FINDEX COM INC - Annual Report: 2008 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the
fiscal year ended December 31, 2008
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the
transition period for ________________________ to
__________________________
Commission
file number: 0-29963
FINDEX.COM,
INC.
(Exact
name of registrant as specified in its charter)
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Nevada
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88-0379462
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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620 North 129th Street, Omaha, Nebraska
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68154
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(Address
of principal executive offices)
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(Zip
Code)
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(402)
333-1900
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par
value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
[ ] No [X]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
[ ] No [X]
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of the registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [_]
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.
Large accelerated filer [_]
Accelerated filer [_]
Non-accelerated filer [_] (Do not check if a smaller
reporting company) Smaller reporting company [X]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes [_] No [X]
As
of April 14,
2009,
the aggregate market value of the voting
and non-voting common equity held by non-affiliates computed by reference to the
average of the closing bid and asked prices on such date was approximately $512,000.
APPLICABLE
ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes [_] No
[_]
APPLICABLE
ONLY TO CORPORATE REGISTRANTS
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:
At April 14,
2009,
the registrant had outstanding 59,572,725
shares of common stock, of which there is only a single
class.
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SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
annual report on Form 10-K, press releases and certain information provided
periodically in writing or verbally by our officers or our agents contain
statements which constitute forward-looking statements. The words “may”,
“would”, “could”, “will”, “expect”, “estimate”, “anticipate”, “believe”,
“intend”, “plan”, “goal”, and similar expressions and variations thereof are
intended to specifically identify forward-looking statements. These
statements appear in a number of places in this Form 10-K and include all
statements that are not statements of historical fact regarding the intent,
belief or current expectations of us, our directors or our officers, with
respect to, among other things: (i) our liquidity and capital resources, (ii)
our financing opportunities and plans, (iii) our ability to attract customers to
generate revenues, (iv) competition in our business segment, (v) market and
other trends affecting our future financial condition or results of operations,
(vi) our growth strategy and operating strategy, and (vii) the declaration
and/or payment of dividends.
Investors
and prospective investors are cautioned that any such forward-looking statements
are not guarantees of future performance and involve risks and uncertainties,
and that actual results may differ materially from those projected in the
forward-looking statements as a result of various factors. Factors that might
cause such differences include, among others, those set forth in Part II, Item 7
of this annual report on Form 10-K, entitled “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”, and including
without limitation the “Risk Factors” section contained in Part I, Item
1A. Except as required by law, we undertake no obligation to update
any of the forward-looking statements in this annual report on Form 10-K after
the date hereof.
OVERVIEW
We
develop, publish, market, and distribute and directly sell consumer and business
software products for PC, Macintosh®
and Mobile devices. We develop our software products through in-house
initiatives supplemented by outside developers. We market and distribute our
software products principally through direct marketing and Internet sales
programs, but also through retailers and distributors.
We were
incorporated in the State of Nevada on November 7, 1997 as EJH Entertainment,
Inc. On December 4, 1997, a predecessor corporation with the same name as our
own but domiciled in Idaho was merged with and into us. Although the predecessor
Idaho corporation was without material assets or operations as of the time of
the merger, since being organized in 1968, it had historically been involved in
mining and entertainment businesses unrelated to our current
business.
Beginning
in 1997, and although we were not then a reporting company under the Securities
Exchange Act, our common stock was quoted on the OTC Bulletin Board (originally
under the symbol “TIXX”, which was later changed to “TIXXD”). On May
13, 1999, we changed our name to FINdex.com, Inc. On March 7, 2000,
in an effort to satisfy a newly imposed NASD Rule eligibility requirement that
companies quoted on the OTC Bulletin Board be fully reporting under the
Securities Exchange Act (thereby requiring recently audited financial
statements) and current in their filing obligations, we acquired, as part of a
share exchange in which we issued 150,000 shares of our common stock, all of the
outstanding capital stock of Reagan Holdings, Inc., a Delaware
corporation. At the time of this transaction, Reagan Holdings was
subject to the requirements of having to file reports pursuant to Section 13 of
the Securities Exchange Act, had recently audited financial statements and was
current in its reporting obligations. Having no operations,
employees, revenues or other business plan at the time, however, it was a public
shell company. As a result of this transaction, Reagan Holdings, Inc.
became our wholly owned subsidiary and we became the successor issuer to Reagan
Holdings for reporting purposes pursuant to Rule 12g-3 of the Securities
Exchange Act. Shortly thereafter, we changed our stock symbol to
“FIND”. Though it does not currently have any operations, employees,
or revenues, Reagan Holdings remains our wholly owned subsidiary.
In
addition to Reagan Holdings, we also have one other wholly owned subsidiary,
Findex.com, Inc. (i.e.
the same name as our own), a Delaware corporation. Like Reagan
Holdings, this entity, too, does not currently have any operations, employees,
or revenues. This subsidiary resulted from an acquisition on April
30, 1999 pursuant to which we acquired all of the issued and outstanding capital
stock of FINdex Acquisition Corp., a Delaware corporation, from its then
stockholders in exchange for 4,700,000 shares of our common stock, which,
immediately following the transaction, represented 55% of our total outstanding
common stock. Our purpose for this acquisition was to broaden our
then-existing stockholder base, an important factor in our effort to develop a
strong market for our common stock. On May 12, 1999, in exchange for
the issuance of 457,625 shares of FINdex Acquisition Corp. common stock,
FINdex.com, Inc., another Delaware corporation (originally incorporated in
December 1995 as FinSource, Ltd.), was merged with and into FINdex Acquisition
Corp., with FINdex Acquisition Corp. remaining as the surviving
entity. Our purpose for this merger was to acquire a proprietary
financial information search engine for the Internet which was to serve as the
cornerstone for a Web-based development-stage business, but which has since been
abandoned. As part of the certificate of merger relating to this
transaction, FINdex Acquisition Corp. changed its name to FINdex.com,
Inc. We currently own 4,700,000 shares of FINdex.com, Inc. (the
Delaware corporation), representing 100% of its total outstanding common
stock.
STRATEGY
We are
currently in the early stages of a defining transformative period in our
development. In recent years, we have come to be recognized as a
consumer desktop software company that serves a demographic defined largely by
an interest in Christianity and faith-based “inspirational”
values. The nature of our products historically, and the fact that
our product lines have not extended materially beyond the boundaries of this
affinity group, have fostered this perception. Indeed, as the
publisher of one of the industry-leading Bible study desktop software products,
QuickVerse®,
we are known to many users of that product only as “QuickVerse”, not
Findex. While we believe that the QuickVerse®
brand is among our most valuable assets, and we greatly value the goodwill that
our reputation in this regard has engendered, we also believe that working to
expand that reputation into one which is more closely associated with providing
high quality branded software and content products generally – and ones that
extend across both consumer and business segments – will afford us significantly
greater opportunities in both the near and long term to steadily increase
revenues and earnings, and, ultimately, to enhance shareholder
value. We believe, moreover, that coupling this strategic
diversification with a commitment to an increasing reliance on a sales and
distribution model through which our products are sold on a subscription basis
and can be purchased and downloaded directly from us online will be instrumental
in furthering these financial objectives. Consequently, while we
expect to continue for the indefinite future to invest substantially in the
growth and development of our existing primary software titles and content, we
also expect as we go forward to invest substantially in not only building a
significantly more diverse line of product titles, but also in building our
technology platform and infrastructure so as to enable our evolution over time
into a principally Webcentric provider of software solutions, content, and
online products.
As part
of that objective, we acquired FormTool.com and the FormTool®
line of products in February 2008. In September 2008, we re-launched
the FormTool.com website as an online marketplace for purchasing the
FormTool®
line of form creation and form filler products, and also a one-stop shop for
finding, purchasing and downloading customizable forms for a wide range of
business and consumer needs. Our model includes the ability to
purchase forms on an individual basis, in bulk packs, or on a subscription
basis.
PRODUCT
LINE DEVELOPMENT
We plan
for the continued broadening of our product lines through the following several
strategies:
Creating
and Maintaining Diversity in Our Product Titles, Platforms and Market
Demographic
We are
committed to creating and maintaining a diversified mix of titles to mitigate
our operating risks and to reach as broad a market as possible while maximizing
unit sales volume. In this regard, we strive to develop and publish titles that
span a wide range of categories and subjects, and that are available for use on
multiple platforms. We use a formal control process for the
selection, development, production, and quality control of our titles and title
versions. We apply this process to products under development with external, as
well as internal, resources. This control process includes upfront concept
evaluation as well as in-depth reviews of each project on numerous levels and at
various intervals during the development process by a team that includes our
senior management and a number of our key technical, marketing and product
development personnel. There are a number of factors that we consider when
determining the appropriate platform for each of our titles and title versions,
including, among others, economic cost, the platform’s user demographics, and
the competitive landscape at the time of a title’s (or title version’s)
release.
Creating,
Acquiring and Maintaining Strong Brands
We
attempt to focus our development and publishing activities principally around
software products that are, or have the potential to become, titles possessing
sustainable consumer or business appeal and brand recognition. We are also in
continual pursuit of both licensing opportunities with respect to software
titles and title versions as well as corporate acquisition opportunities, in
each case where we determine such opportunities offer attractive returns on
capital investment and that may additionally provide strategic value to our
existing product lines in terms of cross-marketing opportunities. As
part of this initiative, we may acquire businesses that (i) only recently
commenced operations, (ii) are development-stage enterprises in need of
additional funds to expand into new products or markets, or (iii) are
established businesses that may be experiencing financial or operating
difficulties and need additional capital.
PRODUCT
DEVELOPMENT
We are
committed to the ongoing development of our existing software as well as the
development of new software titles and title versions. Our product
development methodology is modeled around elements of the consumer packaged
goods and software industry. Within this model, our management
assesses the current market and establishes a direction for each of our
products, while key personnel monitor quality, delivery schedules, development
milestones and budget. Prior to final approval, whether developed internally or
externally by our third-party developers, we test all new titles and title
versions for bugs.
The
manufacturing time and gross margin percentages for each of our products can
vary significantly from platform to platform. For each of our
products we establish and periodically review an individual product development
timeline and expenditure budget, taking into consideration, among others, the
following business factors:
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prior
year or season selling rates for existing and competitive
products;
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known
or estimated growth rates for existing and competitive
products;
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new
market opportunities for products, product categories, or product
platforms;
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competitive
products and known competitive strategies;
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general
consumer market and consumer economic sentiments including past, present,
and projected future conditions and/or events;
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technological
changes, improvements, new platforms, and platform market share
shifts;
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general
distribution channels and customer feedback;
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current
and perceived corporate cash flow;
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availability
and limitations related to knowledgeable/expert talent and workforce;
and
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known
or projected risks associate with each of these
factors.
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We
develop our titles and title versions using a strategic combination of our
internal development group and external, independently contracted developers, a
team of which are located in the Russian Federation and several others of which
are located in the United States, India, and Ghana.
We strive
to provide our in-house team the independence and flexibility needed to foster
creativity and teamwork. Employing an in-house development team provides us with
the following advantages:
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our
developers work collaboratively, sharing development techniques, software
tools, software engines and useful experience, to form a strong collective
and creative environment;
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the
ability to re-focus efforts quickly to meet the changing needs of key
projects;
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more
control over product quality, scheduling and costs; and
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our
developers are not subject to the competing needs of other software
publishers.
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We
maintain an in-house development team in Naperville, Illinois, and we also
maintain development and technical staff at our Omaha, Nebraska
headquarters.
We select
our external developers based on their track record and expertise in producing
titles and title versions within certain categories. This selection process
allows us to strengthen and leverage the particular expertise of our internal
and external development resources, as well as to scale up and down as
necessary, to maximize the productivity of our development budget.
Our total
product development costs incurred during the years ended December 31, 2008 and
2007, were approximately $494,000 and approximately $421,000, respectively, of
which capitalized costs accounted for approximately $257,000 and approximately
$282,000, respectively, and expensed costs accounted for $237,000 and
approximately $139,000, respectively.
OUR
PRODUCTS
Faith-Based
Software
Bible
Study
For the
fiscal year ended December 31, 2008, approximately 86% of our revenues were
derived from sales of our flagship product, QuickVerse®,
an industry-leading Bible-study software now in its 20th year
and 13th
version. Originally introduced into the market in 1989, QuickVerse®
has sold over one million copies since its introduction and is currently
believed by us to be the market leader in its category.
QuickVerse®
simplifies biblical research, allowing users to view multiple reference
materials, including Bibles, dictionaries, commentaries and encyclopedias,
side-by-side on the computer screen. A built-in “QuickSearch” feature enables
the user to highlight a word or Bible verse and find all of its occurrences in a
particular text. Advanced search options enable users to search by word, phrase
or verse across multiple books, offering search options that locate all forms of
a given search word without the need for embedded symbols. For example, a search
for the word “rise”, will yield the words “arise”, “risen”, “rising”, and
“rise”.
QuickVerse®
2009, our latest version, is currently available in six CD-Rom editions for PC
with a range in retail price from $39.95 to $799.95. Each edition and platform
of QuickVerse®
contains several Bible translations (e.g., the King James Version,
the American Standard Version, etc.) along with numerous reference titles (e.g., dictionaries,
commentaries, encyclopedias, etc.). Furthermore, each QuickVerse®
purchase includes access to additional books and content, which can be unlocked
or downloaded and made accessible for an additional fee.
QuickVerse®
Mobile is compatible on both Pocket PC®
and Palm OS®
operating systems. QuickVerse®
4.0 Mobile, our latest version, is currently available in two editions as a
download and in CD-Rom with a range in retail price from $39.95 to
$69.95. QuickVerse®
Macintosh is compatible with Macintosh®
OS X 10.3 or higher operating systems. QuickVerse®
2.0 Macintosh, our latest version, is currently available in three editions with
a range in retail price from $59.95 to $349.95. QuickVerse®
Mobile and QuickVerse®
Macintosh each provide the same simplified access and many of the personal Bible
study features found in the QuickVerse®
PC versions.
QuickVerse®
customers include (i) individuals devoted to or otherwise interested in studying
Christianity and (ii) religious and other spiritual organizations including
schools, churches and other faith-based ministries.
For our
QuickVerse®
customers, we also develop and market certain other Bible study software
packages such as the Vine’s® Complete
Collection, the Nelson’s®
Reference Collection, the Warren Wiersbe®
Collection, the John MacArthur®
Collection and many others. These titles currently range in retail
price from $19.95 to $249.95 per unit.
In
addition, our website, www.quickverse.com,
offers additional content which can be downloaded into the QuickVerse® software
for immediate use. The content offered includes over 180 individual
books and/or collections with a range in retail price from $4.95 to
$249.95.
Other
Faith-Based Products
Our
faith-based software titles and title versions also include those categorized as
Print and Graphic, Financial, Pastoral, Children’s and Language products. These
categories include titles such as ClickArt Christian Publishing® Suite
III, Sermon Builder®
5.0, Ministry Notebook®
2.0, Jonah and the Whale®, Greek
Tutor® and
Hebrew Tutor®. These
titles currently range in retail price from $5.97 to $69.95. For the
fiscal year ended December 31, 2008, approximately 11% or our revenues were
derived from sales of our other faith-based software titles.
Form
Creation
Our form
creation titles currently consist of the FormTool® software
product line. On February 25, 2008 we acquired the FormTool® software
product line from ORG Professional, LLC. FormTool.com and the
FormTool® product
line offers quality, professionally designed forms for business, accounting,
construction, sales, real estate, human resource and personal organization
needs. FormTool® 7.0, our
latest version, is currently available in four editions that range in retail
price from $29.99 to $199.99. Furthermore, in September 2008, we
re-launched the FormTool.com website as an online marketplace for purchasing the
FormTool® product
line, as well as a “one-stop” shop for finding, purchasing, and downloading
customizable forms for a wide range of business and consumer needs. For the year
ended December 31, 2008, approximately 3% of our revenues were derived from
sales of FormTool® products
and forms.
OUR
MARKET
Generally
While,
historically, we have defined ourselves by virtue of the niche faith-based
market we have been focused upon serving, we expect that, going forward, our
markets will broaden significantly as we introduce products and content with
much wider appeal and which serve not only consumers, but also businesses and
other organizations more generally. Taking a somewhat opportunistic
approach to our future growth in this regard, and recognizing consequently that
future products and content are likely to be aimed at target demographics that
we cannot reasonably predict, an analysis of our market is only meaningful as it
relates to our current products and product lines.
Faith-Based
Products
According
to a Gallup poll released in January 2006, 50% of Americans identified
themselves as Protestant, while 25% identified themselves as Catholic, and 13%
identified themselves as “Other Christian”. According to the same
survey, 59% of Americans say that religion is “very” important to them in their
own lives, and another 25% say that religion is “fairly” important in their
lives. Additionally, 41% describe themselves as “born-again” or “evangelical
Christian”.
According
to the most recent survey released in July 2006 by the Christian Bookseller’s
Association (“CBA”), Christian-product sales for the year 2004 were $4.34
billion. The survey also revealed that $2.3 billion of the $4.34
billion total was sold through Christian retail, with $1.3 billion sold through
general retail, and $694 million sold direct-to-consumer, and through ministry
sales channels. The 2,055-store CBA segment includes several different chains,
Family Christian Stores being the largest with over 300 stores. As
faith-based retailing increases, secular stores are offering more faith-based
products as evidenced by the $1.3 billion sales figure in 2004 as reported by
the CBA. It is this faith-based demographic that we seek to target.
Form
Creation Products
Given
that most businesses, large and small, routinely use forms of some sort or
another, we believe the FormTool® line of
products has broad applicability across the entire business spectrum, regardless
of business size or scope. Therefore, it is difficult for us to
quantify the potential market size for the FormTool® line of
products.
MARKETING
AND ADVERTISING
In
developing a marketing strategy for our products, we seek brands or titles that
we believe will appeal to the interests of our target users. We strive to create
marketing campaigns which are consistent with this strategy and generally market
our software through:
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our
Websites (www.quickverse.com/www.formtool.com) and the Internet sites of
others;
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print
advertising;
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opt-in
e-mail campaigns;
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affiliate
merchants;
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product
sampling through trial and limited content software
versions;
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in-store
promotions, displays and retailer assisted co-operative
advertising;
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publicity
activities; and
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trade
shows.
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SALES
Generally
Our
approach to sales methodology depends in all cases on the specific products
and/or product lines involved, and is dictated to a significant degree by
historical results obtained. In general, we seek to adopt the
lowest-cost sales methodologies that enable us to achieve satisfactory unit
volume and corresponding revenue levels. We also seek to become
increasingly less reliant over time on retail distribution and increasingly more
reliant upon direct sales, including most notably those realized through online
channels.
Direct
Marketing / Online Sales
Direct
sales accounted for approximately 57% of our 2008 fiscal year revenue and
approximately 54% of our 2007 fiscal year revenue. Over the past six years, we
have devoted significant and increasing resources to the development of our
direct-marketing program. Through this program, we market our products directly
to consumers through a combination of direct-mailings and opt-in e-mailings of
our product title catalogs and brochures. An important aspect of this initiative
is our online sales. We maintain a full-service online store with many of the
kinds of features and capabilities that online shoppers have come to expect from
cutting-edge Internet retailers. Furthermore, we have made technological
advancements to our Website in order to provide more downloadable products
and/or content. We are currently marketing our products online
through multiple sources including our own www.quickverse.com and
www.formtool.com Internet Websites, other Internet Websites such as
www.amazon.com, as well as several widely used search engines such as
Google® and
Yahoo®. Furthermore,
in October of 2005 we joined an affiliate network through www.shareasale.com and
have gained approximately 570 affiliate merchants that market our products
through their Websites.
We
anticipate online orders will continue to increase as we expand our software and
content product base and enhance our marketing efforts in this
area.
Retail
Sales
Retail
sales accounted for approximately 43% of our 2008 fiscal year revenue and
approximately 46% of our 2007 fiscal year revenue. Our domestic retail sales
involve thousands of retail stores across the United States through which our
products are sold, many of which are members of the CBA. These stores vary from
small, family-owned Christian bookstores to large chain bookstores such as
LifeWay Christian Stores and Family Christian Stores®. We
face the continuing challenge of reaching these stores on a consistent basis to
keep them informed of new releases, promotional offers, etc. In
addition to advertising in trade publications and maintaining visibility at CBA
trade shows and events, we believe that it is critical to be in direct personal
contact with each customer routinely, in order to maintain or increase our
market position. Towards that end, our sales representatives are
expected to contact each of our customers as well as each of the independent
stores that are not yet our customers regularly and present them with the latest
in our products and promotions. We believe our personalized approach to
marketing provides us with an edge over our competition, which we believe rely
predominantly on advertising to maintain and develop their relations with CBA
customers.
The
secular retail market includes chains such as Best Buy™, Sam’s Club, Frys,
OfficeMax™ and Apple® Stores.
We have also partnered with Avanquest USA, a major publisher and distributor of
software in the secular market, to distribute our products.
International
Sales
International
sales accounted for approximately 2% of our 2008 fiscal year revenue and
approximately 3% of our 2007 fiscal year revenue. We currently sell to
distributors and retailers in Africa, Australia, Canada, Faroe Island, Korea,
New Zealand, Philippines, Singapore, and the United Kingdom. These distributors
and retailers, in turn, sell our products into both Christian and large, secular
retail outlets that sell off-the-shelf consumer software packages.
Returns
and Price Concessions
At the
time we ship our products we establish reserves, including reserves that
estimate the potential for future product returns and price concessions.
Management makes these estimates and assumptions based on actual historical
experience regarding allowances for estimated price concessions and product
returns. In determining the percentage of sales for product return reserves,
management considers a number of different statistical
factors. First, it reviews the rate of actual product returns (in
total) for the period. Second, it reviews return rates for the same
period(s) of prior years. Third, it reviews its sales by individual
retail customers to assess any unusual return exposure. Fourth, it
reviews actual return rates of specific title and title versions to determine if
there are any unusual trends taking place. Fifth, the potential for
an increase in actual returns resulting from upcoming new title or title version
releases is reassessed. Sixth, and finally, management reviews the
actual returns from the balance sheet date to the date of calculation to
determine if anything unexpected has taken place.
We give
all of our distributors and retail customers a written product return policy
providing for returns, upon written request, within nine months of the invoice
date for credit only. If a new title or title version release falls
within that nine month time span, a distributor has 60 days from the announced
release date to return the old title or title version in exchange for the new
title or title version only. We provide our end-user consumers with a
30 day satisfaction guarantee, allowing them to return a title or title version
within that time frame if for any reason unsatisfied. Our warranty policy for
defective software is to provide replacement or repair for a period of 30 days
from the invoice date. We believe that these measurement dates provide a
consistent period for assessment and the opportunity to adequately estimate
channel inventory levels for appropriately estimating our return
reserves.
We
generally grant price concessions to our wholesale retail customers when we deem
those concessions necessary to maintain our relationships with those retailers
and maintain continued access to their retail channel customers. Further, if
consumer demand for a specific title falls below expectations or significantly
declines below previous rates of wholesale retail sell-through, then a price
concession or credit may be requested by our retail customers to spur further
retail channel sell-through.
Trends
that our returns typically follow include (i) the seasonality of sales, and (ii)
the fact that, generally, relatively higher return rates occur during periods of
new title or title version releases. Historically, actual returns
have been within management’s prior estimates, however, we cannot be certain
that any future write-offs exceeding reserves will not occur or that amounts
written off will not have a material adverse effect on our business, our
financial condition, including liquidity and profitability, and our results of
operations. Management continually monitors and adjusts these allowances to take
into account actual developments and sales results in the marketplace. In the
past, particularly during title and title version transitions, we have had to
increase price concessions to our retail customers.
MANUFACTURING
AND FULFILLMENT
We
prepare a set of master program copies, documentation and packaging materials
for each platform on which a title or title version is available. Most of our
software products are manufactured through third-party subcontractors while a
small number is produced in-house. Orders for master program copies
and documentation for our PC, Macintosh and Mobile based titles and title
versions generally take seven to ten days, and reorders take three to five days.
Orders for packaging materials for similar titles and title versions generally
take fourteen to twenty-one days, and reorders take seven to fourteen
days. To date, we have not experienced any material returns due to
product defects.
We
currently fulfill all of our direct-to-consumer sales and all of our retail
sales out of our own warehouse located in Omaha, Nebraska.
SIGNIFICANT
CUSTOMERS AND SUPPLIERS
During
the fiscal years ended December 31, 2008 and 2007, we had one customer, Lifeway
Christian Resources, that individually accounted for 10% or more of annual
sales. As we introduce new and enhanced software titles into the
market and increase our focus on direct sales, we anticipate our sales to a
single customer, as a percentage of gross consolidated revenue, will remain
below 10%.
Also for
the fiscal years ended December 31, 2008 and 2007, product and material
purchases from Midlands Packaging Corporation accounted for 37% and 22%,
respectively, IsoDisc accounted for 15% and 15%, respectively, Omaha Box Company
accounted for 12% and 7%, respectively, and Frogs Copy and Graphics accounted
for 8% and 20%, respectively, of the total product and material purchases made
by us. We currently have no long-term written agreements with any of
these suppliers. The payment terms are generally net 30 days, and we are not
substantially dependent upon any one or more of them; all are easily replaceable
with any locally available supplier.
REGULATION
We are
not currently subject to direct regulation by any government agency, other than
regulations applicable to businesses generally.
COMPETITION
The
market for our products is rapidly evolving and intensely competitive as new
software products and platforms are regularly introduced. Competition in the
software industry is based primarily upon:
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brand
name recognition;
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availability
of financial resources;
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the
quality of titles;
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reviews
received for a title from independent reviewers who publish reviews in
magazines, Websites, newspapers and other industry
publications;
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publisher’s
access to retail shelf space;
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the
price of each title; and
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the
number of titles then
available.
