from future taxable income and, to the extent we believe that recovery is not
more likely than not, we must establish a valuation allowance. Significant
management judgment is required in determining our provision for income taxes,
our deferred tax assets and liabilities and any valuation allowance recorded
against our net deferred tax assets. At June 30, 2010, we have fully offset our
U.S. net deferred tax asset with a valuation allowance. While we had
taxable income in 2009 and the first half of 2010, we have experienced a
cumulative loss in recent years and our revenue model continues to be subject to
fluctuations and volatility that impact our ability to accurately forecast our
future expected profitability. We continue to view these factors as
significant pieces of negative evidence that make it difficult to support a
conclusion that expected taxable income from future operations justifies
recognition of deferred tax assets. Notwithstanding, we will continue to monitor
our profitability as well as the extent of fluctuations and volatility and their
impact on our revenue model. As more information accumulates and to the extent
that we continue to experience sustained profitability in future periods, we
will consider if and when a reversal will be appropriate.
ASC 740, “Income
Taxes” (formerly FASB Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes — an Interpretation of FASB Statement
109”), prescribes how a company should recognize, measure, present and
disclose in its financial statements uncertain tax positions that the company
has taken or expects to take on a tax return. Additionally, for tax positions to
qualify for deferred tax benefit recognition under ASC 740, the position must
have at least a “more likely than not” chance of being sustained upon challenge
by the respective taxing authorities, and whether or not it means that criteria
is a matter if significant judgment.
We have not
provided U.S. and Israeli income taxes and withholding taxes on the
undistributed earnings of our Israeli subsidiary as of June 30, 2010 because we
intend to permanently reinvest such earnings outside the U.S. As of June 30,
2010, the cumulative amount of earnings upon which U.S. income taxes have not
been provided is approximately $4.8 million. We make an evaluation at the end of
each reporting period as to whether or not the undistributed earnings of our
foreign subsidiary are permanently reinvested. While, to date, we have concluded
that such undistributed earnings are permanently reinvested, facts and
circumstances may change in the future. Changes in facts and circumstances may
include a change in the estimated capital needs of our foreign subsidiaries, or
a change in our corporate liquidity requirements. Such changes could result in
our management determining that some or all of such undistributed earnings are
no longer permanently reinvested. In that event, we would be required to
recognize income tax liabilities on the assumption that our foreign
undistributed earnings will be distributed to the U.S. parent
company.
Accounting
for Redpoint Financings
In accounting for
the Series A Financing, the proceeds were first allocated to the Series B Unit
Warrant, which was classified as a current liability, based on its fair value,
and the residual amount was allocated among the Series A Convertible Preferred
Stock and the Series A Warrants based on their relative fair values, all in
accordance with the guidance in ASC 480, “Distinguishing
Liabilities from Equity” (formerly SFAS 150, “Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity”), ASC 815,
“Derivatives and Hedging” (formerly SFAS 133,
“Accounting for Derivative Instruments and Hedging Activities”) and
ASC 815–40, “Derivatives
and hedging – Contracts in Entity’s Own Equity” (formerly EITF 00-19,
”Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock”). The Series B Unit Warrant has been revalued at
each reporting date, since its inception until it was exercised on June 10,
2009. The Series A Convertible Preferred Stock has been classified as temporary
equity, in accordance with the guidance in ASC 480-10-S99A (formerly EITF
D-98, “Classification
and Measurement of Redeemable Securities”),and, prior to January 1, 2009,
the Series A Warrants were classified in permanent equity.
As a result of EITF
07-5, “Determining
Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own
Stock” (incorporated in ASC 815–40), effective January 1, 2009, and
due to the Down-Round Protection of the Series A Warrants, such warrants were,
effective January 1, 2009, separately accounted for as a derivative under
ASC 815 and were no longer recorded in equity but rather as a liability to
be revalued at each reporting date.