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In
relation to our faith-based products, we face competition from other software
publishers, all of which generally sell through the same combination of channels
that we do, including chain store, secular, CBA, direct and online
sales.
Specifically,
and in relation to our QuickVerse® family
of products, we believe we are the market leader in our category. We
currently compete with the following companies and products, among others, in
the PC, Macintosh and Mobile categories:
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Logos
Research Systems, Inc. – Logos Bible Software®
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Biblesoft,
Inc. – PC Study Bible®
Version
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Thomas
Nelson, Inc. – Nelson eBible®
for PC and Mobile devices
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WordSearch
Bible Publishers – WordSearch®
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Zondervan
– Zondervan Bible Study Library®
for PC and Macintosh
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Oak
Tree Software, Inc. – Accordance Bible Software®
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Laridian
– PocketBible®
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WordSearch
Bible Publishers – Life Application Bible Pocket Library®
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Zondervan
– NIV Bible Study Suite PDA®
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Olive
Tree Bible Publishers – Olive Tree Bible Software®
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Although
each of these companies publishes software packages in several different
variations, generally in a range that includes a standard package, an expanded
package, and a deluxe package (the same way that we do), in each of these
respective categories we believe that QuickVerse® offers
the best value in that it is relatively inexpensive but the most comprehensive
in terms of the number of Bibles and reference titles included. We
believe QuickVerse’s®
reputation to be among the most well-respected in its category.
In
relation to our FormTool®
products, we currently compete with the following companies and comparable
products, among many others:
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FormDocs,
LLC – FormDocs for Windows
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Nuance
Communications, Inc. – OmniPage
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While
FormDocs publishes software packages in several different variations, generally
in a range that includes a basic edition, a deluxe edition, and a professional
edition package, (as is true with our FormTool®), in
each of these respective categories we believe that FormTool® offers
the best value in that it is relatively inexpensive but more comprehensive in
terms of the number of form templates it includes. Additionally,
FormDocs does not have an “on the shelf” presence in the retail market
place.
While in
the general category as our FormTool®, we
believe that the OmniPage product line is more focused on document conversion
from paper to electronic format than form creation and
editing. OmniPage also sells at a considerably higher price point
than the FormTool® product
line.
Our
general approach to competition as it relates to our FormTool® products
is to offer competitive products at lower price points.
INTELLECTUAL
PROPERTY
Overview
We rely
for our business on a combination of copyrights, trademarks, and trade secrets
to protect our intellectual property. Our copyrighted software
content and the brand recognition associated with our related product trademarks
are among the most important assets that we possess in our present ability to
generate revenues and profits, and we rely very significantly on these
intellectual property assets in being able to effectively compete in our
market. Our intellectual property rights derive from a combination of
licenses from third parties, internal development and confidentiality and
non-disclosure agreements.
We cannot
be certain that the precautions we have taken will provide meaningful protection
from unauthorized use by others. If we must pursue litigation in the
future to enforce or otherwise protect our intellectual property rights, or to
determine the validity and scope of the proprietary rights of others, we may not
prevail and will likely have to make substantial expenditures and divert
valuable resources in the process. Finally, we may not have adequate
remedies if our proprietary content is appropriated, our proprietary rights are
violated or our trade secrets are disclosed.
Copyrights
Our
copyrights, some of which have been registered and others of which remain
unregistered, derive from a combination of program and source code embodied in
software titles that we license from third parties, as well as program and
source code embodied in software titles that we have internally developed on our
own.
We
entered into a license agreement in June 1999 with Parsons Technology, Inc.
which forms the basis of our copyright protection for products that accounted
for approximately 97% of our revenues in 2008, including those generated from
sales of QuickVerse®, by far
our largest selling software title. A copy of the license that we
obtained from Parsons Technology, which has since been assigned to Riverdeep,
Inc., the latest licensor-assignee in a succession of assignments by Parsons
Technology that have occurred since June 1999, is incorporated by reference into
this annual report on Form 10-K for the year ended December 31, 2008 as Exhibit
10.3. At the time, it was acquired as part of a combination of
related transactions involving ourselves, Parsons Technology, then a wholly
owned subsidiary of Mattel, Inc. ®, and
TLC Multimedia Inc., then also a wholly owned subsidiary of Mattel, Inc.® Aside
from the license, the transactions involved an asset sale, a product
distribution agreement, and a related services agreement. Taken as a
whole, and essentially, we had acquired from TLC Multimedia a software
publishing and sales division (known and referred to by many then as the
“Parsons Church Group”). In accordance with its terms, we agreed to
pay a one-time non-recurring fee of $5 million to obtain the license, which fee
was payable over a subsequent approximate one year period. The
related asset sale involved separate consideration.
The
license that we acquired in 1999 provided us with the right, originally for a
term of ten years, to publish, use, distribute, sublicense and sell, exclusively
worldwide in non-secular channels and non-exclusively (with the continuing right
retained by Riverdeep, Inc., successor to Parsons Technology) on an unrestricted
basis in secular channels, a collection of 65 individual top-selling
Christian-related software titles owned by Parsons Technology, including
QuickVerse®, among
others. The license covered a variety of other add-on content titles
(e.g., various Bible
translations, study guides and sermon preparation tools). The license
also included the right for us to modify the programs (including the source
code) in order to prepare derivative works and future versions of the programs,
and stated that we would exclusively own all rights associated with any such
modifications.
Beginning
in 2000, we became involved in a series of mediations arising out of or
otherwise in connection with the 1999 license. The first of these
involved the payment terms of the $5 million licensing fee. Rather
than making payments in accordance with the fee schedule as originally set forth
in the agreement, we entered into an arrangement with Parsons Technology’s
direct sales group whereby we provided resale products and in turn received an
offset credit against the balance due under the fee provision in the
license. The dispute centered on the amount of product actually
resold, and, therefore, the amount of offset credit to which we were
entitled. Prior to the resolution of this contest, a second dispute
arose, naming Parsons Technology and ourselves, among others, as parties
thereto. The first mediation was set aside, and ultimately resolved
in conjunction with the latter proceeding as described in the following
paragraph.
In
October 2001, due to being in arrears with respect to certain royalty payments
owed to The Zondervan Corporation, then a content provider to QuickVerse®, we
became party to a second mediation ultimately resulting in a multi-party
settlement agreement, on October 20, 2003, the terms of which provided for our
payment to Zondervan of $500,000 plus 5% simple interest in installments, as
well as for our destruction of all inventory containing Zondervan-owned content,
all of which we satisfied within months thereafter. As part of the settlement
agreement, we received a covenant in perpetuity with respect to our rights under
the 1999 license, effectively extending it indefinitely with no continuing
financial obligations owed by us. A copy of the settlement agreement which
resulted in the effective extension is incorporated by reference into this
annual report on Form 10-K for the fiscal year ended December 31, 2008 as
Exhibit 10.14.
Since
1999, the developments, including modifications and improvements, that we have
made to the originally acquired copyrighted programs covered by the license have
been extensive. We have used both in-house developers and third-party
contractors in these modifications and improvements over which we retain the
exclusive ownership. Given these developments, which have been made through nine
subsequent versions, eight different editions and three new platforms of
QuickVerse®, and
various subsequent versions of some of the other titles to which we acquired
rights under the license (including those in each of the print and graphics,
pastoral, children’s, and language tutorial product categories), we believe that
the real value of the copyrights associated with these titles lay almost
exclusively at this point in the improvements that we own rather than the base
copyrights that we were originally granted and that continue to be owned by
Riverdeep, Inc. Moreover, it is our belief that the original source
code covered by the license has been effectively rendered valueless by virtue of
these subsequent modifications and improvements. Although we do not
believe that any third parties have been granted any rights to date in addition
to our own to publish or sell these titles into secular channels, and do believe
that, even if this has occurred or should occur in the future, the barriers to
entry created by the extensive developments that we have made and now own to
these otherwise licensed titles would make it practically infeasible for any
third party to effectively compete with us in relation to these products in any
market, there can be no assurance that one or more competitors will not emerge
at some point or that they will not impact on our sales and
revenues.
As noted
above, our largest-selling title, QuickVerse®, is one
from which we originally derived our rights under the 1999
license. One of the features that make QuickVerse® such a
popular title is its breadth of content. A very significant
percentage of this content is licensed by us from various third-party content
providers for inclusion in QuickVerse®. We
are therefore responsible for paying royalties on a regular basis to these
providers in connection with our sales of QuickVerse®. In
total, we currently have content licensing agreements with 47 different
publishers for approximately 924 individual Bible translations and other
biblical or related scholarly works which are incorporated in various editions
of our QuickVerse®
products, or in some cases sold as stand-alone or add-on
content. These licensing agreements are typically non-exclusive and
for a fixed duration (e.g., a term of 3 or 5
years). Royalties are calculated as a percentage of net sales from a
work (e.g., ranging
from 3% to 10% according to the licensing agreements), based upon factors such
as value as a stand-alone product as compared to, for example, value when
bundled with other titles within a collective work. These license
agreements typically cover content in the context of both stand-alone products
and as bundled works. For example, consumers who purchase
QuickVerse® pay the
suggested retail price and are in part paying for the technology within the
program along with the content. QuickVerse® titles
sold to new consumers or new users are subject to royalties on all content
within each specific QuickVerse®
title. However, upgrade sales to existing users are only subject to
royalties on new content additions of the upgraded version.
In
addition to the copyrights associated with the 1999 license described above,
copyright protection exists in relation to the software titles that we resell
published by others. These copyrights, however, are held by the
publishers and/or their respective third-party content providers.
While
approximately 82% of our copyrighted software programs are registered with the
U.S. Copyright Office, approximately 18% remains unregistered, including all of
the works included in the enhancements that we have made to titles from which we
originally derived our rights under the 1999 license. In the U.S.,
works afforded the benefit of copyright protection can either be registered with
the U.S. Copyright Office or remain unregistered, and, although registration
offers certain advantages to the holder in being able to assert its rights
(including a rebuttable presumption of ownership and entitlement to statutory
damages and attorneys fees), the fact remains that an original work in the U.S.
becomes protected by the copyright laws from the moment it is “fixed in a
tangible medium,” which, as it relates to software, has long been interpreted to
mean when it is stored on a hard drive or removable disk.
Trademarks
As part
of the 1999 license, we acquired the unlimited right to use the registered
trademarks associated with the various titles licensed thereunder exclusively
worldwide in non-secular channels and non-exclusively in secular
channels. Because of the fact that QuickVerse® has been
on the market for approximately ten years by the time we acquired the license,
and had a substantial existing user base, the trademark for this product alone
was deemed at the time to be of great importance and value. We
believe that our initiatives in introducing subsequent versions, editions and
platforms of this title since then, as well as our having maintained extremely
high publishing standards throughout the period that we have been publishing
this title, have served to sustain and enhance the importance and value of this
trademark.
Following
our acquisition of FormTool®, we
filed a trademark application for the FormTool® name
with the United States Patent and Trademark Office. On September 30,
2008, this trademark was approved and registered to the Company.
Trade
Secrets
Whenever
we deem it important for purposes of maintaining competitive advantages, our
policy requires parties with whom we share, or who otherwise are likely to
become privy to, our trade secrets or other confidential information, including
source code, to execute and deliver to us confidentiality and/or non-disclosure
agreements prior to their exposure to any such information. Among
others, this includes employees, consultants and other advisors, including our
in-house and outsourced software developers and collaborators, each of whom we
require to execute such an agreement upon commencement of their employment,
consulting or advisory relationships. These agreements generally
provide that all confidential information developed or made known to the
individual by us during the course of the individual’s relationship with us is
to be kept confidential and not to be disclosed to third parties except in
specific circumstances. In the case of employees and consultants, the agreements
provide that all inventions conceived by the individual in the course of their
employment or consulting relationship shall be our exclusive
property.
EMPLOYEES
As of
April 15, 2009, we had fourteen full-time employees and two part-time
employees. Of those sixteen, three were part of the senior-level
executive and financial management team, three were in the product development
team, five were on the sales team, and five were in fulfillment, administration,
and related support positions. For the fiscal year ended December 31,
2008, our annual employee costs (including gross wages, related payroll taxes
and benefits) totaled approximately $1,447,000, equivalent to 53% of gross
revenues. In addition, we have engaged the services of several consulting firms
who are working full or part-time for us in the area of product
development.
We rely
heavily on our current officers and directors in operating the business. We are
not subject to any collective bargaining agreements and believe that our
relationships with our employees are good.
SEASONALITY
Historically,
our business has been highly seasonal. More than 50% of our annual sales have
generally occurred in the five months of September through January; the five
months of April through August have generally been our weakest, historically
accounting for less than 30% of annual sales. Although we believe
that a shifting strategy toward more business-oriented products over time is
likely to reduce the seasonality of our business generally, we expect that
operating results will continue to fluctuate seasonally to some degree for the
foreseeable future.
Several
of the matters discussed in this annual report on Form 10-K for the fiscal year
ended December 31, 2008 contain forward-looking statements that involve risks
and uncertainties. Factors associated with the forward-looking statements that
could cause actual results to differ from those projected or forecast are
included in the statements below. In addition to other information contained in
this annual report, readers should carefully consider the following cautionary
statements and risk factors.
GENERAL
BUSINESS RISKS
Our
liquidity and capital resources are very limited.
Our
ability to fund working capital and anticipated capital expenditures will depend
on our future performance, which is subject to general economic conditions, our
customers, actions of our competitors and other factors that are beyond our
control. Our ability to fund operating activities is also dependent upon (i) the
extent and availability of bank and other credit facilities, (ii) our ability to
access external sources of financing, and (iii) our ability to effectively
manage our expenses in relation to revenues. Although we believe that our
existing working capital, together with cash flow from operations, will be
adequate to meet our minimum anticipated liquidity requirements over the next
twelve months, given our initiative toward rapid revenue growth and due to our
need to service certain long-term liabilities, it is likely to become necessary
for us to raise additional capital to support growth and/or otherwise finance
potential acquisitions. Furthermore, there can be no assurance that our
operations or access to external sources of financing will continue to provide
resources sufficient to satisfy our liabilities arising in the ordinary course
of business, and while it may be possible to borrow funds as required, any such
additional capital is likely to require that we sell and issue additional equity
and/or convertible securities, including shares issuable upon exercise of
currently outstanding warrants, any of which issuances would have a dilutive
effect on holdings of existing shareholders. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources”.
There
is uncertainty as to our ability to continue as a going concern.
Our
audited financial statements for the period ending December 31, 2008, including
the footnotes thereto, call into question our ability to continue as a going
concern. This conclusion was drawn from the fact that, as of the date of those
financial statements, we had a negative current ratio and total liabilities in
excess of total assets. Those factors, as well as questions surrounding our
ability to secure additional financing for continued operations, have resulted
in uncertainty regarding our ability to continue as a going concern. See Note 2
in the Notes to the Consolidated Financial Statements for the year ended
December 31, 2008.
Our
accumulated deficit makes it harder for us to borrow funds.
As of
December 31, 2008, and as a result of historical losses in prior years, our
accumulated deficit was $8,057,377. The fact that we maintain an accumulated
deficit, as well as the extent of our accumulated deficit relative to recent
earnings, negatively affects our ability to borrow funds because lenders
generally view an accumulated deficit as a negative factor in evaluating
creditworthiness. Any inability on our part to borrow funds if and
when required, or any reduction in the favorability of the terms upon which we
are able to borrow funds if and when required, including amount, applicable
interest rate and collateralization, would likely have a material adverse effect
on our business, our financial condition, including liquidity and profitability,
and our results of operations. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources”.
RISKS
ASSOCIATED WITH OUR BUSINESS AND INDUSTRY
We
face serious competition in our business segments.
The
market for our products is rapidly evolving and intensely competitive as new
consumer software products and platforms are regularly
introduced. Competition in the consumer software industry is based
primarily upon:
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brand
name recognition;
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availability
of financial resources;
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the
quality of titles;
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reviews
received for a title from independent reviewers who publish reviews in
magazines, Websites, newspapers and other industry
publications;
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publisher’s
access to retail shelf space;
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the
price of each title; and
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the
number of titles then
available.
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We face
competition from other software publishers, all of which generally sell through
the same combination of channels that we do. In relation to our
faith-based titles, these channels include chain store, secular, CBA, direct and
online sales, and our competitors include Logos Research Systems, Inc.,
Biblesoft, Inc., Thomas Nelson, Inc., WordSearch Bible Publishers and The
Zondervan Corporation, among others. In relation to our form
creation, these channels also include retail chain stores, direct and online
sale and our competitors include FormDocs, LLC and Nuance Communications,
Inc.
To remain
competitive in our market segments we rely heavily upon our product quality,
marketing and sales abilities, proprietary technology and product development
capability. However, some of our competitors have longer operating
histories, larger customer bases and greater financial, marketing, service,
support, technical and other resources than we do. Due to these greater
resources, certain of our competitors have the ability to undertake more
extensive marketing campaigns, adopt more aggressive pricing policies, pay
higher fees to licensors and pay more to third-party software developers than we
can. Only a small percentage of titles introduced into the software market
achieve any degree of sustained market acceptance. If our titles, including
special editions, are not successful, our business, our financial condition,
including liquidity and profitability, and our results of operations will be
negatively impacted. Moreover, we believe that competition from new
entrants will increase as the markets for faith-based products and productivity
tools continue to expand. See “Description of Business –
Competition”.
We
currently depend on only a single title for the overwhelming majority of our
revenue.
In fiscal
year 2008, approximately 86% of our total revenue was derived from one software
title, QuickVerse®,
compared to 72% of our total revenue for fiscal year 2007. We expect that
QuickVerse® will
continue to produce a disproportionately large percentage of our revenue for the
foreseeable future and that such percentage will be significantly higher going
forward than it has been in recent years. Due to this dependence on a single
title, the failure of such title, or individual versions of such title, to
achieve anticipated results would have a material adverse effect on our
business, our financial condition, including liquidity and profitability, and
our results of operations. See “Description of Business – Our
Products”.
We
have experienced, and may continue to experience, reduced revenues and
fluctuations in our quarterly operating results due to delays in the
introduction and distribution of our products.
Historically,
a significant portion of our revenue for any given quarter has been generated by
the sale of new titles and title versions introduced during that quarter or
shipped in the immediately preceding quarter. Our inability to timely begin
volume shipments of a new title or title version in accordance with our internal
development schedule, as has repeatedly been the case in the past, will cause
earnings fluctuations and will negatively impact our business, our financial
condition, including liquidity and profitability, and our results of
operations. Timely introduction of a new title or title version is
largely contingent upon the timing of a variety of other factors. Included among
these are development processes themselves, debugging, approval by third-party
content licensors and duplication and packaging processes. Furthermore, the
complexity of next-generation systems (such as Macintosh® OS X and
Windows® Mobile)
has resulted in longer development cycles, higher development expenditures and
the need to more carefully monitor and plan development processes associated
with these products.
We cannot
be certain that we will be able to meet planned release dates for some or all of
our new titles or title versions. In the past, we have experienced significant
delays in our introduction of some new titles and title versions. It is likely
in the future that delays will continue to occur and that some new titles or
title versions will not be released in accordance with our internal development
schedule, having a negative impact on our business, our financial condition,
including liquidity and profitability, and our results of operations in that
period. See “Management’s Discussion and Analysis of Financial Condition and
Results of Operations - Revenues”.
We
have experienced, and may continue to experience, reduced revenues and
fluctuations in our quarterly operating results due to the limited life cycle of
certain of our products.
The
average life cycle of a new consumer software title ranges anywhere from a few
years to indefinitely, and the average life cycle of a new title version ranges
anywhere from twelve to eighteen months, making our revenue and operating
results difficult to predict and susceptible to substantial fluctuations from
quarter to quarter. While there can be no assurance, we expect, based
on historical experience, that a majority of sales for a new title or title
version will occur within the first thirty to one hundred twenty days following
its release, and that net revenue associated with the initial introduction will
generally account for a disproportionately large percentage of total net revenue
over the life of the title or title version. Furthermore, factors
such as competition, market acceptance, seasonality and technological
developmental and/or promotional expenses associated with a title or title
version can shorten the life cycle of older titles and title versions and
increase the importance of our ability to regularly release new titles and title
versions. Consequently, if net revenue in a given period is below expectation,
our business, our financial condition, including liquidity and profitability,
and our results of operations for that period are likely to be negatively
affected, as has repeatedly occurred in the past.
Product
returns, price protections or price concessions that exceed our anticipated
reserves could result in worse than expected operating results.
In
relation to our retail sales, at the time we ship our products we establish
reserves, including reserves that estimate the potential for future product
returns and price concessions. In the past, particularly during title
version transitions, we have had to increase price concessions to our wholesale
retail customers. If consumer demand for a specific title or title
version falls below expectations or significantly declines below previous rates
of retail sell-through, then a price concession or credit may be requested by
our wholesale retail customers to spur further retail channel sell-through.
Coupled with more competitive pricing, if product returns, price protections or
price concessions exceed our reserves the magnitude of quarterly fluctuations
will increase and our operating and financial results will be negatively
impacted. Furthermore, if we incorrectly assess the creditworthiness of any one
of our wholesale customers who take delivery of our products on credit, we could
be required to significantly increase reserves previously
established.
Typically
we experience the highest reserves at the end of the first quarter and fourth
quarter and the lowest at the end of the third quarter. Historically, actual
returns have been within management’s prior estimates, however, we cannot be
certain that any future write-offs exceeding reserves will not occur or that
amounts written off will not have a material adverse effect on our business, our
financial condition, including liquidity and profitability, and our results of
operations. See “Management’s Discussion and Analysis of Financial Condition and
Results of Operations - Revenues”.
Errors
or defects in our software products may cause a loss of market acceptance and
result in fewer sales and/or greater returns of our products.
Our
products are complex and may contain undetected errors or defects when first
introduced or as new versions are released. In the past, we have discovered
software errors in some of our new products and enhancements following
introduction into the market. Because our products are complex, we anticipate
that software errors and defects will be present in new products or releases in
the future. Although to date, we have not discovered any material errors, future
errors and defects could result in adverse product reviews and a loss of, or
delay in, market acceptance of our products.
We
may not have available funds to develop products that customers
want.
The
Bible-study, faith-based content and productivity software markets are subject
to rapid technological developments. Although the life of most of our titles may
be quite long, the life of any given version tends to be relatively short, in
many cases less than three years. To develop products that consumers and
organizations desire, we must continually improve and enhance our existing
products and technologies and develop new products and technologies that
incorporate these technological developments. Our inability to do this would
likely have a material adverse effect on our business, our financial condition,
including liquidity and profitability, and our results of
operations.
We focus
our development and publishing activities principally on new versions of our
existing titles. We cannot, however, be certain that we will have the financial
and technical resources available to continue to develop these new title
versions particularly since we must undertake these initiatives while remaining
competitive in terms of performance and price. This will require substantial
investments in research and development, often times well in advance of the
widespread release of a product into the market and any revenues these products
may generate.
Our costs
for product development for the fiscal year ended December 31, 2008 were higher
than the fiscal year ended December 31, 2007. We anticipate our product
development costs will increase in the future as a result of the higher costs
associated with releasing more software titles or new title versions across
multiple user interface platforms, and the complexity of developing such titles
and title versions for next-generation systems, among other reasons. We
anticipate that our profitability will continue to be impacted by the levels of
research and development expenditures relative to revenue and by fluctuations
relating to the timing of development in anticipation of future user interface
platforms.
The
loss of any of our key executives could have a material adverse effect on our
business.
Our
success depends to a large degree upon the skills of our three key executives,
Steven Malone, Kirk R. Rowland and William Terrill. We presently do not maintain
key person life insurance on any of our three key executives. Although we have
employment agreements with each of our three key executives, there can be no
assurance that we will be able to retain these executives or attract and retain
additional key executives. The loss of any one of our three key
executives would likely have a material adverse effect on our business, our
financial condition, including liquidity and profitability, and our results of
operations. See “Management – Directors and Executive Officers”.
The
successful development of our products depends on our ability to attract,
integrate, motivate and retain highly skilled personnel.
Our
success depends to a large extent on our ability to attract, hire and retain
skilled software developers, programmers and other highly skilled technical
personnel. The software industry is characterized by a high level of employee
mobility and aggressive recruiting among competitors for personnel with
programming, technical and product development skills. We may not be able to
attract and retain skilled personnel or may incur significant costs in order to
do so. If we are unable to attract additional qualified employees or retain the
services of key personnel, our business, our financial condition, including
liquidity and profitability, and our results of operations could be negatively
impacted.
Our
intellectual property may not be adequately protected from unauthorized use by
others, which could increase our litigation costs and adversely affect our
sales.
Our
copyrighted software content and the brand recognition associated with our
related product trademarks are the most important assets that we possess in our
ability to generate revenues and profits, and we rely very significantly on
these intellectual property assets in being able to effectively compete in our
market. There can be no assurance that these intellectual property
assets will provide meaningful protection to us from unauthorized use by others,
which could result in an increase in competing products and a reduction in our
own sales. If we must pursue litigation in the future to enforce or
otherwise protect our intellectual property rights, or to determine the validity
and scope of the proprietary rights of others, we may not prevail and will
likely have to make substantial expenditures and divert valuable resources in
any case. This is particularly true given the fact that the
copyrights that we own to the source code and other improvements made to our
largest-selling product since 1999 has not been registered, which means that we
may not rely upon the otherwise existing advantage of a rebuttable presumption
of ownership in the event of, and in connection with, any such litigation. See
“Description of Business – Intellectual Property”.
Our
exclusive rights to publish and sell our largest-selling titles are limited to
non-secular channels.
Approximately
97% of our revenues in 2008, including those generated from sales of
QuickVerse®, by far
our largest selling software title, was derived from the publication and sale of
software titles to which we have only the exclusive license to publish and sell
into non-secular channels. Although, as of the date hereof, we do not believe
that any third parties have been granted rights in addition to our own to
publish or sell these titles into secular channels, and we believe that, even if
this has occurred or should occur in the future, the barriers to entry created
by the extensive developments that we have made and now own to these otherwise
licensed titles would make it practically infeasible for any third party to
effectively compete with us in relation to these products in any market, there
can be no assurance that one or more competitors will not emerge at some point
or that they will not adversely impact our sales and revenues. See “Description
of Business – Intellectual Property”.
If
our products infringe any proprietary rights of others, a lawsuit may be brought
against us that could require us to pay large legal expenses and judgments and
redesign or discontinue selling one or more of our products.
We are
not aware of any circumstances under which our products infringe upon any valid
existing proprietary rights of third parties. Any infringement claims, however,
whether or not meritorious, could result in costly litigation or require us to
enter into royalty or licensing agreements. If we are found to have infringed
the proprietary rights of others, we could be required to pay damages, redesign
the products or discontinue their sale. Any of these outcomes, individually or
collectively, could have a material adverse effect on our business, our
financial condition, including liquidity and profitability, and our results of
operations.
Revenue
from our consumer products varies due to the seasonal nature of consumer
software purchases.
Our
consumer products business is highly seasonal. More than 50% of our annual sales
in this category are expected to occur in the five months of September through
January; the five months of April through August have historically been our
weakest, typically generating less than 30% of our annual sales. The seasonal
pattern in this regard is due primarily to the increased consumer demand for
software during the year-end holiday selling season and the reduced demand for
software during the summer months. Historically, our revenues have
varied significantly and been materially affected by releases of popular titles
and title versions and, accordingly, may not necessarily reflect the seasonal
patterns of the industry as a whole. Although we believe that a shifting
strategy toward more business-oriented products over time is likely to reduce
the seasonality of our business generally, we expect that operating results will
continue to fluctuate seasonally to some degree for the foreseeable
future.
RISKS
ASSOCIATED WITH AN INVESTMENT IN OUR COMMON STOCK
Unless
an active trading market develops for our common stock, you may not be able to
sell your shares.
We are a
reporting company and our common stock is listed on the OTC Bulletin Board
(owned and operated by the Nasdaq Stock Market, Inc.), however, there is no
active trading market for our common stock. There can be no assurance that an
active trading market will ever develop for our common stock or, if it does
develop, that it will be maintained. Failure to develop or maintain an active
trading market will have a generally negative effect on the price of our common
stock, and you may be unable to sell your shares or any attempted sale of such
shares may have the effect of lowering the market price, and therefore your
investment could be a complete or partial loss.
Unless
and until we garner analyst research coverage, we are unlikely to create
long-term market value in our common stock.
Although
we are a reporting company and our common shares are listed on the OTC Bulletin
Board, we are unaware of any investment banking firms, large or small, that
currently provide analyst research coverage on our company and, given our
relatively small size within the public securities markets, it is unlikely that
any investment banks will begin doing so in the near future. Without continuing
research coverage by reputable investment banks or similar firms, it is
considerably more difficult, and unlikely, to attract the interest of most
institutional investors, which are generally considered to be very important in
achieving a desirable balance in shareholder composition and long-term market
value in a stock. While we intend to continue to aggressively pursue investor
relations initiatives designed to create visibility for our company and common
stock, and hope to garner analyst coverage in the future, there can be no
assurance that we will succeed in this regard and any inability on our part to
develop such coverage is likely to materially impede the realization of
long-term market value in our common stock.
Since
our common stock is thinly traded, it is more susceptible to extreme rises or
declines in price, and you may not be able to sell your shares at or above the
price you paid.
You may
have difficulty reselling shares of our common stock, either at or above the
price you paid, or even at a fair market value. The stock markets often
experience significant price and volume changes that are not related to the
operating performance of individual companies, and because our common stock is
thinly traded, it is particularly susceptible to such changes. These broad
market changes may cause the market price of our common stock to decline
regardless of how well we perform as a company, and, depending on when you
determine to sell, you may not be able to obtain a price at or above the price
you paid.
Trading
in our common stock on the OTC Bulletin Board may be limited thereby making it
more difficult for you to resell any shares you may own.
Our
common stock trades on the OTC Bulletin Board. The OTC Bulletin Board is not an
exchange and, because trading of securities on the OTC Bulletin Board is often
more sporadic than the trading of securities listed on a national exchange or on
the Nasdaq Global Select Market, you may have difficulty reselling any of the
shares of our common stock that you purchase from the selling
stockholders.
Our
common stock is subject to the “penny stock” regulations, which is likely to
make it more difficult to sell.
Our
common stock is considered a “penny stock”, which generally is a stock trading
under $5.00 and not registered on any national securities exchanges. The SEC has
adopted rules that regulate broker-dealer practices in connection with
transactions in penny stocks. This regulation generally has the result of
reducing trading in such stocks, restricting the pool of potential investors for
such stocks, and making it more difficult for investors to sell their shares.
Prior to a transaction in a penny stock, a broker-dealer is required
to:
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deliver
a standardized risk disclosure document that provides information about
penny stocks and the nature and level of risks in the penny stock
market;
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provide
the customer with current bid and offer quotations for the penny
stock;
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explain
the compensation of the broker-dealer and its salesperson in the
transaction;
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provide
monthly account statements showing the market value of each penny stock
held in the customer’s account; and
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make
a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser’s written agreement
to the transaction.
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These
requirements may have the effect of reducing the level of trading activity in
the secondary market for a stock that is subject to the penny stock rules. Since
our common stock is subject to the penny stock rules, investors in our common
stock may find it more difficult to sell their shares.
As
an issuer of “penny stock,” we do not currently benefit from the protection
provided by the federal securities laws relating to forward-looking
statements.
Although,
generally, federal securities laws provide a safe harbor for forward-looking
statements made by a public company that files reports under the federal
securities laws, this safe harbor is not available to issuers of penny
stocks. As a result, and since our common stock has consistently
traded in recent years at a level at which it is considered to constitute a
“penny stock”, we do not have the benefit of this safe harbor protection in the
event of any legal action based upon a claim that any material provided by us
contained a material misstatement of fact or was misleading in any material
respect because of our failure to include any statements necessary to make the
statements not misleading. Such an action could hurt our financial
condition.
Our
stock price could be volatile, and your investment could suffer a decline in
value.
The
trading price of our common stock is likely to be highly volatile and could be
subject to extreme fluctuations in price in response to various factors, many of
which are beyond our control, including:
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the
trading volume of our shares;
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the
number of securities analysts, market-makers and brokers following our
common stock;
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changes
in, or failure to achieve, financial estimates by securities
analysts;
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new
products introduced or announced by us or our
competitors;
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announcements
of technological innovations by us or our competitors;
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our
ability to produce and distribute retail packaged versions of our software
in advance of peak retail selling seasons;
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actual
or anticipated variations in quarterly operating
results;
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conditions
or trends in the consumer software and/or Christian products
industries;
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announcements
by us of significant acquisitions, strategic partnerships, joint ventures,
or capital commitments;
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additions
or departures of key personnel;
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sales
of our common stock; and
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stock
market price and volume fluctuations of publicly-traded, particularly
microcap, companies
generally.
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The
volatility of our common stock is illustrated by reference to the fact that,
during fiscal year 2008, our trading price fluctuated from a low of $0.02 to a
high of $0.065 per share.
The stock
market has recently experienced significant price and volume fluctuations.
Volatility in the market price for particular companies has often been unrelated
or disproportionate to the operating performance of those companies. These broad
market and industry factors may seriously harm the market price of our common
stock, regardless of our operating performance. In addition, securities class
action litigation has often been initiated following periods of volatility in
the market price of a company’s securities. A securities class action suit
against us could result in substantial costs, potential liabilities and the
diversion of management’s attention and resources from our business. Moreover,
and as noted above, our shares are currently traded on the OTC Bulletin Board
and, further, are subject to the penny stock regulation. Price fluctuations in
such shares are particularly volatile and subject to manipulation by
market-makers, short-sellers and option traders.
Future
sales of our common stock by our officers or directors may depress our stock
price.
Our
officers and directors are not contractually obligated to refrain from selling
any of their shares; therefore, our officers and directors may sell any shares
owned by them which are registered under the Securities Act, or which otherwise
may be sold without registration to the extent permitted by Rule 144 or other
exemptions. Because of the perception by the investing public that a sale by
such insiders may be reflective of their own lack of confidence in our
prospects, the market price of our common stock could decline as a result of a
sell-off following sales of substantial amounts of common stock by our officers
and directors into the public market, or even the mere perception that these
sales could occur.
Future
issuances of our common or preferred stock may depress our stock price and
dilute your interest.
We may
want to issue additional shares of our common stock in future financings and may
grant stock options to our employees, officers, directors and consultants under
our stock incentive plan. Any such issuances could have the effect of depressing
the market price of our common stock and, in any case, would dilute the
interests of our common stockholders. In addition, we could issue serial
preferred stock having rights, preferences and privileges senior to those of our
common stock, including the right to receive dividends and/or preferences upon
liquidation, dissolution or winding-up in excess of, or prior to, the rights of
the holders of our common stock. This could depress the value of our common
stock and could reduce or eliminate the amounts that would otherwise have been
available to pay dividends on our common stock (which are unlikely in any case)
or to make distributions on liquidation.
If
you require dividend income, you should not rely on an investment in our common
stock.
Because
we have very limited cash resources and a substantial accumulated deficit
relative to recent earnings, we have not declared or paid any dividends on our
common stock since our inception and we do not anticipate declaring or paying
any dividends on our common stock in the foreseeable future. Rather, we intend
to retain earnings, if any, for the continued operation and expansion of our
business. It is unlikely, therefore, that holders of our common stock will have
an opportunity to profit from anything other than potential appreciation in the
value of our common stock held by them. If you require dividend
income, you should not rely on an investment in our common stock.
There
were no reportable events under this Item 1B during the fiscal year ended
December 31, 2008.
Our
principal executive offices are located at 620 North 129th Street, Omaha,
Nebraska. We lease this 4,000 square foot premises under a five year lease
agreement with Metro Realty. Our monthly rent is $5,480.33 and, as of April 15,
2009, there were approximately thirty-seven months remaining under the
lease. In addition, our warehouse facility is located at 4437 South
134th Street, Omaha, Nebraska. We lease this 5,000 square foot
facility under a three year lease agreement with Dock High, LLC. Our
monthly rent is $2,500.00 and, as of April 15, 2009, there were approximately
fourteen months remaining under the lease. In accordance with the
terms of these leasehold agreements, we are responsible for all associated
taxes, insurance, and utility expenses.
As of
April 15, 2009, two of our full-time employees work at their homes in
Naperville, Illinois. We do not pay for any space associated with these
operations.
As of the
date of this annual report on Form 10-K for the year fiscal year ended December
31, 2008, there were no pending material legal proceedings to which we were a
party and we are not aware that any were contemplated. There can be no
assurance, however, that we will not be made a party to litigation in the
future.
No
matters were submitted to a vote of our stockholders during the fourth quarter
of the fiscal year ended December 31, 2008.
MARKET
INFORMATION
Our
common stock is traded on the OTC Bulletin Board, a service provided by the
Nasdaq Stock Market Inc., under the symbol “FIND”.
The
following table sets forth for the periods indicated the high and low bid prices
for our common stock as reported each quarterly period within the last two
fiscal years on the OTC Bulletin Board, and as obtained from
Yahoo.com. The prices are inter-dealer prices, do not include retail
mark-up, markdown or commission and may not necessarily represent actual
transactions.
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Common
Stock
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2007
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High
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Low
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First
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$0.050
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$0.030
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Second
Quarter
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$0.050
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$0.030
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Third
Quarter
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$0.050
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$0.030
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Fourth
Quarter
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$0.080
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$0.040
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2008
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High
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Low
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First
Quarter
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$0.065
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$0.035
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Second
Quarter
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$0.060
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$0.027
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Third
Quarter
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$0.040
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$0.020
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Fourth
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$0.030
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$0.021
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STOCKHOLDERS
As of
April 15, 2009, there were approximately 750 holders of record of our common
stock, with any shares held by persons or companies in street or nominee name
counted only under such street or nominee name.
DIVIDENDS
Since
inception, no dividends have been paid on our common stock and we do not
anticipate paying any dividends in the foreseeable future. Although
it is our intention to utilize all available funds for the development of our
business, no restrictions are in place that would limit or restrict our ability
to pay dividends.
EQUITY
COMPENSATION PLAN INFORMATION
Please
refer to Part III, Item 12 Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters as
reported in this annual report on Form 10-K for the information regarding our
equity compensation plans.
RECENT
SALES OF UNREGISTERED SECURITIES
There
were no previously unreported sales of unregistered securities during the fourth
quarter of the fiscal year ended December 31, 2008.
PURCHASES
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
There
were no purchases of equity securities by the Company itself, or any affiliated
purchaser during the fourth quarter of the fiscal year ended December 31,
2008.
As a
“smaller reporting company” as defined by Item 10 of Regulation S-K, we are not
required to provide this information.
The
following discussion should be read together with our consolidated financial
statements for the period ended December 31, 2008 and the Notes to the
Consolidated Financial Statements.
CRITICAL
ACCOUNTING POLICIES
Our
critical accounting policies, including the assumptions and judgments underlying
them, are more fully described in the Notes to the Consolidated Financial
Statements. We have consistently applied these policies in all material
respects. These policies primarily address matters of expense recognition and
revenue recognition, including amortization of software development cost and the
calculation of reserve for returns. Investors are cautioned that these policies
are not guarantees of future performance and involve risks and uncertainties,
and that actual results may differ materially. Below are the
accounting policies that we believe are the most critical in order to gain an
understanding of our financial results and condition.
Accounts
Receivable
Accounts
receivable arise in the normal course of business. It is the policy of
management to continuously review the outstanding accounts receivable, as well
as the bad debt write-offs experienced in the past, and establish an allowance
for doubtful accounts for uncollectible amounts. Individual accounts are charged
against the allowance when they are deemed uncollectible.
Intangible
Assets
In
accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, intangible assets with an indefinite useful life are not
amortized. Intangible assets with a finite useful life are amortized on the
straight-line method over the estimated useful lives. All intangible
assets are tested for impairment annually during the fourth
quarter.
Software
Development Costs
In
accordance with SFAS No. 86, Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed, software development
costs are expensed as incurred until technological feasibility and marketability
has been established, generally with release of a “beta” version for
testing. Once the point of technological feasibility and
marketability is reached, direct production costs (including labor directly
associated with the development projects), indirect costs (including allocated
fringe benefits, payroll taxes, facilities costs, and management supervision),
and other direct costs (including costs of outside consultants, purchased
software to be included in the software product being developed, travel
expenses, material and supplies, and other direct costs) are capitalized until
the product is available for general release to customers. We
amortize capitalized costs on a product-by-product
basis. Amortization for each period is the greater of the amount
computed using (i) the straight-line basis over the estimated product life
(generally from 12 to 18 months, but up to 60 months), or (ii) the ratio of
current revenues to total projected product revenues.
Capitalized
software development costs are stated at the lower of amortized costs or net
realizable value. Recoverability of these capitalized costs is
determined at each balance sheet date by comparing the forecasted future
revenues from the related products, based on management’s best estimates using
appropriate assumptions and projections at the time, to the carrying amount of
the capitalized software development costs. If the carrying value is
determined not to be recoverable from future revenues, an impairment loss is
recognized equal to the amount by which the carrying amount exceeds the future
revenues.
SFAS No.
2, Accounting for Research and
Development Costs, establishes accounting and reporting standards for
research and development. In accordance with SFAS No. 2, costs we
incur to enhance our existing products after general release to the public (bug
fixes) are expensed in the period they are incurred and included in research and
development costs.
Revenue
Recognition
We derive
revenues from the sale of packaged software products, product support and
multiple element arrangements that may include any combination of these
items. We recognize software revenue for software products and
related services in accordance with American Institute of Certified Public
Accountants Statement of Position (“SOP”) 97-2, Software Revenue Recognition,
as modified by SOP 98-9, Modification of SOP 97-2, With
Respect to Certain Transactions. We recognize revenue when
persuasive evidence of an arrangement exists (generally a purchase order), we
have delivered the product, the fee is fixed or determinable and collectibility
is probable.
We sell
some of our products on consignment to a limited number of
resellers. We recognize revenue for these consignment transactions
only when the end-user sale has occurred. Revenue associated with
advance payments from our customers is deferred until we ship the product or
offer the support service. Revenue for software distributed
electronically via the Internet is recognized when the customer has been
provided with the access codes that allow the customer to take immediate
possession of the software on its hardware and evidence of the arrangement
exists.
In
accordance with EITF Issue No. 01-9, Accounting for Consideration Given
by a Vendor to a Customer or a Reseller of the Vendor’s Product, we
generally account for cash considerations (such as sales incentives – rebates
and coupons) that we give to our customers as a reduction of revenue rather than
as an operating expense.
We reduce
product revenue for estimated returns and price protections that are based on
historical experience and other factors such as the volume and price mix of
products in the retail channel, trends in retailer inventory and economic trends
that might impact customer demand for our products. We also reduce
product revenue for the estimated redemption of end-user rebates on certain
current product sales. Our rebate reserves are estimated based on the
terms and conditions of the specific promotional rebate program, actual sales
during the promotion, the amount of redemptions received and historical
redemption trends by product and by type of promotional program.
Trends
that our returns typically follow include (i) the seasonality of sales, and (ii)
the fact that, generally, relatively higher return rates occur in connection
with recently released title or title versions. Historically, actual
returns have been within management’s prior estimates, however, we cannot be
certain that any future write-offs exceeding reserves will not occur or that
amounts written off will not have a material adverse effect on our business, our
financial condition, including liquidity and profitability, and our results of
operations. Management continually monitors and adjusts these allowances to take
into account actual developments and sales results in the marketplace. In the
past, particularly during title and title version transitions, we have had to
increase price concessions to our retail customers in order to move channel
inventory.
Product
returns from distributors and Christian bookstores are allowed primarily in
exchange for new products or for credit towards purchases as part of a
stock-balancing program. These returns are subject to certain
limitations provided for in the contract between us and the corresponding
distributor/retailer. Returns from sales made directly to consumers are accepted
within 30 days of purchase and involve a cash refund. Product
returns, price protections or price concessions that exceed our reserves could
materially adversely affect our business and operating results and could
increase the magnitude of quarterly fluctuations in our operating and financial
results.
We record
the amounts we charge our customers for the shipping and handling of our
software products as product revenue and we record the related costs as cost of
sales on our consolidated statements of operations.
Deferred
Tax Asset Valuation Allowance
In
accordance with SFAS No. 109, Accounting for Income Taxes,
we record deferred tax assets for deductible temporary differences, net of
operating loss carryforwards. To the extent that it is more likely
than not that some portion or all of the deferred tax asset will not be
realized, a valuation allowance is established.
Derivatives
We
account for warrants issued with shares of common stock in a private placement
according to EITF Issue 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock, and the guidance of EITF 00-19-2, Accounting for Registration Payment
Arrangements. In accordance with the accounting mandate, the
derivative liability associated with the warrants is to be adjusted to fair
value (calculated using the Black Scholes method) at each balance sheet date and
is accordingly reassessed at each such time to determine whether the warrants
should be classified (or reclassified, as appropriate) as a liability or as
equity. The corresponding fair value adjustment is included in the consolidated
statements of operations as other expenses as the value of the warrants
increases from an increase in our stock price at the balance sheet date and as
other income as the value of the warrants decreases from a decrease in our stock
price.
MANAGEMENT
OVERVIEW
During
the year ended December 31, 2008, we focused on our two product lines,
QuickVerse®
and FormTool®.
Specifically, we focused on their individual technological features in order to
meet our development schedule and our annual upgrade release for both product
lines as well as focusing on expanding the content for both product
lines. The annual upgrade release of FormTool®,
FormTool®
7.0, was released in September 2008 and the annual upgrade release of
QuickVerse®,
QuickVerse®
2009, was released in October 2008. For the fourth consecutive year,
QuickVerse®
2009 reached retail stores prior to the beginning of the holiday
season. Furthermore, for the year ended December 31, 2008, we
concentrated on building our technology platform and infrastructure in order to
become a more Webcentric provider of online products.
QuickVerse®
During
the year ended December 31, 2008, our development team worked on a number of
projects which resulted in five new content collections for our QuickVerse®
product line, an upgrade to our QuickVerse®
Windows platform, and an upgrade to our QuickVerse®
Mobile platform. These titles, along with their corresponding retail
prices, include:
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H.
A. Ironside Collection with a retail price of $199.95,
|
|
|
▪
|
Timothy
Dwight Collection with a retail price of $49.95,
|
|
|
▪
|
John
Calvin Collection with a retail price of $49.95,
|
|
|
▪
|
Arthur
W. Pink Collection with a retail price of $49.95,
|
|
|
▪
|
John
Bunyan Collection with a retail price of $49.95,
|
|
|
▪
|
QuickVerse®
2009 (Windows) in six different editions with a range in retail price from
$39.95 to $799.95; and
|
|
|
▪
|
QuickVerse®
Mobile 4.0 in two different editions with a range in retail price from
$39.95 to $69.95.
|
Additionally,
in June 2008 we released a free downloadable version of QuickVerse®
2008, which allows new customers to get a look and feel of our QuickVerse®
product line at no cost. In September 2008, we released an online tutorial for
our QuickVerse®
product line, which guides customers through a movie presentation on how to
navigate and use QuickVerse®
to its fullest potential.
In May
2008, we launched a new feature on our website, www.quickverse.com,
called the Books page which enables our QuickVerse®
customers to purchase additional content and immediately download that content
for use within their QuickVerse®
software. Our Books page currently features over 180 individual books
and/or collections with a range in retail price from $4.95 to $249.95.
Furthermore, in December 2008 we updated our QuickVerse®
website, which resulted in the creation of a new front-end, flash-enabled page
viewing feature and streamlined our shopping cart process.
Over
time, we anticipate the number of downloadable options to grow substantially as
we continue to expand and build upon our website technology. Along
with the annual upgrade release of QuickVerse®
in October 2008, we also offered the upgrade to QuickVerse®
2009 as a download for the first time; and therefore, providing instantaneous
delivery to the customer.
Comparatively,
during the year ended December 31, 2007, we released the following:
|
▪
|
QuickVerse®
2007 Macintosh, in three different editions with a range in retail price
from $59.95 to $349.95,
|
|
|
▪
|
Theological
Dictionary of the New Testament: Abridged®,
commonly known as “Little Kittel”, with a retail price of
$59.95,
|
|
|
▪
|
Word
Studies in the Greek New Testament®
Collection with a retail price of $59.95,
|
|
|
▪
|
The
Pulpit Commentary®
Collection with a retail price of $99.95,
|
|
|
▪
|
The
Biblical Illustrator®
Collection with a retail price of $99.95,
|
|
|
▪
|
NIV
Family®
package, which includes access to all currently offered software
platforms with a retail price of $39.95,
|
|
|
▪
|
QuickVerse®
Bible Suite Hybrid, which includes access to all currently offered
software platforms with a retail price of $39.95; and
|
|
|
▪
|
QuickVerse®
2008 (Windows), in seven different editions with a range in retail price
from $39.95 to $799.95.
|
During
October 2007, we sold all of the assets and liabilities associated with our
Membership Plus® product
line for $1,675,000 in cash. The Membership Plus® product
line had accounted for approximately 25% of our 2007 aggregate revenues through
the date of the sale.
FormTool®
During
February 2008, we acquired FormTool.com and the FormTool®
line of products. The FormTool®
product line offers quality, professionally designed forms for business,
accounting, construction, sales, real estate, human resources and personal
organization needs. In September 2008, we re-launched the
FormTool.com website as an online marketplace for purchasing the FormTool®
product line, as well as a “one-stop” shop for finding, purchasing and
downloading customizable forms for a wide range of business and consumer needs.
In addition, FormTool®
7.0, the annual upgrade release of the FormTool®
product line, was released in September 2008. FormTool.com now offers
the FormTool®
product line in four downloadable editions that range in retail price from
$24.99 to $199.99 as well as downloadable forms on an individual basis or in
bulk groups.
|
Statements
of Operations for Years Ended December 31
|
2008
|
2007
|
Change
|
|||||||||
|
Net
revenues
|
$ | 2,414,427 | $ | 3,165,401 | $ | (750,974 | ) | |||||
|
Cost
of sales
|
(1,005,781 | ) | (1,352,794 | ) | 347,013 | |||||||
|
Gross
profit
|
$ | 1,408,646 | $ | 1,812,607 | $ | (403,961 | ) | |||||
|
Sales,
marketing and general and administrative expenses
|
(2,557,475 | ) | (2,783,435 | ) | 225,960 | |||||||
|
Gain
on sale of software product line
|
--- | 1,300,349 | (1,300,349 | ) | ||||||||
|
Income
(loss) from operations
|
$ | (1,148,829 | ) | $ | 329,521 | $ | (1,478,350 | ) | ||||
|
Gain
(loss) on fair value adjustment of derivatives
|
305,620 | (379,406 | ) | 685,026 | ||||||||
|
Gain
on debt settlement
|
491,931 | 16,000 | 475,931 | |||||||||
|
Other
income
|
20,950 | 13,040 | 7,910 | |||||||||
|
Interest
expense
|
(26,560 | ) | (39,947 | ) | 13,387 | |||||||
|
Loss
before income taxes
|
$ | (356,888 | ) | $ | (60,792 | ) | $ | (296,096 | ) | |||
|
Income
tax provision
|
--- | (541,300 | ) | 541,300 | ||||||||
|
Net
loss
|
$ | (356,888 | ) | $ | (602,092 | ) | $ | 245,204 | ||||
The
differing results of operations are primarily attributable to the
following:
|
▪
|
a
decrease in net revenues for the year ended December 31, 2008 partly
attributable to the following:
|
||
|
▪
|
an
overall net decrease in unit sales of our QuickVerse®
product line due to a reduction in the perceived value on the part of
customers of certain upgrades based on the relative frequency
thereof;
|
||
|
▪
|
the
sale of our Membership Plus®
product line during October 2007;
|
||
|
▪
|
the
decreased number of product releases; and
|
||
|
▪
|
the
current economic downturn;
|
||
|
▪
|
a
decrease in cost of sales for the year ended December 31, 2008 due
primarily to decreased direct costs, amortization of software development
costs and royalty costs;
|
||
|
▪
|
a
decrease in sales and marketing and general and administrative expenses
for the year ended December 31, 2008 arising from our continuous efforts
to cut costs; and
|
||
|
▪
|
most
notably for the year ended December 31, 2008:
|
||
|
▪
|
the
recognition of a gain related to the fair value adjustment of derivatives
up to the settlement date of March 6, 2008 due to the fluctuation of our
stock price; and
|
||
|
▪
|
the
recognition of a gain on debt settlement which is mainly attributed to the
settlement of derivative liabilities in relation to warrants issued in
November 2004 and which were canceled on March 6, 2008 in exchange for a
single cash payment ($150,000) that was less than the calculated fair
value of the derivatives on such
date.
|
||
Our
software products are highly seasonal. More than 50% of our annual sales are
expected to occur in the five months of September through January; the five
months of April through August are generally our weakest, generating less than
30% of our annual sales.