On June 10, 2009,
Redpoint exercised, in full, the Series B Unit Warrant, which was valued at
approximately $10.8 million on such date, thus extinguishing this liability from
our balance sheet through a corresponding increase to additional paid-in
capital. In accounting for the Series B Financing, the proceeds were first
allocated to the Series B Warrants which were classified as a liability, based
on its fair value, and the residual amount was allocated to the Series B
Convertible Preferred Stock, all in accordance with the guidance in
ASC 480,
ASC 815 and ASC 815-40. The Series B Convertible Preferred
Stock has been classified as temporary equity, in accordance with the guidance
in ASC 480-10-S99A.
We used various
valuation models and techniques to determine the individual values of the
various components in the Redpoint Financings, including Monte Carlo and
Black-Scholes. Inputs used in the models include our stock price and risk-free
interest rate. Additionally, significant assumptions used in applying these
techniques included redemption behavior estimates (including likelihood of
forced conversion, and timing of liquidation event if such event transpires) and
expected volatility of our stock price. While we believe we applied appropriate
judgment in the aforesaid assumptions, variations in judgment could have
materially affected the valuation results, and thus, our financial statements.
We continue to use the Black-Scholes valuation model in our periodic fair value
adjustments.
The Series A
Convertible Preferred Stock and the Series B Convertible Preferred Stock issued
as part of the Redpoint Financings contain an embedded conversion option which
could potentially require separate accounting under ASC 815. According to
ASC 815-15 (formerly paragraph 12(a) of SFAS 133), in order to determine
whether separate accounting is required, one has to evaluate whether the
economic characteristics and risks of the conversion option are closely related
to the host contract, and the nature of the host contract. We
exercised judgment and evaluated this matter in accordance with ASC 815-10
(formerly EITF Topic D-109, "Determining
the Nature of a Host Contract Related to a Hybrid Financial Instrument Issued in
the Form of a Share under FASB Statement No.133"). ASC 815-10
conveys the SEC staff's views on determining whether the characteristics of a
host contract in a hybrid financial instrument issued in the form of a share is
more akin to debt or equity. In evaluating an embedded derivative feature for
separation under ASC 815, the consideration of the economic characteristics
and risks of the host contract should not ignore the stated or implied
substantive terms and features of the hybrid financial instrument. We considered
various factors including redemption provisions, stated rate, voting rights,
whether returns are discretionary or mandatory, collateral requirements,
participation in residual earnings and liquidation preferences, in making our
determination that the host contract was more akin to equity. The most important
factor that led us to the conclusion that the host contract was more akin to
equity was the fact that the redemption feature was not mandatory or likely to
occur. Had we determined that the host contract was more akin to debt and not
equity it would have impacted the accounting for the host contract and the
embedded conversion option and could have had a material impact on our financial
statements.
QUARTERLY
RESULTS
The following table
sets forth our historical quarterly consolidated statement of operations data
and certain non-GAAP financial measures beginning with the first quarter of
2009. You should read this information together with our consolidated financial
statements and the related notes appearing elsewhere in our filings. The results
of historical periods are not necessarily indicative of the results of
operations for a full year or any future period.
|
Quarter
Ended
|
|
Mar.
31,
2009
|
|
Jun.
30,
2009
|
|
Sep.
30,
2009
|
|
Dec.
31, 2009
|
|
Mar.
31,
2010
|
|
Jun.