Revenues
The
following table presents our revenues for 2008 and 2007 and dollar and
percentage changes from the prior year.
|
|
Change
|
|||||||||||||||||||||||
| Revenues for Years Ended December 31 |
2008
|
%
to Sales
|
2007
|
%
to Sales
|
$
|
%
|
||||||||||||||||||
|
Gross
revenues
|
$ | 2,720,930 | 100 | % | $ | 3,674,514 | 100 | % | $ | (953,584 | ) | 26 | % | |||||||||||
|
Less
estimated sales returns and allowances
|
(306,503 | ) | 11 | % | (509,113 | ) | 14 | % | 202,610 | 40 | % | |||||||||||||
|
Net
revenues
|
$ | 2,414,427 | 89 | % | $ | 3,165,401 | 86 | % | $ | (750,974 | ) | 24 | % | |||||||||||
During
each of the years ended December 31, 2008 and 2007, our sales efforts were
focused on directly targeting end-users through telemarketing and Internet
sales. Our decrease in gross revenues for the year ended December 31,
2008 was primarily attributed to the sale of our Membership Plus®
product line in October 2007. By way of comparison, Membership Plus®
product revenue was approximately $768,000 for the year ended December 31,
2007. In addition, during the year ended December 31, 2007 we
released an upgrade to our QuickVerse®
Macintosh product line and had liquidation sales of our QuickVerse®
2006 product line (Windows and Macintosh editions) whereas for the year ended
December 31, 2008 we did not have an upgrade to the Macintosh platform nor
liquidation sales. Furthermore, during 2008, our retail sales consisted of more
QuickVerse®
Bible Suite editions (which is the least expensive edition of our
QuickVerse®
products with a retail price of $39.95) and less of QuickVerse®
Platinum (which is the most expensive edition of our QuickVerse®
products with a retail price of $799.95). Finally, due to increased frequency
and consistency in our development schedule, and the annual releases of our
flagship product, QuickVerse®,
upgrade sales have not been increasing at as rapid a rate as they have in
previous years. Although there can be no assurance, we anticipate
that our revenues in the future related to the QuickVerse®
product line will remain consistent with the 2008 figures as we continue to
expand the content available for our QuickVerse®
products, develop new products for multiple platforms, offer our products at a
range of price points intended to appeal to various market sub-segments and
offer new venues to gain access to the expanded content available for our
QuickVerse®
customers.
During
the year ended December 31, 2008, we did recognize approximately $78,000 in
revenue from the FormTool®
product line, which we acquired in February 2008. We do anticipate
our revenues in relation to the FormTool®
product line to increase in the near-term based on our launch of the new and
enhanced FormTool.com website and our annual upgrade release of the
FormTool®
desktop product line in September 2008.
Due to
the sale of our Membership Plus®
product line, we anticipate that our reported revenues will continue to
experience a substantial decline in the near term. However, and
although there can be no assurance, we are currently pursuing opportunities for
strategic product line acquisitions, as we did with FormTool®,
which we are hopeful will enable us to achieve more favorable results of
operations than we have historically achieved throughout the period in which we
owned the Membership Plus®
product line. Our divestiture of the Membership Plus®
product line was driven by a combination of our need to raise cash and a
strategic determination to begin a long-term shift in our product lines away
from those within the faith-based vertical market and more towards those that
extend across business-to-business and consumer segments more
generally.
As a
percentage of gross revenues, our sales returns and allowances decreased for the
year ended December 31, 2008 compared to December 31, 2007 due to the increased
stability of our products. Further, for the year ended December 31, 2007, we
experienced a significant increase in actual returns due to the return of
liquidated product sold during the first and second quarter of 2007. Typically,
product returns trend upward after a new version is released as distributors and
retail stores return old product in exchange for the new version release. Due to
our annual release of QuickVerse®
in October 2008, we did experience this upward trend of product returns within
the fourth quarter of 2008. We also anticipate that this trend will carryover to
the first quarter of 2009 as the distributors and retail stores finalize their
old product exchange for the new version release. It is our objective
to release enhanced versions of our biggest-selling products on an annual basis
generally going forward, and as a percentage of gross revenues we anticipate
sales returns and allowances to decrease over time as a result of increased
stability in the functionality of our products, decreasing reliance on retail
sales and increasing reliance on direct sales, which have historically resulted
in fewer returns, and improved planning in the timing of new product version
releases.
Cost
of Sales
The
following table presents our cost of sales for 2008 and 2007 and dollar and
percentage changes from the prior year.
|
|
Change
|
|||||||||||||||||||||||
| Cost of Sales for Years Ended December 31 |
2008
|
%
to Sales
|
2007
|
%
to Sales
|
$
|
%
|
||||||||||||||||||
|
Direct
costs
|
$ | 324,814 | 12 | % | $ | 492,446 | 13 | % | $ | (167,632 | ) | 34 | % | |||||||||||
|
Less
estimated cost of sales returns and allowances
|
(45,900 | ) | 2 | % | (76,665 | ) | 2 | % | 30,765 | 40 | % | |||||||||||||
|
Amortization
of software development costs
|
318,880 | 12 | % | 381,941 | 10 | % | (63,061 | ) | 17 | % | ||||||||||||||
|
Royalties
|
233,680 | 9 | % | 324,328 | 9 | % | (90,648 | ) | 28 | % | ||||||||||||||
|
Freight-out
|
108,316 | 4 | % | 152,770 | 4 | % | (44,454 | ) | 29 | % | ||||||||||||||
|
Fulfillment
|
65,991 | 2 | % | 77,974 | 2 | % | (11,983 | ) | 15 | % | ||||||||||||||
|
Cost
of sales
|
$ | 1,005,781 | 37 | % | $ | 1,352,794 | 37 | % | $ | (347,013 | ) | 26 | % | |||||||||||
Cost of
sales consists primarily of direct costs, amortization of capitalized software
development costs, non-capitalized technical support wages, royalties accrued to
third party providers of intellectual property and the costs associated with
reproducing, packaging, fulfilling and shipping our products.
The
decrease in direct costs for the year ended December 31, 2008 is predominately
attributable to the sale of Membership Plus®. As
a percentage of gross revenues, direct costs decreased slightly and we
anticipate relatively the same for the future as we continue to review our hard
costs and seek out those vendors that provide the most competitive
prices.
Royalties
decreased significantly in real terms for the year ended December 31, 2008 due
to the following:
|
▪
|
decreased
royalty rates on our higher end QuickVerse®
editions (i.e. Deluxe and Platinum) through a realignment of our content
mix in the QuickVerse®
2008 and 2009 versions and
|
|
|
▪
|
a
change in our sales mix for the year ended December 31, 2008 which
resulted in more sales of our lower end QuickVerse®
edition, QuickVerse®
Bible Suite, compared to those sales of our top of the line
QuickVerse®
edition, QuickVerse®
Platinum.
|
However,
our royalty accruals are expected to increase in the future in real terms as
sales to new customers increase, more development projects are implemented for
new and/or enhanced products, and as we continue to expand the content available
for our QuickVerse®
line of products. Upgrade sales will remain only subject to royalties on their
content additions.
Freight
and fulfillment costs decreased in real terms as a result of our decreased sales
volume but remained steady as a percentage of gross
revenues. Although there can be no assurance, we anticipate freight
costs to decrease in the future as a percentage of gross revenues as we continue
to focus our sales efforts on direct and/or upgrade sales, of which our
preferred method of delivery is via a download from our website. Furthermore,
due in large part to the establishment of our own fulfillment center in June
2007, fulfillment costs should remain relatively stable in the near future as a
percentage of gross revenues.
The
amortization recognized during the year ended December 31, 2008 resulted mainly
from the following software releases:
|
▪
|
QuickVerse®
2007 Mobile (released December 2006),
|
|
|
▪
|
QuickVerse®
2007 Macintosh (released March 2007),
|
|
|
▪
|
QuickVerse®
2008 (released November 2007),
|
|
|
▪
|
Multiple
new content additions for QuickVerse®
products (released April 2007 through September 2008),
|
|
|
▪
|
FormTool®
7.0 (released September 2008) and
|
|
|
▪
|
QuickVerse
2009 (released October 2008).
|
Comparatively,
during the year ended December 31, 2007, the amortization recognized resulted
mainly from the following software releases:
|
▪
|
QuickVerse
2006 Macintosh (released June 2005),
|
|
|
▪
|
QuickVerse
2006 (released September 2005),
|
|
|
▪
|
QuickVerse®
2007 (released August 2006),
|
|
|
▪
|
Membership
Plus®
2007 (released October 2006),
|
|
|
▪
|
QuickVerse®
2007 Mobile (released December 2006),
|
|
|
▪
|
QuickVerse®
2007 Macintosh (released March 2007) and
|
|
|
▪
|
QuickVerse®
2008 (released November
2007).
|
The
decreased amount of new and/or enhanced product releases during the fiscal year
2008 led to the decreased amount of amortization in real
terms. However, overall decreased revenues as well as shorter
timeframes between our product upgrades led to the increased amount of
amortization as a percentage of gross revenues for the year ended December 31,
2008.
In the
future, as we continue to implement our strategy to become a principally
Webcentric provider of online products, we anticipate experiencing a decrease in
cost of sales, specifically direct costs, freight and fulfillment, as more of
our products will become available for download.
|
Software
Development Costs For Years Ended December 31
|
2008
|
2007
|
||||||
|
Beginning
balance
|
$ | 392,173 | $ | 491,695 | ||||
|
Capitalized
|
256,725 | 282,419 | ||||||
|
Amortized
(cost of sales)
|
(318,880 | ) | (381,941 | ) | ||||
|
Ending
balance
|
$ | 330,018 | $ | 392,173 | ||||
|
Research
and development expense (General and administrative)
|
$ | 237,619 | $ | 139,281 | ||||
The
overall decrease in capitalized costs for the year ended December 31, 2008 is a
result of the sale of our Membership Plus®
product line and our development staff having been faced with greater
maintenance challenges than anticipated, primarily in the first quarter of 2008,
in connection with the new layout and engine design within the QuickVerse®
2008 product line. The maintenance challenges also led to the relative increase
in research and development expense. Despite these challenges in
2008, our development team focused their efforts on our annual upgrade releases
of QuickVerse®
and FormTool®,
several new content additions for our QuickVerse®
products, as well as the enhanced technology and infrastructure on our websites
www.quickverse.com
and www.formtool.com, and
we have experienced increased efficiency in our development output (both
internal and external).The significant increase in research and development
expense for the year ended December 31, 2008 is mainly the result of abandoning
three development projects and therefore, all capitalized costs were expensed
plus the maintenance challenges mentioned above.
Sales,
General and Administrative
|
|
Change
|
|||||||||||||||||||||||
| Sales, General and Administrative Costs for Years Ended December 31 |
2008
|
%
to Sales
|
2007
|
%
to Sales
|
$
|
%
|
||||||||||||||||||
|
Selected
expenses:
|
||||||||||||||||||||||||
|
Commissions
|
$ | 67,709 | 2 | % | $ | 183,522 | 5 | % | $ | (115,813 | ) | 63 | % | |||||||||||
|
Advertising
and direct marketing
|
190,274 | 7 | % | 245,274 | 7 | % | (55,000 | ) | 22 | % | ||||||||||||||
|
Sales
and marketing wages
|
358,129 | 13 | % | 321,964 | 9 | % | 36,165 | 11 | % | |||||||||||||||
|
Other
sales and marketing costs
|
15,932 | 1 | % | 26,250 | 1 | % | (10,318 | ) | 39 | % | ||||||||||||||
|
Total
sales and marketing
|
$ | 632,044 | 23 | % | $ | 777,010 | 21 | % | $ | (144,966 | ) | 19 | % | |||||||||||
|
Personnel
costs
|
$ | 601,763 | 22 | % | $ | 622,037 | 17 | % | $ | (20,274 | ) | 3 | % | |||||||||||
|
Amortization
and depreciation
|
466,225 | 17 | % | 537,023 | 15 | % | (70,798 | ) | 13 | % | ||||||||||||||
|
Research
and development
|
237,619 | 9 | % | 139,281 | 4 | % | 98,338 | 71 | % | |||||||||||||||
|
Corporate
services
|
80,180 | 3 | % | 127,864 | 3 | % | (47,684 | ) | 37 | % | ||||||||||||||
|
Other
general and administrative costs
|
539,644 | 20 | % | 580,220 | 16 | % | (40,576 | ) | 7 | % | ||||||||||||||
|
Total
general and administrative
|
$ | 1,925,431 | 71 | % | $ | 2,006,425 | 55 | % | $ | (80,994 | ) | 4 | % | |||||||||||
|
Total
sales, marketing, general and administrative
|
$ | 2,557,475 | 94 | % | $ | 2,783,435 | 76 | % | $ | (225,960 | ) | 8 | % | |||||||||||
As gross
revenues decreased for the year ended December 31, 2008, total sales, marketing,
general and administrative costs also decreased. For the year ended
December 31, 2008, total sales and marketing costs decreased in real terms but
increased as a percentage of gross revenues due to the overall decrease in gross
revenues. Commissions decreased significantly as we have discontinued
our contract with a third party for telemarketing services. Although
there can be no assurance, we do not anticipate relying on a third party for
telemarketing services in the future, and therefore, we anticipate third party
commissions to further decrease in the future. Advertising and direct
marketing costs also decreased as we were more selective in our advertising
venues during the fourth quarter of 2008 when we usually increase advertising
due to the annual upgrade release of QuickVerse®.
We anticipate advertising and direct marketing costs to stay in line with the
2008 figures in future periods while we continue to enhance our product
visibility online, increase and focus more on our direct marketing efforts, yet
limit the scope and frequency of our print advertising campaigns to those that
we can capitalize on the most in order to maximize sales associated with new
products, product enhancements and potential new product
lines. During the year ended December 31, 2008, sales and marketing
wages - reclassified, increased as we began to transform our customer service
department and its representatives into our in-house direct telemarketing sales
team in late 2007. While we would like to expand our in-house
direct-telemarketing sales team in relation to our current and potential new
product lines, we may not be able to do so in the immediate future due to the
current economic climate. Therefore, we anticipate our sales and
marketing wages to remain relatively steady in future periods.
In
addition to the decrease in total net personnel costs, gross direct salaries and
wages, before adjustments of capitalized wages and reclassifications, decreased
approximately $60,000, from approximately $1,313,000 for the year ended December
31, 2007 to approximately $1,253,000 for the year ended December 31, 2008. The
decrease in direct salaries and wages was a result of the departure of a
customer service representative, a member of the product development team as we
have streamlined this department with external, independently contracted
developers, and the further reduction in our technical support staff in relation
to the sale of our Membership Plus®
product line. However, as a percentage of gross revenues, gross direct salaries
and wages increased approximately 10% from approximately 36% for the year ended
December 31, 2007 to approximately 46% for the year ended December 31, 2008. Due
to this significant increase as well as the current economic climate, we
anticipate direct salaries and wages to decrease slightly in the
future.
The
decrease in the amortization and depreciation expense is mainly attributable to
the decrease in amortization. The software license we acquired in 1999, from
which we derive our base intellectual property rights associated with the
products that are responsible for generating the overwhelming majority of our
revenues (the “1999 license”), is being amortized over a 10 year useful life and
will have been fully amortized by the close of the year ending December 31,
2009. Amortization expense for the year ended December 31, 2008 and 2007 reflect
the continual amortization of the 1999 license as well as the amortization of
the FormTool®
assets we acquired in February 2008. The FormTool®
assets are amortized over a period of years that range from less than one year
to ten years and approximate $3,000 of amortization expense each
month. Due to the sale of the Membership Plus®
product line, we no longer carry on our books the net value associated with the
Membership Plus®
product in relation to the 1999 license and, as a result, we no longer had the
corresponding amortization expense as of mid-October 2007. Finally, the
amortization expense for 2007 reflects the amortization of our website,
www.quickverse.com, the most recent version of which we launched during the
second quarter of 2004 and which such amortization was fully recognized as of
March 2007. However, for the year ended December 31, 2008 we
recognized amortization expense for our FormTool®
website, www.formtool.com,
which was successfully re-launched in September 2008. Overall, we
anticipate amortization and depreciation expense to decrease in future
periods.
Research
and development costs include direct production costs (including labor directly
associated with the development projects), indirect costs (including allocated
fringe benefits, payroll taxes, facilities costs and management supervision),
and other direct costs (including costs of outside consultants, purchased
software to be included in the software product being developed, travel
expenses, material and supplies, and other direct costs). The increase in
software development costs related to third-party developers and direct labor
expensed as research and development reflects less capitalization of research
and development costs for the year ended December 31, 2008. During the first
quarter of 2008, our development staff was faced with greater maintenance issues
than anticipated due to a new layout and engine design within the
QuickVerse®
2008 product line which ultimately resulted in an increase in research and
development costs expensed. Furthermore, during the year ended December 31, 2008
we determined that three of our development projects were no longer viable and
therefore, approximately $47,000 of capitalized costs were expensed. In future
periods, we anticipate research and development expenses to slightly decrease as
we have experienced increased efficiency in our development output (both
internal and external).
In March
2007, we engaged the services of a consultant for business development related
advisory services. The consultant’s contract expired in June 2008, at which time
we extended the contract on a month by month basis. Corporate service
fees decreased for the year ended December 31, 2008, due to the following items
related to the contract noted above, that took place in the year ended December
31, 2007:
|
▪
|
in
July 2007, we provided for additional compensation consisting of warrants
to purchase up to 2,300,000 shares of common stock at $0.032 per share and
therefore, the related expense was recognized over the remaining term of
the contract (June 2008) and
|
|
|
▪
|
we
recognized approximately $41,000 related to the annual compensation
provision within the agreement noted above, which provided for annual
compensation of 5% of our fiscal 2007 earnings before interest, taxes,
depreciation and amortization (EBITDA) in excess of $500,000 (excluding
all non-cash charges).
|
In
December 2008, we entered into a new contract with the consultant for additional
business development related advisory services and such agreement is scheduled
to expire in December 2010.
Gain
on Sale of Software Product Line
On
October 18, 2007, we sold all of the assets and liabilities associated with our
Membership Plus® product
line for $1,675,000 in cash. The Membership Plus® product
line had accounted for approximately 25% of our 2007 aggregate revenues through
the date of the sale. The specific assets conveyed in the transaction included,
among others, underlying software source code, existing product inventories,
online marketing channels, registered trade names, and accounts
receivable. The Membership Plus® product
line did not qualify as a component as defined in SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, and therefore has been included in income
(loss) from operations on our Consolidated Statements of
Operations.
Gain
(Loss) on Fair Value Adjustment of Derivatives
In
connection with warrants issued in November 2004, a non-cash fair value
adjustment of approximately $306,000 and ($379,000) has been included in other
income (expenses) for the years ended December 31, 2008 and 2007, respectively.
These warrants have been accounted for as a liability according to the guidance
of EITF 00-19, Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock and the guidance of EITF 00-19-2, Accounting for Registration Payment
Arrangements. In accordance with the accounting mandate, the
derivative liability associated with these warrants has been adjusted to fair
value at each balance sheet date and was accordingly reassessed at each such
time to determine whether the warrants should be classified (or reclassified, as
appropriate) as a liability or as equity. Under EITF 00-19, a decrease in our
stock price results in a decrease in the fair value of the derivative liability
and a valuation gain to be recognized in our income statement whereas an
increase in our stock price results in an increase in the fair value of the
derivative liability and a valuation loss to be recognized in our income
statement. At December 31, 2008 and 2007, the fair value of the derivative
liability was approximately $0 and $906,000, respectively.
On March
6, 2008, we entered into and consummated an agreement with Barron Partners, LP
in which the warrants issued in November 2004 were immediately canceled in
exchange for a single cash payment to Barron Partners, LP in the amount of
$150,000. As a result of this transaction, these warrants are now
null and void for all purposes.
Gain
on Debt Settlement
We
recorded a one time gain of approximately $451,000 in the year ended December
31, 2008 due to the agreement with Barron Partners, LP noted above calling for a
cash payment that was less than the fair value of the derivatives on such date.
In the future, we do not anticipate the recognition of a derivative liability or
a non-cash fair value adjustment which would be included in other expenses or
other income. Furthermore, for the year ended December 31, 2008 we
recorded a gain of approximately $41,000 related to settlements of debt owed to
two vendors whom we no longer do business with. Comparatively, for the year
ended December 31, 2007, we recorded a gain of $16,000 related to a debt
extinguishment settlement with a consultant.
Provision
for Income Taxes
For the
year ended December 31, 2008, based on uncertainty about the timing of and
ability to generate future taxable income and our assessment that the
realization of the deferred tax assets no longer met the “more likely than not”
criterion for realization, we provided for a full valuation allowance against
our net deferred tax assets. During the year ended December 31, 2007, our
provision for income taxes included a net deferred tax expense of approximately
$541,000 primarily related to a substantial reversal of our deferred income tax
valuation allowance.
As of
December 31, 2008, we have net operating loss carryforwards, for federal income
tax purposes, of approximately $8,562,000. These carryforwards are the result of
income tax losses generated in 2000 ($873,000 expiring in 2020), 2001
($5,191,000 expiring in 2021), 2002 ($235,000 expiring in 2022), 2005 ($956,000
expiring in 2025), 2006 ($584,000 expiring in 2026), and 2008 ($723,000 expiring
in 2028). We will need to achieve a minimum annual taxable income, before
deduction of operating loss carryforwards, of approximately $505,000 to fully
utilize the current loss carryforwards. See Note 7, Income Taxes, in the Notes to
the Consolidated Financial Statements for the year ended December 31, 2008 for
further information regarding the components of our income tax
provision.
LIQUIDITY
AND CAPITAL RESOURCES
Our
primary needs for liquidity and capital resources are the working capital
requirements of our continued operations, which includes the ongoing internal
development of new products, expansion and upgrade of existing products, and
marketing and sales, as well as funding for the acquisition of new product lines
and/or companies. At this time it is unlikely that cash generated through our
continuing operations will be sufficient to sustain our continuing operations.
Furthermore, our pursuit of an aggressive growth plan, whether based on
internally developed products, licensing opportunities, or strategic product
line and/or company acquisitions, will likely require funding from outside
sources or the divestiture of one or more existing product lines (as recently
occurred with respect to our Membership Plus® product
line). Funding from outside sources may include but is not limited to the
pursuit of other financing options such as commercial loans, common stock and/or
preferred stock issuances and convertible notes. At this time, we have no
legally committed funds for future capital expenditures.
The
divestiture of our Membership Plus® product
line in October 2007 was driven by a combination of our need to raise cash and a
strategic determination to begin a long-term shift in our product lines away
from those within the faith-based vertical market and more towards those that
extend across the business-to-business and consumer segments more
generally. With a portion of the funds we realized from the sale of
our Membership Plus® product
line, we purchased FormTool® in
February 2008 which was our first product line acquisition outside of the
faith-based market. Although there can be no assurance, we anticipate
acquiring additional product lines and/or entering into business combinations
which will either replace or increase the revenue and free cash flow previously
produced by the Membership Plus® product
line.
|
Working
Capital at December 31
|
2008
|
2007
|
||||||
|
Current
assets
|
$ | 712,066 | $ | 1,600,326 | ||||
|
Current
liabilities
|
$ | 1,815,561 | $ | 2,614,891 | ||||
|
Retained
deficit
|
$ | 8,057,377 | $ | 7,700,489 | ||||
While
liquidity for our day-to-day continued operations remains an ongoing concern for
us, and while there can be no continuing assurance, given the fact that a
substantial portion of our net sales – 57% of which we collected during the year
ended December 31, 2008 through credit card processing transactions – are able
to be collected in a much shorter timeframe (several days) than that in which we
must generally pay our trade payables (30 days) and our accrued royalties
(quarterly, semi-annually, or annually), the situation suggested by our
consistently and significantly negative ratio of current assets to current
liabilities has historically been manageable.
|
Cash
Flows for Years Ended December 31
|
2008
|
2007
|
Change
|
%
|
||||||||||||
|
Cash
flows (used) provided by operating activities
|
$ | (113,023 | ) | $ | 77,172 | $ | (190,195 | ) | 246 | % | ||||||
|
Cash
flows (used) provided by investing activities
|
$ | (403,838 | ) | $ | 1,186,517 | $ | (1,590,355 | ) | 134 | % | ||||||
|
Cash
flows (used) by financing activities
|
$ | (194,315 | ) | $ | (177,814 | ) | $ | (16,501 | ) | 9 | % | |||||
Net cash
used by operating activities increased for the year ended December 31, 2008
primarily due to a reduction in cash collections, from reduced net revenues, and
continued payments made to employees, content providers and
vendors.
The
increase in net cash used by investing activities for the year ended December
31, 2008 was primarily a result of the purchase of FormTool® in
February 2008. Specifically, and in connection with FormTool®, we
increased our cash investment for the development and re-launch of the
FormTool.com website. Offsetting this to some extent, however, was
the fact that, during the year ended December 31, 2008 we capitalized fewer
costs associated with software development as compared to the year ended
December 31, 2007 due to maintenance issues (as previously described) as well as
the curtailment of development work associated with the now-divested Membership
Plus® product
line. Furthermore, in the year ended December 31, 2007 cash provided by
investing activities was primarily attributable to the sale of our Membership
Plus® product
line.
The
increase in net cash used by financing activities for the year ended December
31, 2008 was the result of our settlement payment to Barron Partners, LP in the
amount of $150,000 in exchange for the cancellation of the warrants issued in
November 2004 along with continued payments made on long-term notes
payable.
Financing
We have
been unable to secure bank financing due to our internal financial ratios and
negative working capital position and do not expect that we will be successful
in securing any such financing unless and until our ratios in this regard
improve. However, it may be possible to secure financing on our open accounts
receivable in order to satisfy our future financing needs. Equity financing,
too, remains an option for us, though no definitive prospects for any such
financing have been specifically identified.
Contractual
Liabilities
In May
2007, we secured a new operating lease with a third-party for our corporate
office facility in Omaha, Nebraska with terms extending through May
2012. We also secured a new operating lease with a third-party for a
warehouse facility in Omaha, Nebraska with terms extending through June 2010. In
accordance with the terms of these leasehold agreements, we are responsible for
all associated taxes, insurance and utility expenses.
We lease
office space in Naperville, Illinois under an operating lease with a third-party
with terms extending through March 2009. We are responsible for all insurance
expenses associated with this lease.
At
December 31, 2007, the total future minimum rental payments required under these
leases is approximately $221,000 through the year 2012. See Note 12, Rental and Lease Information,
in the Notes to the Consolidated Financial Statements for the year ended
December 31, 2008 for more detailed information.
We lease
telephone equipment under a capital lease due to expire in November 2009. The
asset and liability under the capital lease are recorded at the present value of
the minimum lease payments. The asset is depreciated over a 5 year life. Total
minimum future lease payments under capital leases as of December 31, 2008 is
approximately $13,000 through the year 2009. See Note 12, Rental and Lease Information,
in the Notes to the Consolidated Financial Statements for the year ended
December 31, 2008 for more detailed information.
The
Potential Impact of Known Facts, Commitments, Events and Uncertainties on Future
Operating Results or Future Liquidity Requirements
New
Accounting Pronouncements
See Note
1, Summary of Significant
Accounting Policies, in the Notes to the Consolidated Financial
Statements for the year ended December 31, 2008 for information regarding the
potential effects of new accounting pronouncements on our results of operations and financial
condition.
As a
“smaller reporting company” as defined by Item 10 of Regulation S-K, we are not
required to provide this information.
Board of
Directors
FindEx.com
Inc.
We have
audited the accompanying consolidated balance sheets of FindEx.com Inc. and
subsidiaries as of December 31, 2008 & 2007, and the related consolidated
statements of operations, changes in shareholders’ equity, and cash flows for
the years then ended. Findex.com Inc.’s management is responsible for
these financial statements. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of FindEx.com Inc. and subsidiaries as
of December 31, 2008 & 2007 and the results of operations and cash flows for
the years ended December 31, 2008 & 2007 in conformity with accounting
principles generally accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As shown in the financial statements, the
Company incurred a net loss of $356,888 during the year ended December 31, 2008,
and, as of that date, had a working capital deficiency of $1,103,495 and a
retained deficit of $8,057,377. These conditions raise substantial doubt about
the Company’s ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/
BRIMMER, BUREK & KEELAN LLP
Brimmer,
Burek & Keelan LLP
Tampa,
Florida
April 15,
2009
|
CONSOLIDATED
BALANCE SHEETS
|
||||||||
|
December
31, 2008 and 2007
|
||||||||
|
2008
|
2007
|
|||||||
|
Assets
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 423,371 | $ | 1,134,547 | ||||
|
Accounts
receivable, trade, net
|
148,880 | 236,301 | ||||||
|
Inventories
|
81,545 | 93,852 | ||||||
|
Deferred
income taxes, net
|
7,500 | 34,800 | ||||||
|
Other
current assets
|
50,770 | 100,826 | ||||||
|
Total
current assets
|
712,066 | 1,600,326 | ||||||
|
Property
and equipment, net
|
37,347 | 56,214 | ||||||
|
Intangible
assets, net
|
710,771 | 979,011 | ||||||
|
Restricted
cash
|
40,000 | 40,000 | ||||||
|
Other
assets
|
115,532 | 52,860 | ||||||
|
Total
assets
|
$ | 1,615,716 | $ | 2,728,411 | ||||
|
Liabilities
and stockholders’ equity (deficit)
|
||||||||
|
Current
liabilities:
|
||||||||
|
Current
maturities of long-term debt
|
$ | 112,908 | $ | 67,591 | ||||
|
Accrued
royalties
|
720,305 | 587,692 | ||||||
|
Accounts
payable, trade
|
496,957 | 627,720 | ||||||
|
Accounts
payable, related parties
|
97,200 | 75,302 | ||||||
|
Derivatives
|
--- | 906,274 | ||||||
|
Other
current liabilities
|
388,191 | 350,312 | ||||||
|
Total
current liabilities
|
1,815,561 | 2,614,891 | ||||||
|
Long-term
debt, net
|
8,180 | 11,877 | ||||||
|
Deferred
income taxes, net
|
7,500 | 34,800 | ||||||
|
Commitments
and contingencies (Note 13)
|
||||||||
|
Stockholders’
equity (deficit):
|
||||||||
|
Preferred
stock, $.001 par value
|
||||||||
|
5,000,000
shares authorized
|
||||||||
|
-0-
and -0- shares issued and outstanding, respectively
|
--- | --- | ||||||
|
Common
stock, $.001 par value
|
||||||||
|
120,000,000
shares authorized,
|
||||||||
|
54,072,725
and 52,250,817 shares issued and outstanding, respectively
|
54,073 | 52,251 | ||||||
|
Paid-in
capital
|
7,787,779 | 7,715,081 | ||||||
|
Retained
(deficit)
|
(8,057,377 | ) | (7,700,489 | ) | ||||
|
Total
stockholders’ equity (deficit)
|
(215,525 | ) | 66,843 | |||||
|
Total
liabilities and stockholders’ equity (deficit)
|
$ | 1,615,716 | $ | 2,728,411 | ||||
|
See
accompanying notes.
|
||||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||
|
Year
Ended December 31
|
2008
|
2007
|
||||||
|
Revenues,
net of reserves and allowances
|
$ | 2,414,427 | $ | 3,165,401 | ||||
|
Cost
of sales
|
1,005,781 | 1,352,794 | ||||||
|
Gross
profit
|
1,408,646 | 1,812,607 | ||||||
|
Other
operating income and expenses:
|
||||||||
|
Sales
and marketing expenses
|
632,044 | 777,010 | ||||||
|
General
and administrative expenses
|
1,925,431 | 2,006,425 | ||||||
|
Gain
on sale of software product line
|
--- | (1,300,349 | ) | |||||
|
Total
other operating income and expenses
|
2,557,475 | 1,483,086 | ||||||
|
Income
(loss) from operations
|
(1,148,829 | ) | 329,521 | |||||
|
Gain
(loss) on fair value adjustment of derivatives
|
305,620 | (379,406 | ) | |||||
|
Gain
on debt settlement
|
491,931 | 16,000 | ||||||
|
Other
income
|
20,950 | 13,040 | ||||||
|
Interest
expense
|
(26,560 | ) | (39,947 | ) | ||||
|
Loss
before income taxes
|
(356,888 | ) | (60,792 | ) | ||||
|
Income
tax (provision)
|
--- | (541,300 | ) | |||||
|
Net
loss
|
$ | (356,888 | ) | $ | (602,092 | ) | ||
|
Net
loss per share - Basic & Diluted:
|
$ | (0.01 | ) | $ | (0.01 | ) | ||
|
Weighted
average shares used in computing basic & diluted net loss per
share:
|
53,683,926 | 50,861,639 | ||||||
|
See
accompanying notes.
|
||||||||
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
|
||||||||||||||||||||
|
Retained
|
||||||||||||||||||||
|
Common
Stock
|
Paid-In
|
Earnings
|
||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
(Deficit)
|
Total
|
||||||||||||||||
|
Balance,
December 31, 2006
|
49,788,317 | $ | 49,788 | $ | 7,592,884 | $ | (7,098,397 | ) | $ | 544,275 | ||||||||||
|
Common
stock issued for services
|
1,162,500 | 1,163 | 42,837 | --- | 44,000 | |||||||||||||||
|
Common
stock issued for cash
|
1,300,000 | 1,300 | 31,200 | --- | 32,500 | |||||||||||||||
|
Common
stock warrant issued for services
|
--- | --- | 48,160 | --- | 48,160 | |||||||||||||||
|
Net
loss, December 31, 2007
|
--- | --- | --- | (602,092 | ) | (602,092 | ) | |||||||||||||
|
Balance,
December 31, 2007
|
52,250,817 | $ | 52,251 | $ | 7,715,081 | $ | (7,700,489 | ) | $ | 66,843 | ||||||||||
|
Common
stock issued for services
|
821,908 | 822 | 33,698 | --- | 34,520 | |||||||||||||||
|
Common
stock issued for asset acquisition
|
1,000,000 | 1,000 | 39,000 | --- | 40,000 | |||||||||||||||
|
Net
loss, December 31, 2008
|
--- | --- | --- | (356,888 | ) | (356,888 | ) | |||||||||||||
|
Balance,
December 31, 2008
|
54,072,725 | $ | 54,073 | $ | 7,787,779 | $ | (8,057,377 | ) | $ | (215,525 | ) | |||||||||
|
See
accompanying notes.
|
||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||
|
Year
Ended December 31
|
2008
|
2007
|
||||||
|
Cash
flows from operating activities:
|
||||||||
| Cash received from customers | $ | 2,473,389 | $ | 3,219,742 | ||||
| Cash paid to suppliers and employees | (2,591,094 | ) | (3,128,184 | ) | ||||
| Other operating receipts | 5,375 | 19,130 | ||||||
| Interest paid | (20,459 | ) | (39,579 | ) | ||||
| Interest received | 19,766 | 4,013 | ||||||
| Taxes refunded | --- | 2,050 | ||||||
|
Net
cash (used) provided by operating activities
|
(113,023 | ) | 77,172 | |||||
|
Cash
flows from investing activities:
|
||||||||
| Acquisition of property and equipment | (11,651 | ) | (16,639 | ) | ||||
| FormTool purchase | (100,000 | ) | --- | |||||
| Proceeds from sale of property and equipment | --- | 4,334 | ||||||
| Proceeds from sale of software product line | --- | 1,675,000 | ||||||
| Cash paid for tradename | --- | (25,000 | ) | |||||
| Software development costs | (214,528 | ) | (396,220 | ) | ||||
| Website development costs | (80,359 | ) | (13,769 | ) | ||||
| Deposits refunded (paid) | 2,700 | (41,189 | ) | |||||
|
Net
cash (used) provided by investing activities
|
(403,838 | ) | 1,186,517 | |||||
|
Cash
flows from financing activities:
|
||||||||
| Payments made on long-term notes payable | (44,315 | ) | (210,314 | ) | ||||
| Proceeds from issuance of common stock | --- | 32,500 | ||||||
| Payment made for settlement of derivative liabilities | (150,000 | ) | --- | |||||
|
Net
cash (used) by financing activities
|
(194,315 | ) | (177,814 | ) | ||||
|
Net
(decrease) increase in cash and cash equivalents
|
(711,176 | ) | 1,085,875 | |||||
|
Cash
and cash equivalents, beginning of year
|
1,134,547 | 48,672 | ||||||
|
Cash
and cash equivalents, end of year
|
$ | 423,371 | $ | 1,134,547 | ||||
|
Reconciliation
of net loss to cash flows from operating activities:
|
||||||||
|
Net
loss
|
$ | (356,888 | ) | $ | (602,092 | ) | ||
|
Adjustments
to reconcile net loss to net cash (used) provided by operating
activities:
|
||||||||
|
Software
development costs amortized
|
318,880 | 381,941 | ||||||
|
Stock
and warrants issued for services
|
34,520 | 72,160 | ||||||
|
Provision
for (recovery of) bad debts
|
15,933 | 26,250 | ||||||
|
Depreciation
& amortization
|
466,225 | 537,023 | ||||||
|
(Gain)
on debt settlement
|
(491,931 | ) | --- | |||||
|
(Gain)
on sale of software product line
|
--- | (1,300,349 | ) | |||||
|
(Gain)
on disposal of property and equipment
|
--- | (1,361 | ) | |||||
|
(Gain)
loss on fair value adjustment of derivatives
|
(305,620 | ) | 379,406 | |||||
|
Change
in assets and liabilities:
|
||||||||
|
Decrease
in accounts receivable
|
71,488 | 34,683 | ||||||
|
Decrease
in inventories
|
12,307 | 41,669 | ||||||
|
Decrease
in prepaid expenses
|
61,351 | 13,538 | ||||||
|
Increase
(decrease) in accrued royalties
|
132,613 | (62,071 | ) | |||||
|
(Decrease)
in accounts payable
|
|
(67,588 | ) | (11,021 | ) | |||
|
Increase
(decrease) in income taxes payable
|
--- | 2,050 | ||||||
|
Increase
(decrease) in deferred taxes
|
--- | 541,300 | ||||||
|
(Decrease)
increase in other liabilities
|
(4,313 | ) | 24,046 | |||||
|
Net
cash (used) provided by operating activities
|
$ | (113,023 | ) | $ | 77,172 | |||
|
Schedule
of Noncash Investing and Financing Activities:
|
||||||||
| Long-term note payable issued for FormTool purchase | $ | 85,934 | $ | --- | ||||
| Equity issued for FormTool purchase | $ | 40,000 | $ | --- | ||||
|
See
accompanying notes.
|
||||||||
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Findex.com,
Inc. was incorporated under the laws of the State of Nevada on November 7, 1997,
as EJH Entertainment, Inc. On December 4, 1997, we acquired EJH
Entertainment, Inc., an Idaho corporation, in a stock-for-stock transaction. EJH
Idaho was incorporated on June 21, 1968, as Alpine Silver, Inc. Alpine changed
its name to The Linked Companies, Inc. on December 4, 1992. On September 9,
1996, The Linked Companies acquired Worldwide Entertainment, Inc., a Delaware
corporation, in a stock-for-stock transaction and changed its name to Worldwide
Entertainment, Inc. On June 27, 1997, Worldwide Entertainment changed its name
to EJH Entertainment, Inc.
On April
30, 1999, we acquired FINdex Acquisition Corporation, a Delaware corporation in
a stock-for-stock transaction and our name was changed to Findex.com, Inc.
FINdex Acquisition Corporation is a wholly-owned subsidiary without current
business operations. It was incorporated on February 19, 1999 and acquired
FinSource Ltd., a Delaware corporation in April 1999, in a stock-for-stock
transaction. The mergers with FINdex Acquisition Corporation and FinSource were
treated as reorganization mergers with the accounting survivor being
FinSource.
On March
7, 2000, we acquired Reagan Holdings, Inc., a Delaware corporation in a
stock-for-stock transaction. Reagan was incorporated on July 27, 1999 and is a
wholly-owned subsidiary without current business operations.
We are a
retail, wholesale and Internet supplier of personal computer software products
to business and religious organizations and individuals around the world. In
July 1999, we completed a license agreement with Parsons Technology, Inc., a
subsidiary of TLC Multimedia, LLC, formerly Mattel Corporation, for the Parsons
Church Division of Mattel. In so doing, we obtained the right to market, sell
and continue to develop several Bible study software products. We develop and
publish church and Bible study software products designed to simplify biblical
research and streamline church office tasks.
ACCOUNTING
METHOD
We
recognize income and expenses on the accrual basis of accounting.
PRINCIPLES
OF CONSOLIDATION
The
consolidated financial statements include the accounts of the company and our
wholly-owned subsidiaries after eliminations.
USE
OF ESTIMATES
The
preparation of consolidated financial statements in conformity with Generally
Accepted Accounting Principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Significant estimates used in the consolidated financial
statements include the estimates of (i) doubtful accounts, sales returns, price
protection and rebates, (ii) provision for income taxes and realizability of the
deferred tax assets, and (iii) the life and realization of identifiable
intangible assets. The amounts we will ultimately incur or recover could differ
materially from current estimates.
CONCENTRATIONS
Financial
instruments that potentially subject us to concentrations of credit risk consist
of cash and cash equivalents and accounts receivable. We place our cash and cash
equivalents at well-known, quality financial institutions. We currently maintain
our cash balances in one financial institution located in Omaha, Nebraska. The
balances are insured by the Federal Deposit Insurance Corporation up to
$250,000. The maximum loss that would have resulted from that risk totaled
$117,554 and $1,119,557 at December 31, 2008 and 2007, respectively, for the
excess of the deposit liabilities reported by the bank over the amount that
would have been covered by federal insurance.
We sell a
majority of our products to consumers through distributors, Christian
bookstores, Internet and direct marketing efforts. Although we attempt to
prudently manage and control accounts receivable and perform ongoing credit
evaluations in the normal course of business, we generally require no collateral
on our product sales. During 2008, we incurred sales transactions with
approximately 19,000 consumers and 450 retail bookstores and
distributors. Our top five retail customers in aggregate accounted
for 29% and 33% of gross sales for the years ended December 31, 2008 and 2007,
respectively, as indicated below.
|
Sales
to Top 5 Retail Customers – Percent to Total Sales
|
||||||||||||
|
Customers
|
||||||||||||
|
A
|
B –
E Combined
|
Total
|
||||||||||
|
2008
|
17%
|
12%
|
29%
|
|||||||||
|
2007
|
11%
|
22%
|
33%
|
|||||||||
Accounts
receivable relating to customer A was $-0- for both December 31, 2008 and 2007,
respectively.
During
the years ended December 31, 2008 and 2007, we derived our total revenue from
the following sales breakdown:
|
2008
|
2007
|
|||||||
|
QuickVerse®
|
86%
|
72%
|
||||||
|
Membership
Plus®
|
-0-%
|
21%
|
||||||
|
FormTool®
|
3%
|
-0-%
|
||||||
|
Other
software titles
|
11%
|
7%
|
||||||
|
Total
|
100%
|
100%
|
||||||
During
the years ended December 31, 2008 and 2007, four vendors provided purchases
individually of 10% or more of the total product and material purchases as
follows:
|
Major
Vendors – Percent to Total Product and Material Purchases
|
||||||||||||||||||||
|
Vendors
|
||||||||||||||||||||
|
A
|
B
|
C
|
D
|
Total
|
||||||||||||||||
|
2008
|
37%
|
15%
|
12%
|
8%
|
72%
|
|||||||||||||||
|
2007
|
22%
|
15%
|
7%
|
20%
|
64%
|
|||||||||||||||
|
Major
Vendors – Accounts Payable Balances in Dollars
|
||||||||||||||||||||
|
Vendors
|
||||||||||||||||||||
|
A
|
B
|
C
|
D
|
Total
|
||||||||||||||||
|
2008
|
$ | 11,412 | $ | 4,257 | $ | -0- | $ | 2,001 | $ | 17,670 | ||||||||||
|
2007
|
$ | 18,312 | $ | 1,650 | $ | 5,975 | $ | 13,418 | $ | 39,355 | ||||||||||
ROYALTY
AGREEMENTS
We have
entered into certain agreements whereby we are obligated to pay royalties for
content of software published. We generally pay royalties based on a percentage
of sales on respective products or on a fee per unit sold basis. We expense
software royalties as product costs during the period in which the related
revenues are recorded. See Note 13.
CASH
AND CASH EQUIVALENTS
We
consider all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
ACCOUNTS
RECEIVABLE
We sell
our products to resellers and distributors generally under terms appropriate for
the creditworthiness of the customer. Our terms generally range from net 30 days
for domestic resellers, net 60 days for domestic distributors, to net 90 days
for international resellers and distributors. Receivables from customers are
unsecured. We continuously monitor our customer account balances and actively
pursue collections on past due balances.
We
maintain an allowance for doubtful accounts comprised of two components, (i)
historical collections performance and (ii) specific collection issues. If
actual bad debts differ from the reserves calculated based on historical trends
and known customer issues, we record an adjustment to bad debt expense in the
period in which the difference occurs. Such adjustment could result in
additional expense or a reduction of expense.
Our
accounts receivable go through a collection process that is based on the age of
the invoice and requires attempted contacts with the customer at specified
intervals and the assistance from other personnel within the company who have a
relationship with the customer. If after a number of days, we have been
unsuccessful in our collections efforts, we may turn the account over to a
collection agency. We write-off accounts to our allowance when we have
determined that collection is not likely. The factors considered in reaching
this determination are (i) the apparent financial condition of the customer,
(ii) the success we’ve had in contacting and negotiating with the customer and
(iii) the number of days the account has been outstanding. To the extent that
our collections do not correspond with historical experience, we may be required
to incur additional charges.
INVENTORY
Inventory,
including out on consignment, consists primarily of software media, manuals and
related packaging materials and is recorded at the lower of cost or market
value, determined on a first-in, first-out, and adjusted on a per-item
basis.
PROPERTY
AND EQUIPMENT
Property
and equipment are recorded at cost. Furniture, fixtures and computer equipment
are depreciated over five years using the straight-line method. Software is
depreciated over three years using the straight-line method. Expenditures for
maintenance, repairs and other renewals of items are charged to expense when
incurred.
ACCOUNTING
FOR LONG-LIVED ASSETS
We review
property and equipment and intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability is measured by comparison of our carrying amount
to future net cash flows the assets are expected to generate. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds its fair market value.
Property and equipment to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
INTANGIBLE
ASSETS
In
accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, intangible assets with an indefinite useful life are not
amortized. Intangible assets with a finite useful life are amortized on the
straight-line method over the estimated useful lives. All intangible assets are
tested for impairment annually during the fourth quarter.
SOFTWARE
DEVELOPMENT COSTS
In
accordance with SFAS No. 86, Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed, software development
costs are expensed as incurred until technological feasibility and marketability
has been established, generally with release of a “beta” version for testing.
Once the point of technological feasibility and marketability is reached, direct
production costs (including labor directly associated with the development
projects), indirect costs (including allocated fringe benefits, payroll taxes,
facilities costs, and management supervision), and other direct costs (including
costs of outside consultants, purchased software to be included in the software
product being developed, travel expenses, material and supplies, and other
direct costs) are capitalized until the product is available for general release
to customers. We amortize capitalized costs on a product-by-product basis.
Amortization for each period is the greater of the amount computed using (i) the
straight-line basis over the estimated product life (generally from 12 to 18
months, but up to 60 months), or (ii) the ratio of current revenues to total
projected product revenues.
Capitalized
software development costs are stated at the lower of amortized costs or net
realizable value. Recoverability of these capitalized costs is determined at
each balance sheet date by comparing the forecasted future revenues from the
related products, based on management’s best estimates using appropriate
assumptions and projections at the time, to the carrying amount of the
capitalized software development costs. If the carrying value is determined not
to be recoverable from future revenues, an impairment loss is recognized equal
to the amount by which the carrying amount exceeds the future revenues. To date,
no capitalized costs have been written down to net realizable
value.
SFAS No.
2, Accounting for Research and
Development Costs, established accounting and reporting standards for
research and development. In accordance with SFAS No. 2, costs we incur to
enhance our existing products after general release to the public (bug fixes)
are expensed in the period they are incurred and included in research and
development costs. Research and development costs incurred prior to
determination of technological feasibility and marketability and after general
release to the public and charged to expense were $237,619 and $139,281 for the
years ended December 31, 2008 and 2007, respectively.
We
capitalize costs related to the development of computer software developed or
obtained for internal use in accordance with the American Institute of Certified
Public Accountants Statement of Position (“SOP”) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. Software obtained for
internal use has generally been enterprise level business and finance software
that we customize to meet our specific operational needs. We have not sold,
leased, or licensed software developed for internal use to our customers and
have no intention of doing so in the future.
We
capitalize costs related to the development and maintenance of our website in
accordance with the FASB’s EITF Issue No. 00-2, Accounting for Website Development
Costs. Under EITF Issue No. 00-2, costs expensed as incurred are as
follows:
|
▪
|
planning
the website,
|
|
|
▪
|
developing
the applications and infrastructure until technological feasibility is
established,
|
|
|
▪
|
developing
graphics such as borders, background and text colors, fonts, frames, and
buttons, and
|
|
|
▪
|
operating
the site such as training, administration and
maintenance.
|
Capitalized
costs include those incurred to:
|
▪
|
obtain
and register an Internet domain name,
|
|
|
▪
|
develop
or acquire software tools necessary for the development
work,
|
|
|
▪
|
develop
or acquire software necessary for general website
operations,
|
|
|
▪
|
develop
or acquire code for web applications,
|
|
|
▪
|
develop
or acquire (and customize) database software and software to integrate
applications such as corporate databases and accounting systems into web
applications,
|
|
|
▪
|
develop
HTML web pages or templates,
|
|
|
▪
|
install
developed applications on the web server,
|
|
|
▪
|
create
initial hypertext links to other websites or other locations within the
website, and
|
|
|
▪
|
test
the website applications.
|
We
amortize website development costs on a straight-line basis over the estimated
life of the site, generally 36 months. Total cumulative website development
costs, included in other assets on our consolidated balance sheets, were
$118,661 and $122,351, less accumulated amortization of $15,571 and $84,635 at
December 31, 2008 and 2007, respectively.