30,
2010
|
|
(in
thousands, except page views and RPM data)
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
revenue
|
$4,729
|
|
$4,985
|
|
4,970
|
|
$6,000
|
|
$5,707
|
|
$5,004
|
Answers
services licensing
|
18
|
|
19
|
|
17
|
|
17
|
|
19
|
|
16
|
|
4,747
|
|
5,004
|
|
4,987
|
|
6,017
|
|
5,726
|
|
5,020
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
revenue
|
1,059
|
|
1,166
|
|
1,264
|
|
1,307
|
|
1,437
|
|
1,315
|
Research and
development
|
873
|
|
817
|
|
921
|
|
997
|
|
1,061
|
|
1,140
|
Community
development and marketing
|
499
|
|
558
|
|
621
|
|
781
|
|
744
|
|
660
|
General and
administrative
|
1,219
|
|
1,248
|
|
1,201
|
|
1,231
|
|
1,257
|
|
1,115
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
3,650
|
|
3,789
|
|
4,007
|
|
4,316
|
|
4,499
|
|
4,230
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
1,097
|
|
1,215
|
|
980
|
|
1,701
|
|
1,227
|
|
790
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income (expense), net
|
(87)
|
|
(362)
|
|
4
|
|
5
|
|
11
|
|
13
|
Other income
(expense), net
|
15
|
|
(9)
|
|
(5)
|
|
5
|
|
(8)
|
|
12
|
Gain (loss)
resulting from fair value adjustment of warrants, net
|
2,010
|
|
(4,385)
|
|
(999)
|
|
740
|
|
615
|
|
1,468
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
3,035
|
|
(3,541)
|
|
(20)
|
|
2,451
|
|
1,845
|
|
2,283
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax
benefit (expense), net
|
6
|
|
(78)
|
|
(50)
|
|
(43)
|
|
(91)
|
|
(160)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
$3,041
|
|
$(3,619)
|
|
$(70)
|
|
$2,408
|
|
1,754
|
|
2,123
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Data:
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA(1)
|
$1,744
|
|
$1,895
|
|
$1,708
|
|
$2,389
|
|
$1,840
|
|
$1,381
|
|
|
|
|
|
|
|
|
|
|
|
|
WikiAnswers
average daily page views
|
5,337,000
|
|
6,082,000
|
|
6,336,000
|
|
8,199,000
|
|
8,995,000
|
|
8,578,000
|
ReferenceAnswers
average daily page views
|
2,982,000
|
|
2,965,000
|
|
2,857,000
|
|
2,737,000
|
|
2,737,000
|
|
2,399,000
|
|
|
|
|
|
|
|
|
|
|
|
|
WikiAnswers
RPM
|
$6.58
|
|
$6.14
|
|
$5.87
|
|
$5.93
|
|
$5.55
|
|
$5.11
|
ReferenceAnswers
RPM
|
$5.84
|
|
$5.87
|
|
$5.89
|
|
$6.08
|
|
$4.94
|
|
$4.64
|
(1) We
define Adjusted EBITDA as net earnings before interest, taxes, depreciation,
amortization, gain (loss) resulting from fair value adjustment of warrants,
stock-based compensation and foreign currency exchange rate
differences.
We use Adjusted
EBITDA as an additional measure of our overall performance for purposes of
business decision-making, developing budgets and managing expenditures. It is
useful because it removes the impact of our capital structure (interest expense
and gain (loss) resulting from fair value adjustment of warrants), asset base
(amortization and depreciation), stock-based compensation expenses, taxes, and
foreign currency exchange rate differences from our results of operations. We
believe that the presentation of Adjusted EBITDA provides useful information to
investors in their analysis of our results of operations for reasons similar to
the reasons why we find it useful and because these measures enhance their
overall understanding of the financial performance and prospects of our ongoing
business operations. By reporting Adjusted EBITDA, we provide a basis for
comparison of our business operations between current, past and future periods,
and peer companies in our industry.
More specifically,
we believe that removing these impacts is important for several
reasons:
·
|
Amortization
of Intangible Assets. Adjusted EBITDA disregards amortization of
intangible assets. Specifically, we exclude the amortization of intangible
assets resulting from the acquisition of WikiAnswers and other related
assets in November 2006. This acquisition resulted in operating expenses
that would not otherwise have been incurred. We believe that excluding
such expenses is significant to investors, due to the fact that they
derive from prior acquisition decisions and are not necessarily indicative
of future cash operating costs. In addition, we believe that the amount of
such expenses in any specific period may not directly correlate to the
underlying performance of our business operations. While we exclude the
aforesaid expenses from Adjusted EBITDA we do not exclude revenues derived
as a result of such acquisitions. The amount of revenue that resulted from
the acquisition of WikiAnswers and other related assets is disclosed in
the revenue discussion of this Item
2.