RESTRICTED
CASH
Restricted
cash represents cash held in reserve by our merchant banker to allow for a
potential increase in credit card charge backs from increased consumer
purchases.
REVENUE
RECOGNITION
We derive
revenues from the sale of packaged software products, product support and
multiple element arrangements that may include any combination of these items.
We recognize software revenue for software products and related services in
accordance with SOP 97-2, Software Revenue Recognition,
as modified by SOP 98-9, Modification of SOP 97-2, With
Respect to Certain Transactions. We recognize revenue when persuasive
evidence of an arrangement exists (generally a purchase order), we have
delivered the product, the fee is fixed or determinable and collectibility is
probable.
In some
situations, we receive advance payments from our customers. We defer revenue
associated with these advance payments until we ship the products or offer the
support.
In
accordance with EITF Issue No. 01-9, Accounting for Consideration Given
by a Vendor to a Customer or a Reseller of the Vendor’s Product, we
generally account for cash considerations (such as sales incentives – rebates
and coupons) that we give to our customers as a reduction of revenue rather than
as an operating expense.
Product
Revenue
We
typically recognize revenue from the sale of our packaged software products when
we ship the product. We sell some of our products on consignment to a limited
number of resellers. We recognize revenue for these consignment transactions
only when the end-user sale has occurred. Revenue for software distributed
electronically via the Internet is recognized when the customer has been
provided with the access codes that allow the customer to take immediate
possession of the software on its hardware and evidence of the arrangement
exists (web order).
Some of
our software arrangements involve multiple copies or licenses of the same
program. These arrangements generally specify the number of
simultaneous users the customer may have (multi-user license), or may allow the
customer to use as many copies on as many computers as it chooses (a site
license). Multi-user arrangements, generally sold in networked
environments, contain fees that vary based on the number of users that may
utilize the software simultaneously. We recognize revenue when
evidence of an order exists and upon delivery of the authorization code to the
consumer that will allow them the limited simultaneous access. Site
licenses, generally sold in non-networked environments, contain a fixed fee that
is not dependent on the number of simultaneous users. Revenue is
recognized when evidence of an order exists and the first copy is delivered to
the consumer.
Many of
our software products contain additional content that is “locked” to prevent
access until a permanent access code, or “key,” is purchased. We
recognize revenue when evidence of an order exists and the customer has been
provided with the access code that allows the customer immediate access to the
additional content. All of the programs containing additional locked
content are fully functional and the keys are necessary only to access the
additional content. The customer’s obligation to pay for the software
is not contingent on delivery of the “key” to access the additional
content.
We reduce
product revenue for estimated returns and price protections that are based on
historical experience and other factors such as the volume and price mix of
products in the retail channel, trends in retailer inventory and economic trends
that might impact customer demand for our products. We also reduce product
revenue for the estimated redemption of end-user rebates on certain current
product sales. Our rebate reserves are estimated based on the terms and
conditions of the specific promotional rebate program, actual sales during the
promotion, the amount of redemptions received and historical redemption trends
by product and by type of promotional program. We did not offer any rebate
programs to our customers during 2008 or 2007 and maintain a reserve for rebate
claims remaining unpaid from 2000 and 2001.
Multiple
Element Arrangements
We also
enter into certain revenue arrangements for which we are obligated to deliver
multiple products or products and services (multiple elements). For these
arrangements, which include software products, we allocate and defer revenue for
the undelivered elements based on their vendor-specific objective evidence
(“VSOE”) of fair value. VSOE is generally the price charged when that element is
sold separately.
In
situations where VSOE exists for all elements (delivered and undelivered), we
allocate the total revenue to be earned under the arrangement among the various
elements, based on their relative fair value. For transactions where VSOE exists
only for the undelivered elements, we defer the full fair value of the
undelivered elements and recognize the difference between the total arrangement
fee and the amount deferred for the undelivered items as revenue (residual
method). If VSOE does not exist for undelivered items that are services, we
recognize the entire arrangement fee ratably over the remaining service period.
If VSOE does not exist for undelivered elements that are specified products, we
defer revenue until the earlier of the delivery of all elements or the point at
which we determine VSOE for these undelivered elements.
We
recognize revenue related to the delivered products or services only if: (i) the
above revenue recognition criteria are met; (ii) any undelivered products or
services are not essential to the functionality of the delivered products and
services; (iii) payment for the delivered products or services is not contingent
upon delivery of the remaining products or service; and (iv) we have an
enforceable claim to receive the amount due in the event that we do not deliver
the undelivered products or services.
Discounts
on Future Purchases
In
connection with the licensing of an existing product, we sometimes offer a
discount on additional licenses of the same product or on other
products. We apply a proportionate amount of the discount to each
element covered by the arrangement based on each element’s fair
value. If the future elements are unknown at the time of the original
sale, we apply the discount to the current product(s) purchased, defer the
discount amount to be recognized pro rata over the estimated period during which
additional purchases will be made (typically one year), and recognize current
revenue on the remainder.
Shipping
and Handling Costs
We record
the amounts we charge our customers for the shipping and handling of our
software products as product revenue and we record the related costs as cost of
sales on our consolidated statements of operations.
Sales
Taxes
We record
the amounts we charge our customers for sales taxes assessed by state and local
governments on the sale of our software products and related shipping charges,
as appropriate, on the net basis. As such, we report the taxes
collected as a liability on our balance sheet and do not include them in product
revenue in our consolidated statements of operations.
Customer
Service and Technical Support
Customer
service and technical support costs include the costs associated with performing
order processing, answering customer inquiries by telephone and through
websites, email and other electronic means, and providing technical support
assistance to our customers. In connection with the sale of certain products, we
provide a limited amount of free technical support assistance to customers. We
do not defer the recognition of any revenue associated with sales of these
products, since the cost of providing this free technical support is
insignificant. The technical support is provided within one year after the
associated revenue is recognized and free product enhancements (bug fixes) are
minimal and infrequent. We accrue the estimated cost of providing this free
support upon product shipment and record it as cost of sales.
ADVERTISING
Advertising
costs, including direct response advertising costs, are charged to operations as
incurred. We have determined that direct response advertising costs are
insignificant. Total advertising costs included in “Sales and marketing
expenses” in the Consolidated Statements of Operations for the years ended
December 31, 2008 and 2007 were approximately $143,000 and $175,000,
respectively.
STOCK-BASED
COMPENSATION
We
recognize share-based compensation in accordance with SFAS No. 123(R), Share-Based Payment, using
the modified prospective method. SFAS No. 123(R) requires that we measure the
cost of the employee services received in exchange for an award for equity
instruments based on the grant-date fair value and to recognize this cost over
the requisite service period. It also provides that any corporate income tax
benefit realized upon exercise or vesting of an award in excess of that
previously recognized in earnings (referred to as a “windfall tax benefit”) will
be presented in the Consolidated Statements of Cash Flows as a financing (rather
than as operating) cash flow. Realized windfall tax benefits are
credited to paid-in capital in the Consolidated Balance
Sheets. Realized shortfall tax benefits (amounts which are less than
that previously recognized in earnings) are first offset against the cumulative
balance of windfall tax benefits, if any, and then charged directly to income
tax expense.
The fair
value of each warrant is estimated on the date of grant using the Black-Scholes
option-pricing model that used the assumptions noted in the following table.
Expected volatilities are based on implied volatilities from historical
volatility of our stock. We use historical data to estimate warrant
exercise within the valuation model. The expected term of warrants
granted is derived from the output of the valuation model and represents the
period of time that warrants granted are expected to be outstanding. The
risk-free rate for periods within the contractual life of the warrant is based
on the U.S. Treasury yield curve in effect at the time of the
grant.
|
2007
|
||||
|
Expected
volatility
|
110 | % | ||
|
Expected
dividend yield
|
0.00 | % | ||
|
Expected
term (in years)
|
3.00 | |||
|
Risk-free
interest rate
|
4.85 | % | ||
No
options or warrants were issued during the year ended December 31,
2008.
We
maintain a policy of issuing authorized but unissued shares of common stock to
satisfy share option and warrant exercises.
LEGAL
COSTS RELATED TO LOSS CONTINGENCIES
We accrue
legal costs expected to be incurred in connection with a loss contingency as
they occur. We did not accrue any legal costs related to a loss
contingency during the years ended December 31, 2008 and 2007.
INCOME
TAXES
We follow
SFAS No. 109, Accounting for
Income Taxes, which requires the use of the asset and liability method of
accounting for income taxes. Under this method, deferred income taxes are
provided for the temporary differences between the financial reporting basis and
the tax basis of our assets and liabilities. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled.
EARNINGS
PER SHARE
We follow
SFAS No. 128, Earnings Per
Share, to calculate and report basic and diluted earnings per share
(“EPS”). Basic EPS is computed by dividing income available to common
stockholders by the weighted average number of shares of common stock
outstanding for the period. Diluted EPS is computed by giving effect to all
dilutive potential shares of common stock that were outstanding during the
period. For us, dilutive potential shares of common stock consist of the
incremental shares of common stock issuable upon the exercise of stock options
and warrants for all periods, convertible notes payable and the incremental
shares of common stock issuable upon the conversion of convertible preferred
stock.
When
discontinued operations, extraordinary items, and/or the cumulative effect of an
accounting change are present, income before any of such items on a per share
basis represents the “control number” in determining whether potential shares of
common stock are dilutive or anti-dilutive. Thus, the same number of potential
shares of common stock used in computing diluted EPS for income from continuing
operations is used in calculating all other reported diluted EPS amounts. In the
case of a net loss, it is assumed that no incremental shares would be issued
because they would be anti-dilutive. In addition, certain options and warrants
are considered anti-dilutive because the exercise prices were above the average
market price during the period. Anti-dilutive shares are not included in the
computation of diluted EPS, in accordance with SFAS No. 128.
The
following table shows the amounts used in computing earnings per share and the
effect on income and the average number of shares of dilutive potential common
stock:
|
For
the Year Ended December 31
|
2008
|
2007
|
||||||
|
Numerator:
|
||||||||
|
Net
loss
|
$ | (356,888 | ) | $ | (602,092 | ) | ||
|
Denominator:
|
||||||||
|
Denominator
for basic per share amounts – weighted average shares
|
53,683,926 | 50,861,639 | ||||||
|
Dilutive
effect of:
|
||||||||
|
Stock
options
|
--- | --- | ||||||
|
Warrants
|
--- | --- | ||||||
|
Denominator
for diluted per share amounts - weighted average shares
|
53,683,926 | 50,861,639 | ||||||
The
calculations of earnings (loss) per share for 2008 and 2007 excluded the impact
of the following potential common shares as their inclusion would be
anit-dilutive:
|
For
the Year Ended December 31
|
2008
|
2007
|
||||||
|
Stock
options
|
2,930,000 | 3,060,000 | ||||||
|
Warrants
|
2,850,000 | 23,850,000 | ||||||
|
Total
weighted average anti-dilutive potential common shares
|
5,780,000 | 26,910,000 | ||||||
TRANSFER
OF FINANCIAL ASSETS
We have
adopted SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. SFAS
No. 140 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities and provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The adoption of this standard did not
have a material effect on our results of operations or financial
position.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
Unless
otherwise indicated, the fair values of all reported assets and liabilities that
represent financial instruments (none of which are held for trading purposes)
approximate the carrying values of such instruments because of the short
maturity of those instruments.
DERIVATIVES
We
account for warrants issued with shares of common stock in a private placement
according to EITF Issue 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock, and the guidance of EITF 00-19-2, Accounting for Registration Payment
Arrangements. In accordance with the accounting mandate, the derivative
liability associated with the warrants is to be adjusted to fair value
(calculated using the Black-Scholes method) at each balance sheet date and is
accordingly reassessed at each such time to determine whether the warrants
should be classified (or reclassified, as appropriate) as a liability or as
equity. The corresponding fair value adjustment is included in the consolidated
statements of operations as other expenses as the value of the warrants
increases from an increase in our stock price at the balance sheet date and as
other income as the value of the warrants decreases from a decrease in our stock
price. During the year ended December 31, 2008, we canceled the warrants subject
to derivative treatment in exchange for a single cash payment of
$150,000. See Notes 5 and 8.
RECENT
ACCOUNTING PRONOUNCEMENTS
Financial
Guarantee Insurance Contracts
In May
2008, the FASB issued SFAS No. 163, Accounting for Financial Guarantee
Insurance Contract-and Interpretation of FASB Statement No. 60 to clarify
how Statement No. 60 applies to financial guarantee insurance contracts,
including the recognition and measurement of premium revenue and claims
liabilities. SFAS No. 163 also requires expanded disclosures about
financial guarantee insurance contracts. SFAS No. 163 is effective
for fiscal years beginning on or after December 15, 2008, and interim periods
within those fiscal years. We do not expect SFAS No. 163 to have a material
impact on our consolidated financial statements.
GAAP
Hierarchy
In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles, to identify the sources of accounting principles
and the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with GAAP. SFAS No. 162 directs the GAAP hierarchy to the
entity, not the independent auditors, as the entity is responsible for selecting
accounting principles for financial statements that are presented in conformity
with GAAP. SFAS No. 162 is effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to remove
the GAAP hierarchy from the auditing standards. We do not expect SFAS
No. 162 to have a material impact on our consolidated financial
statements.
Derivative
Instruments
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, to improve financial reporting about
derivative instruments and hedging activities. The standard requires
enhanced disclosures to enable investors to better understand their effects on
an entity’s financial position, financial performance, and cash
flows. SFAS No. 161 is effective for fiscal years and interim periods
beginning after November 15, 2008. We do not expect SFAS No. 161 to
have a material impact on our consolidated financial statements.
Noncontrolling
Interests
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51. SFAS No. 160 establishes accounting and reporting standards
for ownership interests in subsidiaries held by parties other than the parent,
the amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent’s ownership interest and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS No. 160 also establishes disclosure requirements that
clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal
years beginning after December 15, 2008. We do not expect SFAS No. 160 to
have a material impact on our consolidated financial statements.
Business
Combinations
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations. SFAS
No. 141(R) establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any noncontrolling interest in the acquiree
and the goodwill acquired. SFAS No. 141(R) also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of the
business combination. SFAS No. 141(R) is effective for fiscal years beginning
after December 15, 2008. We will apply the guidance of SFAS No. 141(R) to
business combinations completed on or after January 1, 2009.
Fair
Value Measurements
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, to
provide enhanced guidance for using fair value to measure assets and
liabilities. The standard also expands disclosure requirements for
assets and liabilities measured at fair value, how fair value is determined, and
the effect of fair value measurements on earnings. The standard
applies whenever other authoritative literature requires, or permits, certain
assets or liabilities to be measured at fair value, but does not expand the use
of fair value. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. In February 2008, the FASB issued Staff
Positions 157-1 and 157-2 which partially defer the effective date of
SFAS No. 157 for one year for certain nonfinancial assets and
liabilities and remove certain leasing transactions from its scope. Our adoption
of SFAS No. 157 for financial assets and liabilities did not have a material
impact on our consolidated financial statements. The impact of adoption of SFAS
No. 157 on non-financial assets and liabilities is not expected to have a
significant impact on our financial position, results of operations and cash
flows.
RECLASSIFICATIONS
Certain
accounts in our 2007 financial statements have been reclassified for comparative
purposes to conform with the presentation in our 2008 financial
statements.
NOTE
2 – GOING CONCERN
The
accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplates our continuation as a going concern. However, as of December 31,
2008 and 2007, we had negative working capital of $1,103,495 and $1,014,565,
respectively, and had an accumulated deficit of $8,057,377 and $7,700,489,
respectively. Although these factors raise substantial doubt about our ability
to continue as a going concern, we have taken several actions in an attempt to
mitigate the risk that we will be unable to continue as a going concern through
December 31, 2008. These actions include relying on the approximately $423,000
cash reserve from the 2007 sale of our Membership Plus product line and pursuing
mergers and acquisitions that will provide profitable operations and positive
operating cash flow.
NOTE
3 – BALANCE SHEET DETAILS
Details
of certain balance sheet captions are as follows:
|
Year
ended December 31,
|
2008
|
2007
|
||||||
|
Accounts
receivable, trade, net:
|
||||||||
|
Gross
trade accounts receivable
|
$ | 165,180 | $ | 238,301 | ||||
|
Less: allowance
for doubtful accounts
|
(16,300 | ) | (2,000 | ) | ||||
|
Net
accounts receivable, trade
|
$ | 148,880 | $ | 236,301 | ||||
|
Allowance
for doubtful accounts:
|
||||||||
|
Beginning
balance
|
$ | 2,000 | $ | 11,000 | ||||
|
Bad
debts provision (included in Sales and marketing expenses)
|
16,572 | 26,250 | ||||||
|
Accounts
written off
|
(2,905 | ) | (35,965 | ) | ||||
|
Collection
of accounts previously written off
|
633 | 715 | ||||||
|
Ending
balance
|
$ | 16,300 | $ | 2,000 | ||||
|
Inventories,
net:
|
||||||||
|
Raw
materials
|
$ | 61,583 | $ | 66,022 | ||||
|
Finished
goods
|
35,462 | 42,230 | ||||||
|
Less:
reserve for obsolete inventory
|
(15,500 | ) | (14,400 | ) | ||||
|
Net
inventories
|
$ | 81,545 | $ | 93,852 | ||||
|
Reserve
for obsolete inventory:
|
||||||||
|
Beginning balance
|
$ | 14,400 | $ | --- | ||||
|
Provision for obsolete inventory
|
14,900 | 19,121 | ||||||
|
Obsolete inventory written off
|
(13,800 | ) | (4,721 | ) | ||||
|
Ending
balance
|
$ | 15,500 | $ | 14,400 | ||||
|
Other
current assets:
|
||||||||
|
Interest
income receivable
|
$ | 345 | $ | 4,536 | ||||
|
Prepaid
expenses
|
50,425 | 96,290 | ||||||
|
Total
other current assets
|
$ | 50,770 | $ | 100,826 | ||||
|
Property
and equipment, net
|
||||||||
|
Computer
equipment
|
$ | 88,392 | $ | 84,477 | ||||
|
Computer
software
|
75,374 | 83,082 | ||||||
|
Office
equipment
|
70,198 | 70,198 | ||||||
|
Office
furniture and fixtures
|
42,687 | 43,655 | ||||||
|
Warehouse
equipment
|
5,958 | 5,958 | ||||||
|
Total
property and equipment
|
282,609 | 287,370 | ||||||
|
Less: accumulated
depreciation
|
(245,262 | ) | (231,156 | ) | ||||
|
Net property and equipment
|
$ | 37,347 | $ | 56,214 | ||||
At
December 31, 2008 and 2007, Office equipment contained telephone equipment under
a capital lease obligation with a cost basis of $51,788. See Notes 6 and
12.
|
Intangible
assets, net
|
||||||||
|
Software license agreements, net
|
||||||||
|
Cost
|
$ | 4,227,390 | $ | 4,012,753 | ||||
|
Less:
accumulated amortization
|
(3,846,637 | ) | (3,425,915 | ) | ||||
|
Net
software license agreement
|
$ | 380,753 | $ | 586,838 | ||||
|
Capitalized software development costs, net
|
||||||||
|
Capitalized
costs
|
$ | 1,082,025 | $ | 1,997,301 | ||||
|
Less: accumulated
amortization
|
(752,007 | ) | (1,605,128 | ) | ||||
|
Net
capitalized software development costs
|
$ | 330,018 | $ | 392,173 | ||||
|
Net
intangible assets
|
$ | 710,771 | $ | 979,011 | ||||
We
entered into a license agreement in June 1999 with Parsons Technology, Inc., a
subsidiary of TLC, a copy of which has since been assigned to Riverdeep, Inc.,
the latest licensor-assignee in a succession of assignments that have occurred
since the original agreement. The license, as we acquired it in 1999, provided
us with the right, for a term of ten years, to publish, use, distribute,
sublicense and sell, exclusively worldwide in non-secular channels and
non-exclusively in secular channels, a collection of top-selling
Christian-related software titles and content owned by Parsons
Technology. In October 2003, we reached settlement in a dispute with
The Zondervan Corporation and TLC which extended indefinitely the term of the
software license agreement.
Amortization
related to the software license agreements, included in General and
administrative expenses on our Consolidated Statements of Operations, was
$420,722 and $480,870 for the years ended December 31, 2008 and 2007,
respectively.
Amortization
for the capitalized software development costs, included in Cost of sales on our
Consolidated Statements of Operations, was $318,880 and $381,941 for the years
ended December 31, 2008 and 2007, respectively.
|
Other
current liabilities:
|
||||||||
|
Accrued
payroll
|
$ | 205,254 | $ | 158,598 | ||||
|
Reserve
for sales returns
|
119,822 | 95,009 | ||||||
|
Other
accrued expenses
|
63,115 | 96,705 | ||||||
|
Total
other current liabilities
|
$ | 388,191 | $ | 350,312 | ||||
|
Reserve
for sales returns:
|
||||||||
|
Beginning balance
|
$ | 95,009 | $ | 97,603 | ||||
|
Return provision – sales
|
306,000 | 511,100 | ||||||
|
Return provision – cost of sales
|
(45,900 | ) | (76,665 | ) | ||||
|
Returns processed
|
(235,287 | ) | (437,029 | ) | ||||
|
Ending balance
|
$ | 119,822 | $ | 95,009 | ||||
NOTE
4 – PRODUCT LINE ACQUISITION
On
February 25, 2008, we acquired the FormTool software product line from ORG
Professional, LLC. The purchase price of $225,934 was comprised as
follows:
|
Description
|
Amount
|
|||
|
Fair
value of common stock
|
$ | 40,000 | ||
|
Cash
|
100,000 | |||
|
Promissory
note
|
85,934 | |||
|
Total
|
$ | 225,934 | ||
The fair
value of our common stock was determined based on 1,000,000 restricted shares of
our common stock issued and priced at the closing price as of February 22, 2008
($0.04). See Note 8.
The
allocation of the purchase price to the assets acquired based on their estimated
fair values was as follows:
|
Description
|
Amount
|
|||
|
Trademark/Trade
name
|
$ | 67,780 | ||
|
Internet
domain names
|
33,890 | |||
|
Customer
list
|
22,594 | |||
|
Copyrights
|
67,780 | |||
|
Computer
software code
|
22,594 | |||
|
Distribution
agreements
|
11,296 | |||
|
Total
|
$ | 225,934 | ||
The
assets will be amortized over a period of years as follows:
|
Description
|
Estimated
Remaining Life (years)
|
|||
|
Trademark/Trade
name/Copyrights
|
10 | |||
|
Internet
domain names
|
5 | |||
|
Customer
list/Computer software code
|
3 | |||
|
Distribution
agreements (remaining contract term)
|
.33 | |||
One of
our outside directors currently owns a 5% equity interest in ORG Professional,
LLC, and agreed to forego any direct personal economic benefit to which he would
otherwise be entitled, including the restricted shares of our common stock
issuable as part of the consideration.
NOTE
5 – DERIVATIVE LIABILITIES
In
November 2004, we issued two five-year warrants to purchase up to an aggregate
of 21,875,000 shares of our common stock in connection with a certain Stock
Purchase Agreement completed with a New York-based private investment
partnership on July 19, 2004. The first warrant entitled the holder to purchase
up to 10,937,500 shares of our common stock at a price of $0.18 per share, and
the second warrant entitled the holder to purchase up to 10,937,500 additional
shares of our common stock at a price of $0.60 per share. Each warrant was
subject to standard adjustment provisions and each provided for settlement in
registered shares of our common stock and may have been, at the option of the
holder, settled in a cashless, net-share settlement. These warrants were
accounted for as a liability according to the guidance of EITF 00-19 and the
fair value of each warrant was determined using the Black-Scholes valuation
method.
The
warrants were revalued at each measurement date by using parameters existing
thereon, reducing the expected term to reflect the passing of time, and using
the stock price at the measurement date. Net fair value adjustments included on
the consolidated statements of operations were income (expense) adjustments of
$305,620 and ($379,406) for the years ended December 31, 2008 and 2007,
respectively. Income adjustments generally reflect a decrease in the
market price of our common stock between measurement dates whereas expense
adjustments would generally reflect an increase in the market price of our
common stock between measurement dates. The income adjustment
recorded for the year ended December 31, 2008 reflects the difference between
measurement parameters that existed on March 5, 2008 and December 31,
2007.
On March
6, 2008, we entered into and consummated an agreement with the holder pursuant
to which the outstanding common stock purchase warrants held by them, which were
subject to derivative treatment, were immediately canceled in exchange for a
single cash payment in the amount of $150,000. As a result of this
transaction, these warrants are now null and void for all purposes (See Note
8). Pursuant to this cancellation, we recorded a gain on the
settlement of derivative liabilities in the amount of $450,654 (included in Gain
on debt settlement on our Consolidated Statements of Operations), which
represents the difference between the cash payment and the Black-Scholes
calculated liability as of March 5, 2008. The warrant cancellation
has eliminated 21,875,000 potentially dilutive shares and eliminated the future
non-cash effects associated with the volatility of our stock price.
NOTE
6 – DEBT
At
December 31, 2008 and 2007, long-term debt consisted of the
following:
|
2008
|
2007
|
|||||||
|
Capital
lease obligation payable to a corporation due November 2009 in monthly
installments of $1,144, including interest at 11.7%. Secured by telephone
equipment. See Notes 3 and 12.
|
$ | 11,877 | $ | 23,468 | ||||
|
Unsecured
term note payable to a shareholder due March 2008 in monthly installments
of $10,000, plus interest at 8%, through April 2007, and monthly
installments of $20,000, plus interest at 8%, beginning May 2007. See Note
14.
|
56,000 | 56,000 | ||||||
|
Unsecured
term note payable to a limited liability company due February 2010 in
monthly installments of $4,167, including simple interest at 15%. See Note
4.
|
53,211 | --- | ||||||
|
Total
Long-term debt
|
121,088 | 79,468 | ||||||
|
Less: Current
maturities
|
(112,908 | ) | (67,591 | ) | ||||
|
Long-term
debt, net
|
$ | 8,180 | $ | 11,877 | ||||
At
December 31, 2008, we were current on the capital lease obligation and the
unsecured term note payable to a limited liability company. We remain
in arrears for the final three payments of the unsecured term note payable to a
shareholder.
Principal
maturities at December 31, 2008 are as follows:
|
2009
|
$ | 112,908 | ||
|
2010
|
8,180 | |||
|
Total
|
$ | 121,088 |
NOTE
7 – INCOME TAXES
The
provision for taxes on income from continuing operations for the years ended
December 31, 2008 and 2007 consisted of the following:
|
2008
|
2007
|
|||||||
|
Current:
|
||||||||
|
Federal
|
$ | --- | $ | --- | ||||
|
State
|
--- | --- | ||||||
|
Net
current income tax expense
|
--- | --- | ||||||
|
Deferred:
|
||||||||
|
Federal
|
--- | 542,100 | ||||||
|
State
|
--- | (800 | ) | |||||
|
Net
deferred income tax expense
|
--- | 541,300 | ||||||
|
Total
tax provision
|
$ | --- | $ | 541,300 | ||||
The
provisions for income taxes differ from the amounts computed by applying the
federal statutory rate due to the following:
|
2008
|
2007
|
|||||||
|
Expense
(benefit) at Federal statutory rate – 34%
|
$ | (121,342 | ) | $ | (20,669 | ) | ||
|
State
tax effects, net of Federal taxes
|
(532 | ) | (28 | ) | ||||
|
Nondeductible
expenses
|
1,015 | 131,004 | ||||||
|
Nontaxable
income
|
(258,261 | ) | --- | |||||
|
Deferred
tax asset valuation allowance
|
379,120 | 430,993 | ||||||
|
Income
tax expense
|
$ | --- | $ | 541,300 | ||||
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Our total and net deferred tax assets,
deferred tax asset valuation allowances and deferred tax liabilities at December
31, 2008 and 2007 are as follows:
|
For
the year ended December 31, 2008
|
Federal
|
State
|
Total
|
|||||||||
|
Current
Deferred Income Taxes
|
||||||||||||
|
Accrued
expenses, reserves, other items
|
$ | 108,800 | $ | 300 | $ | 109,100 | ||||||
|
Operating
loss carryforwards
|
--- | --- | --- | |||||||||
|
Total
current deferred income tax asset
|
108,800 | 300 | 109,100 | |||||||||
|
Less: Valuation
allowance
|
(101,300 | ) | (300 | ) | (101,600 | ) | ||||||
|
Deferred
income tax asset, net
|
$ | 7,500 | $ | --- | $ | 7,500 | ||||||
|
Non-current
Deferred Income Taxes
|
||||||||||||
|
Property
and equipment and state deferred tax liabilities
|
$ | 3,800 | $ | 400 | $ | 4,200 | ||||||
|
Operating
loss carryforwards
|
2,904,400 | 5,500 | 2,909,900 | |||||||||
|
Total
non-current deferred income tax asset
|
2,908,200 | 5,900 | 2,914,100 | |||||||||
|
Less: Valuation
allowance
|
(2,705,100 | ) | (4,500 | ) | (2,709,600 | ) | ||||||
|
Deferred
income tax asset, net
|
203,100 | 1,400 | 204,500 | |||||||||
|
Capitalized
development costs
|
(112,000 | ) | (750 | ) | (112,750 | ) | ||||||
|
Software
license fees
|
(57,800 | ) | (400 | ) | (58,200 | ) | ||||||
|
Other
items
|
(40,800 | ) | (250 | ) | (41,050 | ) | ||||||
|
Deferred income tax liability
|
(210,600 | ) | (1,400 | ) | (212,000 | ) | ||||||
|
Deferred income tax liability, net
|
$ | (7,500 | ) | $ | --- | $ | (7,500 | ) | ||||
|
For
the year ended December 31, 2007
|
Federal
|
State
|
Total
|
|||||||||
|
Current
Deferred Income Taxes
|
||||||||||||
|
Accrued
expenses, reserves, other items
|
$ | 104,600 | $ | 200 | $ | 104,800 | ||||||
|
Operating
loss carryforwards
|
169,700 | 300 | 170,000 | |||||||||
|
Total
current deferred income tax asset
|
274,300 | 500 | 274,800 | |||||||||
|
Less: Valuation
allowance
|
(239,700 | ) | (300 | ) | (240,000 | ) | ||||||
|
Deferred
income tax asset, net
|
$ | 34,600 | $ | 200 | $ | 34,800 | ||||||
|
Non-current
Deferred Income Taxes
|
||||||||||||
|
Property
and equipment and state deferred tax liabilities
|
$ | 2,700 | $ | 4 | $ | 2,704 | ||||||
|
Operating
loss carryforwards
|
2,490,300 | 4,010 | 2,494,310 | |||||||||
|
Total
non-current deferred income tax asset
|
2,493,000 | 4,014 | 2,497,014 | |||||||||
|
Less: Valuation
allowance
|
(2,177,600 | ) | (2,214 | ) | (2,179,814 | ) | ||||||
|
Deferred
income tax asset, net
|
315,400 | 1,800 | 317,200 | |||||||||
|
Capitalized
development costs
|
(133,060 | ) | (700 | ) | (133,760 | ) | ||||||
|
Software
license fees
|
(196,480 | ) | (1,130 | ) | (197,610 | ) | ||||||
|
Other
items
|
(20,460 | ) | (170 | ) | (20,630 | ) | ||||||
|
Deferred income tax liability
|
(350,000 | ) | (2,000 | ) | $ | (352,000 | ) | |||||
|
Deferred income tax liability, net
|
$ | (34,600 | ) | $ | (200 | ) | $ | (34,800 | ) | |||
A
valuation allowance has been recorded primarily related to tax benefits
associated with income tax operating loss carryforwards. Adjustments to the
valuation allowance will be made if there is a change in management’s assessment
of the amount of the deferred tax asset that is realizable. The valuation
allowance for deferred tax assets was increased by $391,386 and $416,714 during
the years ended December 31, 2008 and 2007, respectively.
At
December 31, 2008, we had available net operating loss carryforwards of
approximately $8,562,000 for federal income tax purposes that expire in 2028.
The federal carryforwards resulted from losses generated in 1996 through 2002,
2005, 2006 and 2008. We also had net operating loss carryforwards available from
various state jurisdictions ranging from approximately $6,100 to approximately
$841,000 that expire in 2023.
We
adopted the provisions of FIN No. 48 as of January 1, 2007, and have
analyzed filing positions in each of the federal and state jurisdictions where
we are required to file income tax returns, as well as all open tax years in
these jurisdictions. We have identified the U.S. Federal, Nebraska, Iowa
and Illinois as our “major” tax jurisdictions. Generally, we remain subject to
examination of our 2005 through 2007 U.S. Federal, Nebraska, Iowa and
Illinois income tax returns.
We
believe that our income tax filing positions and deductions will be sustained on
audit and do not anticipate any adjustments that will result in a material
change to our financial position. Therefore, no reserves for uncertain income
tax positions have been recorded pursuant to FIN No. 48. In addition, we
did not record a cumulative effect adjustment related to the adoption of
FIN No. 48. Our policy for recording interest and penalties associated with
income-based tax audits is to record such items as a component of income
taxes.
NOTE
8 – STOCKHOLDERS’ EQUITY
COMMON
STOCK
In June
2007, we committed to issue a total of 562,500 restricted shares of common stock
to our outside director, at the closing price as of June 29, 2007 ($0.032), in
lieu of cash payments of amounts accrued for services as a member of our board
from the period of October 1, 2006 through June 30, 2007. This issuance was
valued at $18,000.
In July
2007, we entered into a stock subscription agreement with a business development
consultant for the sale of 1,300,000 shares of common stock at a price of $0.025
per share. We realized $32,500 from this subscription.
In August
2007, pursuant to settlement of an agreement with an individual for business
consulting services, we committed to issue 500,000 restricted shares of common
stock, valued at $0.04, in lieu of cash. See Note 10.
In
November 2007, we committed to issue a total of 100,000 restricted shares of
common stock to a company for business development services, at the closing
price as of November 19, 2007 ($0.06), in accordance with the terms of an
agreement that expires June 30, 2008. The issuance was valued at
$6,000.
In
February 2008, we issued a total of 1,000,000 restricted shares of common stock
to a third party, at the closing price as of February 25, 2008 ($0.04), as part
of the acquisition of the FormTool software product line. This issuance was
valued at $40,000.
In April
2008, we committed to issue a total of 143,337 restricted shares of common stock
to three members of our management team, at the closing price as of April 14,
2008 ($0.042), in lieu of cash payment, net of appropriate tax withholdings, of
the amounts accrued for their 2007 bonus. This issuance was valued at
$6,020.
In April
2008, we committed to issue a total of 678,571 restricted shares of common stock
to our outside directors, at the closing price as of April 14, 2008 ($0.042) in
lieu of cash payments of amounts accrued for service as members of our board
from the period of July 1, 2007 through March 31, 2008. This issuance
was valued at $28,500.
COMMON
STOCK OPTIONS
In April
2007, 50,000 vested stock options with an exercise price of $0.11, related to a
former employee, expired unexercised. We did not grant any options or other
stock-based awards to the individual for whom the options expired, during the
six months prior to and after the option expirations.
In July
2007, 80,000 vested stock options with an exercise price of $0.10, related to
former employees, expired unexercised. We did not grant any options
or other stock-based awards to the individuals for whom the options expired,
during the six months prior to and after the option expirations.
In August
2007, 40,000 vested stock options with an exercise price of $0.10, related to a
former employee, expired unexercised. We did not grant any options or
other stock-based awards to the individual for whom the options expired, during
the six months prior to and after the option expirations.
In
September 2008, 40,000 vested stock options with an exercise price of $0.10,
related to a former employee, expired unexercised. We did not grant
any options or other stock-based awards to the individual for whom the options
expired, during the six months prior to and after the option
expirations.
In
December 2008, 50,000 vested stock options with an exercise price of $0.11,
related to a former employee, expired unexercised. We did not grant
any options or other stock-based awards to the individual for whom the options
expired, during the six months prior to and after the option
expirations.
In
December 2008, 40,000 vested stock options with an exercise price of $0.10,
related to a former employee, expired unexercised. We did not grant
any options or other stock-based awards to the individual for whom the options
expired, during the six months prior to and after the option
expirations.
COMMON
STOCK WARRANTS
In May
2007, a warrant to purchase up to 600,000 restricted shares of our common stock
with an exercise price of $0.15 per share expired unexercised.
In June
2007, a warrant to purchase up to 250,000 restricted shares of our common stock
with an exercise price of $0.10 per share expired unexercised.
In July
2007, we amended an agreement with a business development consultant to provide
for additional compensation of warrants to purchase up to 2,300,000 shares of
common stock at $0.032 per share. The agreement provides that
warrants to purchase up to 1,300,000 shares of common stock vested on August 31,
2007 and warrants to purchase up to 1,000,000 shares of common stock vest on
January 1, 2008. These warrants were valued at $48,160 using the
Black-Scholes method and recorded as an expense. See Note
14.
In
February 2008, warrants to purchase up to 125,000 restricted shares of our
common stock with an exercise price of $0.148 per share expired
unexercised.
In March
2008, a warrant to purchase up to 10,937,500 shares of our common stock with an
exercise price of $0.18 per share and a warrant to purchase up to 10,937,500
shares of our common stock with an exercise price of $0.60 per share were
canceled in exchanged for a single cash payment of $150,000. These
warrants are now null and void for all purposes as a result of this
transaction. See Notes 5 and 11.
NOTE
9 – GAIN ON SALE OF SOFTWARE PRODUCT LINE
On
October 18, 2007, we sold our Membership Plus software product line to ACS
Technologies Group, Inc. for $1,675,000 in cash. The Membership Plus
product line accounted for approximately 25% of our 2007 aggregate revenues
through the date of sale. Membership Plus did not qualify as a
component as defined in SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, and therefore has been included in income
(loss) from operations on our Consolidated Statements of
Operations.
NOTE
10 – OTHER INCOME AND ADJUSTMENTS
In August
2007, we settled with a consultant for a lump-sum payment of 500,000 restricted
shares of our common stock in lieu of cash for approximately 56% of the balance
owed. The difference between the balance owed and the settlement amount,
totaling $16,000, has been treated as gain from extinguishment of debt and
included in Gain on Debt Settlement on our Consolidated Statements of
Operations.
In
December 2008, we recognized income from debt forgiveness totaling $41,277
resulting from two vendors agreeing to reductions in the balance owed to
them. This has been treated as gain from extinguishment of debt and
included in Gain on Debt Settlement on our Consolidated Statements of
Operations.
NOTE
11 – STOCK-BASED COMPENSATION
Our
1999 Stock Incentive Plan authorizes the issuance of various forms of
stock-based awards including incentive and nonqualified stock options, stock
appreciation rights attached to stock options, and restricted stock awards to
our directors, officers and other key employees. The plan has been approved
by our stockholders and as such, provides certain income tax advantages to
employees as provided under Sections 421, 422, and 424 of the Internal Revenue
Code. Stock options are granted at an exercise price as determined by our
board at the time the option is granted and may not be less than the par
value of such shares of common stock. None of the options granted under the plan
have been granted with an exercise price less than fair value of the common
stock on the date of grant. Stock options vest quarterly over three years and
have a term of up to ten years. The plan authorizes an aggregate of 1,500,000
shares of common stock may be issued. We did not grant any options under the
plan during 2008 or 2007.
In
addition, we issue various forms of stock-based awards including nonqualified
stock options and restricted stock awards to directors, officers, other key
employees and third-party consultants, outside of the plan. Awards granted
outside of the plan have been granted pursuant to equity compensation
arrangements that have not been approved by our stockholders. These awards
are granted at an exercise price as determined by our board at the time of
grant and are not less than the par value of such shares of common stock. None
of the options granted outside of the plan have been granted with an exercise
price less than fair value of the common stock on the date of grant. Stock
options granted outside of the plan vest as determined by our board at the
time of grant and have a term of up to ten years. We did not grant any options
outside of the plan during 2008 or 2007 to non-executive employees.
Activity
under our stock option plans is summarized as follows:
|
Options
|
Shares
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining Contractual Term
|
Aggregate
Intrinsic Value
|
||||||||||||
|
Outstanding
at January 1, 2008
|
3,060,000 | $ | 0.09 | |||||||||||||
|
Granted
|
--- | --- | ||||||||||||||
|
Exercised
|
--- | --- | ||||||||||||||
|
Forfeited
or expired
|
(130,000 | ) | $ | (0.10 | ) | |||||||||||
|
Canceled
|
--- | --- | ||||||||||||||
|
Outstanding
at December 31, 2008
|
2,930,000 | $ | 0.09 | 2.5 | $ | --- | ||||||||||
|
Exercisable
at December 31, 2008
|
2,930,000 | $ | 0.09 | 2.5 | $ | --- | ||||||||||
There
were no non-vested equity instruments at the beginning of the year, end of the
year, granted or forfeited during the year.
Warrant
activity is summarized as follows:
|
Warrants
|
Shares
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining Contractual Term
|
Aggregate
Intrinsic Value
|
||||||||||||
|
Outstanding
at January 1, 2008
|
24,850,000 | $ | 0.35 | |||||||||||||
|
Granted
|
--- | --- | ||||||||||||||
|
Exercised
|
--- | --- | ||||||||||||||
|
Forfeited
or expired
|
(125,000 | ) | $ | (0.15 | ) | |||||||||||
|
Canceled
|
(21,875,000 | ) | $ | (0.39 | ) | |||||||||||
|
Outstanding
at December 31, 2008
|
2,850,000 | $ | 0.04 | 1.28 | $ | 1,200 | ||||||||||
|
Exercisable
at December 31, 2008
|
2,850,000 | $ | 0.04 | 1.28 | $ | 1,200 | ||||||||||
No other
equity instruments were issued during 2008 to acquire goods and services. See
Note 8.
NOTE
12 – RENTAL AND LEASE INFORMATION
OPERATING
LEASES
We lease
office space in Omaha, Nebraska under an operating lease with a third-party with
terms extending through May 2012. We are responsible for all taxes, insurance
and utility expenses associated with this lease. There is no lease renewal
option contained in the lease.
We lease
warehouse facilities in Omaha, Nebraska under an operating lease with a
third-party with terms extending through June 2010. We are responsible for all
taxes, insurance and utility expenses associated with this lease. There is no
lease renewal option contained in the lease.
We lease
office space in Naperville, Illinois under an operating lease with a third-party
with terms extending through March 2009. We are responsible for all insurance
expenses associated with this lease.
Rental
expense for the years ended December 31, 2008 and 2007 amounted to $101,456 and
$93,618, respectively. Rental expenses are included in capitalized software
development costs. See Note 1.
At
December 31, 2008, the future minimum rental payments required under these
leases are as follows:
|
2009
|
$ | 78,993 | ||
|
2010
|
63,883 | |||
|
2011
|
54,339 | |||
|
2012
|
23,335 | |||
|
Total
future minimum rental payments
|
$ | 220,550 |
CAPITAL
LEASES
We lease
telephone equipment under a capital lease expiring in November 2009. The asset
and liability under the capital lease are recorded at the present value of the
minimum lease payments. The asset is depreciated over a 5-year life.
Depreciation of the asset under the capital lease is included in depreciation
expense for 2008 and 2007.
The
following table summarizes property held under capital leases at December 31,
2008:
|
Office
equipment
|
$ | 51,788 | ||
|
Less: Accumulated
depreciation
|
(43,158 | ) | ||
|
Net
property and equipment under capital lease
|
$ | 8,630 |
Future
minimum lease payments under capital leases as of December 31, 2008 are as
follows:
|
2009
|
$ | 12,582 | ||
|
2010
|
--- | |||
|
Total
minimum lease payments
|
12,582 | |||
|
Less: Amount
representing interest
|
(705 | ) | ||
|
Total
obligations under capital lease
|
11,877 | |||
|
Less: Current
installments of obligations under capital lease
|
(11,877 | ) | ||
|
Long-term
obligation under capital lease
|
$ | --- |
NOTE
13 – COMMITMENTS AND CONTINGENCIES
We are
subject to legal proceedings and claims that arise in the ordinary course of our
business. In the opinion of management, the amount of ultimate liability with
respect to these actions will not materially affect our financial statements
taken as a whole.
Our
employment agreements with our management team each contain a provision for an
annual bonus equal to 1% of our net operating income (4% total). We accrue this
bonus on a quarterly basis. Our management team consists of our Chief Executive
Officer (with a base annual salary of $150,000), our Chief Financial Officer
(with a base annual salary of $110,000), our Chief Technical Officer (with a
base annual salary of $150,000) and our Vice President of Sales (with a base
annual salary of $110,000). In addition to the bonus provisions and annual base
salary, each employment agreement provides for payment of all accrued base
salaries ($28,204 included in accrued payroll at December 31, 2008), bonuses
($-0- included in accrued payroll at December 31, 2008), and any vested deferred
vacation compensation ($29,450 included in accrued payroll at December 31, 2008)
for termination by reason of disability. The agreements also provide for
severance compensation equal to the then base salary until the later of (i) the
expiration of the term of the agreement as set forth therein or (ii) one year,
when the termination is other than for cause (including termination by reason of
disability). There is no severance compensation in the event of voluntary
termination or termination for cause.
In 2003
and 2004, we reduced our reserve for rebates payable based, in part, on our
ability to meet the financial obligation of claims carried forward from our last
rebate program in 2001. As such, we may have a legal obligation to pay rebates
in excess of the liability recorded.
We have
included content in QuickVerse, our flagship software product, under contracts
with publisher providers that have expired. We are currently pursuing
resolution, however, there is no guarantee that we will be able to secure a new
agreement, or an extension, and should any of the publishers demand we cease and
desist including their content, the unknown potential negative impact could be
material.
Our
royalty agreements for new content generally provide for advance payments to be
made upon contract signing. In addition, several new agreements
provide for additional advance payments to be made upon delivery of usable
content and publication. We accrue and pay these advances when the
respective milestone is met.
We do not
collect sales taxes or other taxes with respect to shipments of most of our
goods into most states in the U.S. Our fulfillment center and
customer service center networks, and any future expansion of those networks,
along with other aspects of our evolving business, may result in additional
sales and other tax obligations. One or more states may seek to
impose sales or other tax collection obligations on out-of-jurisdiction
companies that engage in e-commerce. A successful assertion by one or
more states that we should collect sales or other taxes on the sale of
merchandise or services could result in substantial tax liabilities for past
sales, decrease our ability to compete with traditional retailers, and otherwise
harm our business.
Currently,
decisions of the U.S. Supreme Court restrict the imposition of obligations to
collect state and local taxes and use taxes with respect to sales made over the
Internet. However, a number of states, as well as the U.S. Congress,
have been considering various initiatives that could limit or supersede the
Supreme Court’s constitutional concerns and resulted in a reversal of its
current position, we could be required to collect sales and use taxes in
additional states. The imposition by state and local governments of
various taxes upon Internet commerce could create administrative burdens for us,
put us at a competitive disadvantage if they do not impose similar obligations
on all of our online competitors and decrease our future sales.
NOTE
14 – RELATED PARTY TRANSACTIONS
Our
executive officers and employees, from time to time, make purchases of materials
and various expense items (including business related travel) in the ordinary
course of business via their personal credit cards in lieu of a corporate check
for COD orders and/or prior to establishment of a line of credit with a vendor.
We do not provide our employees or executive officers with corporate credit
cards and reimburse these purchases as quickly as possible. Accounts payable,
related parties, on our Consolidated Balance Sheets, represents these unpaid
expense accounts.
On March
6, 2007, we entered into an agreement for business development advisory services
with a consultant who was appointed to fill a vacancy on our Board of Directors
on December 14, 2007. This agreement provides for monthly cash
compensation of $5,000, reimbursement for all pre-approved travel expenses
related to meetings or work related to service under the agreement, cash
compensation of $1,500 per day for any special project work or meetings that
require the consultant to travel, and annual compensation of 5% of our fiscal
2007 earnings before interest, taxes, depreciation and amortization (EBITDA) in
excess of $500,000 (excluding all non-cash charges). This agreement
was amended on July 9, 2007 to extend the expiration to June 30, 2008 (from
March 15, 2008), extend the annual EBITDA bonus to include fiscal 2008, and
provide for additional compensation consisting of warrants to purchase up to
2,300,000 shares of common stock at $0.032 per share. We have accrued
$40,784, included in Accounts payable, related parties on our Consolidated
Balance Sheets, related to the additional annual compensation provision. See
Note 8.
On
December 1, 2008, we entered into an agreement for business development advisory
services with the above referenced consultant/board member. This
agreement provides for monthly cash compensation of $2,500, reimbursement for
all pre-approved travel expenses related to meetings or work related to service
under the agreement, and cash compensation of $1,500 per day for any special
project work or meetings that require the consultant to travel. The
agreement may be terminated by either party with 90-day written
notice.
On April
7, 2006, we signed a 2-year, $336,000, 8% promissory note with the New York
based institutional investor for payment of unpaid registration rights
penalties. See Note 6.
On
February 25, 2008, we acquired the FormTool software product line from ORG
Professional, LLC, in which one of our outside directors currently has a 5%
equity interest. Despite the ownership interest, the director agreed
to forego any direct personal economic benefit to which he would otherwise be
entitled as a result of the transaction.
We had no
other transactions with related parties during the years ended December 31, 2008
and 2007.
NOTE
15 – RISKS AND UNCERTAINTIES
Our
future operating results may be affected by a number of factors. We are
dependent upon a number of major inventory and intellectual property suppliers.
If a critical supplier had operational problems or ceased making material
available to us, operations could be adversely affected.
NOTE
16 – SUBSEQUENT EVENTS
On March
13, 2009, we resolved to issue restricted stock compensation awards to our
independent board of directors (2,142,857 shares valued at $45,000) in lieu of
cash for services rendered from April 1, 2008 through December 31, 2008, and our
executive officers (1,907,143 shares valued at $40,050) and non-executive
employees (1,450,000 shares valued at $30,450) in lieu of cash for services
rendered from January 1, 2004 through December 31, 2008.
There are
not currently and have not been any disagreements between us and our accountants
on any matter of accounting principles, practices or financial statement
disclosure.
DISCLOSURE
CONTROLS AND PROCEDURES
As
required by paragraph (b) of Rule 13a-15 under the Exchange Act, our principal
executive and principal financial officers are responsible for assessing the
effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(f) under the Exchange Act). Accordingly, we maintain
disclosure controls and procedures designed to ensure that information required
to be disclosed in our filings under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms. Our
Chief Executive Officer and Chief Financial Officer have evaluated our
disclosure controls and procedures as of the end of the period covered by this
Annual Report on Form 10-K December 31, 2008, and have determined that such
disclosure controls and procedures are effective.
MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rules 13a-15(f) under the
Exchange Act).
Our
management, under the supervision of our Chief Executive Officer and Chief
Financial Officer, assessed the effectiveness of our internal control over
financial reporting as of December 31, 2008. In making this
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control –
Integrated Framework. Based on our assessment, our management
identified material weaknesses in our internal control over financial reporting
as described below. Management has concluded that, as a result of
these material weaknesses, our internal control over financial reporting was not
effective as of December 31, 2008 based on those criteria.