|
·
|
Stock-based
Compensation Expense. Adjusted EBITDA disregards expenses associated with
stock-based compensation, a non-cash expense arising from the grant of
stock-based awards to employees and directors. We believe that, because of
the variety of equity awards used by companies, the varying methodologies
for determining stock-based compensation expense, and the subjective
assumptions involved in those determinations, excluding stock-based
compensation from Adjusted EBITDA enhances the ability of management and
investors to compare financial results over multiple
periods.
|
·
|
Depreciation,
Interest, Gain (Loss) Resulting from Fair Value Adjustment of Warrants,
Taxes and Foreign Currency Exchange Rate Differences. We believe that,
excluding these items from the Adjusted EBITDA measure provides investors
with additional information to measure our performance, by excluding
potential differences caused by variations in capital structures
(affecting interest expense), asset composition, and tax
positions.
|
Adjusted EBITDA is
not a measure of liquidity or financial performance under generally accepted
accounting principles, or GAAP, and should not be considered in isolation from,
or as a substitute for, a measure of financial performance prepared in
accordance with GAAP. Investors are cautioned that there are inherent
limitations associated with the use of Adjusted EBITDA as an analytical tool.
Some of these limitations are:
·
|
Non-GAAP
financial measures are not based on a comprehensive set of accounting
rules or principles;
|
·
|
Many of the
adjustments to Adjusted EBITDA reflect the exclusion of items that are
recurring and will be reflected in our financial results for the
foreseeable future;
|
·
|
Other
companies, including other companies in our industry, may calculate
Adjusted EBITDA differently than us, thus limiting its usefulness as a
comparative tool;
|
·
|
Adjusted
EBITDA does not reflect the periodic costs of certain tangible and
intangible assets used in generating revenues in our
business;
|
·
|
Adjusted
EBITDA does not reflect interest income from our investments in cash and
investment securities;
|
·
|
Adjusted
EBITDA does not reflect gains and losses from foreign currency exchange
rate differences;
|
·
|
Adjusted
EBITDA does not reflect interest expense and other cost relating to
financing our business, including gains and losses resulting from fair
value adjustment of Redpoint Venture’s
warrants;
|
·
|
Adjusted
EBITDA excludes taxes, which are an integral cost of doing
business; and
|
·
|
Because
Adjusted EBITDA does not include stock-based compensation, it does not
reflect the cost of granting employees equity awards, a key factor in
management’s ability to hire and retain
employees.
|
We compensate for
these limitations by providing specific information in the reconciliation to the
GAAP amounts excluded from Adjusted EBITDA, as follows:
|
Quarter
Ended
|
|
Mar. 31,
2009
|
|
Jun. 30,
2009
|
|
Sep. 30,
2009
|
|
Dec. 31,
2009
|
|
Mar. 31,
2010
|
|
Jun. 30,
2010
|
|
($
- in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
$3,041
|
|
$(3,619)
|
|
$(70)
|
|
$2,408
|
|
$1,754
|
|
$2,123
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
(income) expense, net
|
87
|
|
362
|
|
(4)
|
|
(5)
|
|
(11)
|
|
(13)
|
Foreign
currency (gains) losses
|
(15)
|
|
9
|
|
5
|
|
(5)
|
|
8
|
|
(12)
|
Income tax
(benefit) expense, net
|
(6)
|
|
78
|
|
50
|
|
43
|
|
91
|
|
160
|
Depreciation
and amortization
|
261
|
|
299
|
|
328
|
|
302
|
|
300
|
|
311
|
Stock-based
compensation
|
386
|
|
381
|
|
400
|
|
386
|
|
313
|
|
280
|
(Gain) loss
resulting from fair value adjustment of warrants
|
(2,010)
|
|
4,385
|
|
999
|
|
(740)
|
|
(615)
|
|
(1,468)
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA
|
$1,744
|
|
$1,895
|
|
$1,708
|
|
$2,389
|
|
$1,840
|
|
$1,381
|
Our
Outlook
We see our business
consisting of core
platform plus product
extensions. We plan to focus
on our core platform and product extensions for the remainder of 2010 and
2011.
The core platform
is Answers.com in English, comprised of WikiAnswers and ReferenceAnswers. We
will continue to invest resources in our core platform in areas such as content
quality, maintaining and improving search engine optimization, performance,
scalability, and usability. We are also investing in the creation of an
Application Programmer’s Interface in order to allow for the design of future
product extensions and functionalities originating from third
parties.
In particular, we
see content quality as the single biggest opportunity and
challenge of WikiAnswers. The essential driving force behind the growth
of our traffic has been the expansion of our database of questions and answers,
and the rankings that those questions and answers receive from search engines.
Content quality plays a crucial role in our search engine rankings, as well as
user experience. Our single most important quality initiative, which is
currently in development, is our Reputation Management System, or “RMS”. The
goal of RMS will be to measure and rate the trustworthiness of each contributor,
and each question and each answer, thus, dynamically empowering the best
contributors by automatically granting and revoking community-related
permissions. We view RMS as potentially being a key factor in driving future
traffic, growth and revenue, however, we do not expect it to contribute
significantly to traffic or revenue in 2010.
In addition to the
FIGS product extension which has already commenced, there are three additional
product extensions areas that we are planning in the realm of mobile,
social media and video. Users are not always in front of a desktop or laptop
when they need answers, and market research, as well as recent announcements by
Apple, Google and others, point to the expected growth of handheld Internet
access devices. We think that mobile Answers.com access could add usage, greater
engagement, and brand recognition. In terms of connecting more aggressively to
social media, we’ve taken first steps, in the form of our Facebook Connect
solution announced in January 2010, which allows users to log into Answers.com
using their Facebook, Twitter, Yahoo or Google identity. In April 2010 we
introduced an alpha Twitter feature that delivers instant answers to users who
tweet their Twitter questions to @AnswersDotCom or include
the hashtag #AnswersDotCom. Answers.com then searches for a good match and
offers a reply with a snippet and link to the full answer, if available. Our
goal is to further address the social answers space by more tightly integrating
the question-answering process with popular social networks. Lastly, we recently
introduced licensed premium videos to Answers.com.
Based on an
evaluation of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934, as amended) required by paragraph (b) of Rule 13a-15 or
Rule 15d-15, as of June 30, 2010, our Chief Executive Officer and Principal
Financial Officer have concluded that our disclosure controls and procedures
were effective in ensuring that information required to be disclosed by us in
the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Commission’s rules and forms. Our Chief Executive Officer and Principal
Financial Officer also concluded that, as of June 30, 2010, our disclosure
controls and procedures were effective in ensuring that information required to
be disclosed by us in the reports that we file or submit under the Exchange Act
is accumulated and communicated to our management, including our Chief Executive
Officer and Principal Financial Officer, to allow timely decisions regarding
required disclosure.
During the three
months ended June 30, 2010, there were no changes in our internal control over
financial reporting identified in connection with the evaluation required by
paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II. OTHER INFORMATION
We are not
currently involved in any legal proceedings. However, from time to time, we may
receive various legal claims incidental to our normal business activities, such
as intellectual property infringement claims and claims of defamation and
invasion of privacy. Although the results of claims cannot be predicted with
certainty, we believe the final outcome of such matters will not have a material
adverse effect on our financial position, results of operations, or cash flows.
Regardless of the outcome, litigation can have an adverse impact on us because
of defense costs, diversion of management resources, and other factors. In
addition, it is possible that an unfavorable resolution of any proceeding could
in the future materially and adversely affect our financial position, results of
operations, or cash flows.
N/A
Pursuant to the
requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
ANSWERS
CORPORATION
|
|
(Registrant)
|
|
|
|
Date: August
11, 2010
|
By:
|
/s/ Robert S.
Rosenschein
|
|
|
Robert S.
Rosenschein
|
|
|
Chief
Executive Officer
|
|
|
|
Date: August
11, 2010
|
By:
|
/s/ Steven
Steinberg
|
|
|
Steven
Steinberg
|
|
|
Chief
Financial Officer
|
|
|
(Principal
Financial Officer)
|