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management’s report in
this annual report.
DESCRIPTION
OF MATERIAL WEAKNESSES
|
1.
|
Ineffective
design of our e-commerce website and inadequate monitoring of the activity
from downloaded software.
|
|
▪
|
Allowed
unlimited downloads of software purchases resulting in potential lost
revenue;
|
|
|
▪
|
Allowed
unlimited distribution of download file link by purchasers to others who
were also allowed unlimited downloads of the same software and unlimited
distribution of the download file link resulting in potential lost
revenue;
|
|
|
▪
|
Website
download activity reports were inadequate for monitoring software download
activity to detect unauthorized downloads; and
|
|
|
▪
|
Design
did not provide a safeguard of electronic
inventory.
|
|
2.
|
Inadequate
controls over sales commissions.
|
|
▪
|
Allowed
sales representatives to attach their initials to an order without proper
documentation;
|
|
|
▪
|
Allowed
the sales supervisor to attach sales representative initials to an order
without proper documentation;
|
|
|
▪
|
Allowed
the sales supervisor to change sales representative initials from one rep
to another without supporting documentation; and
|
|
|
▪
|
Did
not provide adequate review and oversight of sales commission activity
allowing for overpayment of sales
commissions.
|
Due to
the material weaknesses described above, there was a reasonable possibility that
material misstatement of our annual or interim financial statements would not
have been prevented or detected on a timely basis.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
In
response to the material weaknesses described above, we have implemented several
changes in our internal control over financial reporting that have materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
To
address the ineffective design and monitoring of our e-commerce website and
software download activity:
|
▪
|
In
January 2009, we modified the functionality of our e-commerce website to
limit customers purchasing a software download to one (1) attempt within
48 hours of the purchase. If an additional attempt is
necessary, the customer is required to contact us to request an additional
download attempt. In addition, the web link provided to the
customer purchasing the software download is only useable by the purchaser
and is ineffective if an unauthorized user attempts to
download.
|
|
|
▪
|
We
have accumulated sufficient evidence that the new process and related
controls are operating
effectively.
|
To
address the inadequate controls over sales commissions:
|
▪
|
In
February 2009, we initiated an independent review of 100% of the current
orders containing sales representative initials to determine if sufficient
documentation existed to support earning a commission.
|
|
|
▪
|
In
April 2009, we are eliminating the commission plan based on a sales
representative’s initials and will be implementing a bonus plan based on a
modified contribution margin determined on a monthly
basis. This bonus compensation plan will remove the opportunity
for a sales representative or the sales supervisor to improperly influence
the amount and/or recipient of commissions earned.
|
|
|
▪
|
This
material weakness will not be considered remediated until the new process
has been fully designed, appropriately controlled and implemented for a
sufficient period of time.
|
There
were no reportable events under this Item 9B during the fourth quarter of the
fiscal year ended December 31, 2008.
Our
directors and executive officers and their ages as of April 15, 2009 were as
follows:
|
Name
|
Age
|
Position
|
||
|
Steven
Malone
|
42
|
Director,
Chairman of the Board and President
|
||
|
Kirk
R. Rowland, CPA
|
49
|
Director
and Chief Financial Officer
|
||
|
John
A. Kuehne, CA
|
51
|
Director
|
||
|
Gordon
A. Landies
|
52
|
Director
|
||
|
William
J. Bush, CPA
|
44
|
Director
|
||
|
William
Terrill
|
52
|
Chief
Technology
Officer
|
Steven
Malone — Chairman of the Board of Directors, President and Chief Executive
Officer
Mr.
Malone has served as our President and Chief Executive Officer since March 2001
and as a director and Chairman of the Board since February 2002. Between July
2000 and March 2001, Mr. Malone was Senior Vice President and between June 1999
and July 2000 he was a Vice President. Mr. Malone possesses over twenty years of
experience in the computer industry, with the last fifteen focused on software
sales. As a National Account Manager from 1992 to 1996 for Grolier Interactive,
he was responsible for their largest retail and distribution accounts. As
Director of Corporate Sales from 1996 to 1998 for Software Publishing
Corporation, he was responsible for the on-going sales growth of premiere
corporate products, such as the award winning Harvard Graphics, as well as the
introduction of several new products to the corporate marketplace. As Director
of Sales from 1998 to1999 for InfoUSA, he was responsible for sales and
marketing of InfoUSA’s products to retail, distribution, OEM and corporate
accounts.
Kirk
R. Rowland, CPA – Chief Financial Officer
Mr.
Rowland has served as our Chief Financial Officer and as one of our directors
since April 2002. He served as our Vice President of Finance from March 2001 to
April 2002, and as our Director of Finance from December 1999 through March
2001. Mr. Rowland has over eighteen years of experience in public accounting
working in a multitude of industries, including insurance, manufacturing, and
agriculture. Most recently, and from 1992 to 1999 he was a partner in Manning
& Associates, P.C. a local Nebraska accounting firm. From 1984 to
1988, Mr. Rowland was a Senior Staff Accountant with KMG Main Hurdman (now
KPMG), an international accounting firm, and from 1988 to 1992 he was an Audit
Supervisor with Sommer, Magnuson, & Dawson, P.C.
John
A. Kuehne, CA – Director
Mr.
Kuehne has served as one of our directors since December 2000. He is also
currently a management consultant and the President of SmallCap Corporate
Partners Inc., (www.smallcap.ca), a venture capital and management consulting
firm for microcap public companies. He has held this position since
August 2003. Prior to SmallCap, Mr. Kuehne served as a management
consultant with Alliance Corporate Services Inc. from July 2000 through to June
2003. Mr. Kuehne worked in finance and accounting for Deloitte & Touche for
eight years. He also has industry experience, including over seven years with
Doman Industries Limited (1990 to 1999), a large public Canadian forest products
company, where he eventually became Chief Financial Officer. As the CFO of Doman
Industries, Mr. Kuehne gained practical experience in corporate finance and
mergers and acquisitions, completing a $125 million senior note issue through
Bear Stearns and the $140 million acquisition of Pacific Forest Products. Mr.
Kuehne holds a Bachelor of Commerce degree from the University of Alberta (1984)
and a Masters of Management from the J.L.Kellogg Graduate School of Management
at Northwestern University (1990). From June 2000 to May 2004 he
served as a director of Prospector Consolidated Resources Inc., a Canadian
public company. From January 2003 to November 2004 he served as a
director of Beau Pre Explorations Ltd., also a Canadian public
company. Mr. Kuehne qualified as a Canadian Chartered Accountant in
1983 and as an American Certified Public Accountant in 1985.
Gordon
A. Landies – Director
Mr.
Landies has served as one of our directors since December 2007. With
over twenty-five years in the computer software industry, Mr. Landies was most
recently President of International Microcomputer Software, Incorporated
(IMSI). Mr. Landies helped manage the re-establishment of IMSI from
insolvency and a $2 million value to a company with a valuation of over $120
million. Prior to that, Mr. Landies was an executive in the software
industry for Mindscape, Inc, The Learning Company and Mattel
Corporation.
William
J. Bush, CPA – Director
Mr. Bush
has served as one of our directors since December 2007. He brings
over twenty years of experience in accounting, financial support and business
development and he has been actively involved with several early stage internet
businesses assisting in company formation, financing and regulatory
matters. Since
September 2007, Mr. Bush has served as Chief Financial Officer of Solar
Semiconductor, Inc. a manufacturer and distributor of solar energy
solutions. Previously, Mr. Bush was Chief Financial Officer of
ZVUE Corporation from January 2006 through December 2007 (NASDAQ: ZVUE), a
leading distributor of user generated content in January 2006. From
2002 to 2006, Mr. Bush was the Chief Financial Officer and Secretary for
International Microcomputer Software, Inc. (OTCBB: IMSI), a developer and
distributor of precision design software, content and on-line services. Prior to
that he was a Director of Business Development and Corporate Controller for
Buzzsaw.com. Mr. Bush was one of the founding members of Buzzsaw.com, a
privately held company spun off from Autodesk, Inc. in 1999, focusing on online
collaboration, printing and procurement applications. From 1997 to
1999, Mr. Bush worked as Corporate Controller at Autodesk, Inc. (NASDAQ: ADSK),
the fourth largest software applications company in the world. Mr.
Bush began his career in public accounting with Ernst & Young, and later
with Price Waterhouse in Munich, Germany. He received a B.S. in
Business Administration from U.C. Berkeley and is a Certified Public
Accountant. He is also a director and chairman of the Audit Committee
of Towerstream Corporation (NASDAQ: TWER), a leading provider of
WIMAX services.
William
Terrill – Chief Technology Officer
Mr.
Terrill rejoined us in July 2002 as our Chief Technology Officer after having
been involved with us from July 1999 to July 2000. He has over twenty nine years
of experience managing software divisions and technology efforts for us, The
Learning Company, Mindscape, and The Software Toolworks. As Vice President of
the Parsons Church Division for The Learning Company, from January 1999 to July
1999, Mr. Terrill managed a 30% annual revenue increase and shared
responsibilities in the transaction that resulted in our acquiring that
division. Mr. Terrill was the Senior Vice President Reference Products Division
for Mindscape from 1989 to 1995 managing revenues exceeding $14 million. He has
extensive experience managing international software development teams in China,
Singapore, United Kingdom, India, and Russia. Mr. Terrill has experience with
joint ventures, spin-offs, mergers, IPOs, and corporate acquisitions. In
addition, Mr. Terrill has lead software product marketing teams and
content/media acquisition efforts for over ten years. As a consultant from 1996
to 1998, Mr. Terrill has extensive experience leading large-scale product
development and information technology efforts for Navistar, Nalco Chemical,
American Express, Motorola, and IBM Global Services. From July 2000
to July 2002, Mr. Terrill served as the IT Integration Program Manager for Blue
Diamond Joint Venture between Ford Motor Company and International Truck and
Engine Corporation.
Board
of Directors Committees
On
December 14, 2007, our board of directors voted unanimously to fill two existing
vacancies on our board of directors. The individuals named to our board of
directors included William J. Bush and Gordon A. Landies. Further, at
this time, Mr. Bush and Mr. Landies were each named to serve on one of our two
standing committees. Currently our two standing committees comprised of members
of our board of directors are our audit committee and our compensation
committee.
Since
December 2000, our board of directors has maintained an audit
committee. As of April 15, 2009, the audit committee consisted of two
members, John Kuehne and William J. Bush. Mr. Kuehne and Mr. Bush
each are considered to be a “financial expert” within the meaning of Item
407(d)(5) of Regulation S-K and each qualifies as an “independent” under Item
7(d)(3)(iv) of Schedule 14A of the Securities Exchange Act of 1934.
Since
July 2003, we have maintained a compensation committee. We currently have two
members, John A. Kuehne and Gordon A. Landies, serving on our compensation
committee.
Except as
may be provided in our bylaws (incorporated by reference into this Form 10-K as
Exhibt 3(ii)), we do not currently have specified procedures in place pursuant
to which whereby security holders may recommend nominees to the Board of
Directors.
Code
of Ethics
We have
adopted the Code of Ethics incorporated by reference as Exhibit 14.1 to this
Form 10-K for our senior financial officers and the principal executive
officer.
Compliance
with Section 16(a)
Section
16(a) of the Exchange Act requires our directors and executive officers, and
persons who own more than ten percent of a registered class of our equity
securities, to file with the SEC initial reports of ownership and reports of
changes in ownership of our common stock and other equity securities of ours.
Officers, directors and greater than ten percent stockholders are required by
the SEC’s regulations to furnish us with copies of all Section 16(a) forms they
filed. We prepare the Section 16(a) forms on behalf of our executive officers
and directors based on the information provided by them.
The
following table sets forth the compliance reporting under Section 16(a) for the
fiscal year ended December 31, 2008.
|
Number
of Late Reports
|
Number
of Transactions Not Timely Reported
|
Failure
to File
|
||||
|
Steven
Malone
|
1
|
1
|
---
|
|||
|
Kirk
R. Rowland
|
1
|
1
|
---
|
|||
|
John
A. Kuehne
|
1
|
1
|
---
|
|||
|
Gordon
A. Landies
|
1
|
1
|
---
|
|||
|
William
J. Bush
|
1
|
1
|
---
|
|||
|
William
Terrill
|
1
|
1
|
---
|
|||
|
Barron
Partners, LP
|
1
|
1
|
---
|
SUMMARY
COMPENSATION TABLE
The
following table sets forth the total compensation awarded to, earned or paid,
for each of the last two fiscal years to our Chief Executive Officer and each of
our executive officers earning a total compensation of $100,000 or more during
any such fiscal year. Steven Malone has served as our President and Chief
Executive Officer since March 2001. William Terrill has served as our Chief
Technology Officer since July 2002. Kirk R. Rowland has served as our Chief
Financial Officer and director since April 2002. Brittian Edwards served as our
Vice President of CBA Sales and Licensing from July 2004 until January 2009. No
other individuals employed by us earned a total compensation in excess of
$100,000 during the fiscal year ended December 31, 2008.
|
Summary
Compensation
|
|||||||||||||||||||||||||||||||||
|
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($) (a)
|
Stock
Awards ($)
|
Option
Awards ($)
|
Non-equity
Incentive Plan Compensation ($)
|
Non-qualified
Deferred Compensation Earnings ($) (b)
|
All
Other Compensation ($) (c)
|
Total
($)
|
||||||||||||||||||||||||
|
Steven
Malone,
|
2008
|
$ | 150,000 | $ | --- | $ | --- | $ | --- | $ | --- | $ | 1,950 | $ | 4,883 | $ | 156,833 | ||||||||||||||||
|
President
and Chief Executive Officer
|
2007
|
$ | 150,000 | $ | 3,219 | $ | --- | $ | --- | $ | --- | $ | 1,625 | $ | 6,044 | $ | 160,888 | ||||||||||||||||
|
William
Terrill,
|
2008
|
$ | 150,000 | $ | --- | $ | --- | $ | --- | $ | --- | $ | 4,597 | $ | 14,136 | $ | 168,733 | ||||||||||||||||
|
Chief
Technology Officer
|
2007
|
$ | 150,000 | $ | 3,219 | $ | --- | $ | --- | $ | --- | $ | 5,023 | $ | 13,425 | $ | 171,667 | ||||||||||||||||
|
Kirk
R. Rowland,
|
2008
|
$ | 110,000 | $ | --- | $ | --- | $ | --- | $ | --- | $ | --- | $ | 6,147 | $ | 116,147 | ||||||||||||||||
|
Chief
Financial Officer
|
2007
|
$ | 110,000 | $ | 3,219 | $ | --- | $ | --- | $ | --- | $ | --- | $ | 8,783 | $ | 122,002 | ||||||||||||||||
|
Brittian
Edwards,
|
2008
|
$ | 110,000 | $ | --- | $ | --- | $ | --- | $ | --- | $ | 2,265 | $ | 4,284 | $ | 116,549 | ||||||||||||||||
|
Vice
President of CBA Sales and Licensing
|
2007
|
$ | 110,000 | $ | 3,219 | $ | --- | $ | --- | $ | --- | $ | 2,723 | $ | 6,397 | $ | 122,339 | ||||||||||||||||
|
(a)
In April 2008, Steven Malone, William Terrill and Kirk R. Rowland elected
to have the management bonus earned in 2007 to be issued as restricted
shares of common stock in lieu of cash payment. The restricted shares
of common stock were committed to be issued on April 14, 2008 with a
closing price of $0.042 per common share.
|
|||||||||||||||||||||||||||||||||
|
(b)
Represents accrued deferred compensation from our Simple IRA retirement
plan, which allows for those employees who participate to receive an
employer's match in contribution funds up to 3% of the employee's annual
gross pay.
|
|||||||||||||||||||||||||||||||||
|
(c)
Represents earnings accrued at the end of each fiscal year for vacation
hours earned that would be required to be paid in connection with any
termination, including without limitation through retirement, resignation,
severance or constructive termination of any such executive officer's
employment.
|
|||||||||||||||||||||||||||||||||
The
following table sets forth the outstanding equity awards, specifically
unexercised options, stock that has not vested, and equity incentive plan
awards, held by the executive officers named in the Summary Compensation Table
as of fiscal year ended December 31, 2008.
|
Outstanding
Equity Awards at Fiscal Year-End
|
|||||||||||||||||||||||||||||||||
|
Option
awards
|
Stock
awards
|
||||||||||||||||||||||||||||||||
|
Name
|
Number
of Securities Underlying Unexercised options (#)
Exercisable
|
Number
of Securities Underlying Unexercised options (#)
Unexercisable
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options (#)
|
Option
Exercise Price ($)
|
Option
Expiration Date
|
Number
of Shares or Units of Stock that have not Vested (#)
|
Market
Value of Shares or Units of Stock that have not Vested ($)
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights
that have not Vested (#)
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or
Other rights that have not Vested ($)
|
||||||||||||||||||||||||
|
Steven
Malone
|
250,000 | --- | --- | $ | 0.11 |
July
17, 2011
|
--- | $ | --- | --- | $ | --- | |||||||||||||||||||||
|
William
Terrill
|
500,000 | --- | --- | $ | 0.05 |
June
6, 2012
|
--- | $ | --- | --- | $ | --- | |||||||||||||||||||||
|
William
Terrill
|
500,000 | --- | --- | $ | 0.05 |
June
7, 2013
|
--- | $ | --- | --- | $ | --- | |||||||||||||||||||||
|
Kirk
R. Rowland
|
150,000 | --- | --- | $ | 0.11 |
July
17, 2011
|
--- | $ | --- | --- | $ | --- | |||||||||||||||||||||
|
Brittian
Edwards
|
200,000 | --- | --- | $ | 0.11 |
July
15, 2009
|
--- | $ | --- | --- | $ | --- | |||||||||||||||||||||
|
Brittian
Edwards
|
100,000 | --- | --- | $ | 0.10 |
July
15, 2009
|
--- | $ | --- | --- | $ | --- | |||||||||||||||||||||
Information
Concerning Stock Options
Our Stock
Incentive Plan, adopted in 1999, authorizes the issuance of various forms of
stock-based awards including incentive and nonqualified stock options, stock
appreciation rights attached to stock options, and restricted stock awards to
our directors, officers and other key employees. In accordance with the terms of
the Stock Incentive Plan, stock options are granted at an exercise price as
determined by our board of directors at the time any such option is granted but
which may not be less than the par value of our common shares
($.001).
We did
not grant stock options to our executive officers during the fiscal year ended
December 31, 2008. No executive exercised any stock options during the fiscal
year 2008.
EMPLOYMENT
AGREEMENTS
Mr.
Malone is employed by us pursuant to a two-year employment agreement extension,
which extension commenced on April 14, 2008, and which is a term extension to
the previous employment agreement originally dated July 25, 2003. The original
agreement, as amended on April 13, 2007, provided for a base annual salary equal
to $150,000 and an annual bonus equal to 1% of income from operations adjusted
for other income and interest expense for 2007 and beyond. In the event Mr.
Malone is terminated by us for reason other than cause, we are required to pay
him his then base salary until the later of (i) the expiration of the employment
agreement or (ii) one year. Mr. Malone has agreed to refrain from competing with
us for a period of one year following the termination of his
employment.
Mr.
Terrill is employed by us pursuant to a two-year employment agreement extension,
which extension commenced on April 14, 2008, and which is a term extension to
the previous employment agreement originally dated June 7, 2002. The
original agreement, as amended on April 13, 2007, provided for a base annual
salary equal to $150,000, an annual bonus equal to 1% of income from operations
adjusted for other income and interest expense for 2007 and beyond, 500,000
stock options upon his start date at an exercise price of $0.05 per share, and
an additional 500,000 stock options upon the one year anniversary of his start
date based on performance criteria outlined in a separate agreement. The
agreement also included a signing cash bonus of $10,000, which was converted on
July 25, 2003 into 250,000 common shares at the market price of $0.04 per share,
the quoted trading price on the date the agreement was reached. In the event Mr.
Terrill is terminated by us for reason other than cause, we are required to pay
him his then base salary until the later of (i) the expiration of the employment
agreement or (ii) one year. Mr. Terrill has agreed to refrain from competing
with us for a period of one year following the termination of his
employment.
Mr.
Rowland is employed by us pursuant to a two-year employment agreement extension,
which extension commenced on April 14, 2008, and which is a term extension to
the previous employment agreement originally dated July 25, 2003. The
original agreement, as amended on April 13, 2007, provided for a base annual
salary equal to $110,000 and an annual bonus equal to 1% of income from
operations adjusted for other income and interest expense for 2007 and beyond.
In the event Mr. Rowland is terminated by us for reason other than cause, we are
required to pay him his then base salary until the later of (i) the expiration
of the employment agreement or (ii) one year. Mr. Rowland has agreed to refrain
from competing with us for a period of one year following the termination of his
employment.
DIRECTOR
COMPENSATION
As of the
date hereof, we have accrued approximately $45,000 in director’s fees for our
outside directors for the period of April 1, 2008 through December 31,
2008.
The
following table sets forth the compensation of our outside directors for the
fiscal year ended December 31, 2008.
|
Director
Compensation
|
||||||||||||||||||||||||||||
|
Name
|
Fees
Earned or Paid in Cash ($)
|
Stock
Awards ($)
|
Option
Awards ($)
|
Non-Equity
Incentive Plan Compensation ($)
|
Non-Qualified
Deferred Compensation Earnings ($)
|
All
Other Compensation ($)
|
Total
($)
|
|||||||||||||||||||||
|
John
Kuehne
|
$ | 24,000 | $ | --- | $ | --- | $ | --- | $ | --- | $ | --- | $ | 24,000 | ||||||||||||||
|
Gordon
A. Landies (a)
|
$ | 12,000 | $ | --- | $ | --- | $ | --- | $ | --- | $ | 48,300 | $ | 60,300 | ||||||||||||||
|
William
J. Bush
|
$ | 24,000 | $ | --- | $ | --- | $ | --- | $ | --- | $ | --- | $ | 24,000 | ||||||||||||||
|
(a)
All other compensation arises from a consulting agreement which provides
for monthly cash compensation that totaled $48,300 earned.
|
||||||||||||||||||||||||||||
Mr.
Kuehne has served as one of our directors since December 2000. Mr. Kuehne's
compensation agreement currently provides for a monthly fee of $1,000 for
committee services and a monthly fee of $1,000 for services as a “financial
expert” (as defined in Item 407(d)(5) of Regulation S-K). We currently accrue
$2,000 a month for Mr. Kuehne’s services.
Mr.
Landies was unanimously voted to serve as one of our directors as of December
14, 2007. Mr. Landies’ compensation agreement currently provides for a monthly
fee of $1,000 for committee services. We currently accrue $1,000 a month for Mr.
Landies’ services.
Mr. Bush
was unanimously voted to serve as one of our directors as of December 14, 2007.
Mr. Bush’s compensation agreement currently provides for a monthly fee of $1,000
for committee services and a monthly fee of $1,000 for services as a “financial
expert” (as defined in Item 407(d)(5) of Regulation S-K). We currently accrue
$2,000 a month for Mr. Bush’s services.
Please
refer to Part III, Item 12 Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters as
reported in this annual report on Form 10-K for the aggregate number of stock
awards and option awards outstanding at fiscal year end 2008 for all of our
directors listed above.
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
EQUITY
COMPENSATION PLAN INFORMATION
|
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options,
warrants and rights
(a)
|
Weighted-average
exercise price of all outstanding options, warrants and
rights
(b)
|
Number
of securities remaining available for future issuance under
equity compensation plans (excluding securities reflected
in column (a))
(c)
|
|||||||||
|
Equity
compensation plans approved by security holders
|
755,000 | $ | 0.11 | 745,000 | ||||||||
|
Equity
compensation plans not approved by security holders
|
4,925,000 | $ | 0.06 | --- | ||||||||
|
Total
|
5,680,000 | $ | 0.07 | 745,000 | ||||||||
Our 1999
Stock Incentive Plan authorizes the issuance of various forms of stock-based
awards including incentive and nonqualified stock options, stock appreciation
rights attached to stock options, and restricted stock awards to our directors,
officers and other key employees. The plan has been approved by our stockholders
and as such, provides certain income tax advantages to employees as provided
under Sections 421, 422, and 424 of the Internal Revenue Code. Stock options are
granted at an exercise price as determined by our board at the time the option
is granted and may not be less than the par value of such shares of common
stock. Stock options vest quarterly over three years and have a term of up to
ten years. The plan authorizes an aggregate of 1,500,000 shares of common stock
that may be issued.
In
addition, we issue various forms of stock-based awards including nonqualified
stock options and restricted stock awards to directors, officers, other key
employees and third-party consultants, outside of the 1999 Stock Incentive Plan.
Awards granted outside of the plan have been granted pursuant to equity
compensation arrangements that have not been approved by our stockholders. These
awards are granted at an exercise price as determined by our board at the time
of grant, which is based on the last available closing price of our common stock
and are not less than the par value of such shares of common stock. Stock
options granted outside of the plan vest as determined by our board at the time
of grant and have a term of up to ten years.
All
issued options, whether under the plan or not, create the obligation for stock
issuance upon payment of the corresponding exercise price.
The
tables below set forth information regarding the beneficial ownership of our
common stock as of April 15, 2009. The information in these tables
provides the ownership information for:
|
▪
|
each
person known by us to be the beneficial owner of more than 5% of our
common stock;
|
|
|
▪
|
each
of our directors and executive officers; and
|
|
|
▪
|
all
of our directors and executive officers as a
group.
|
Beneficial
ownership has been determined in accordance with the rules and regulations of
the SEC and includes voting or investment power with respect to our common stock
and those rights to acquire additional shares within sixty days. Unless
otherwise indicated, the persons named in the table below have sole voting and
investment power with respect to the number of shares of common stock indicated
as beneficially owned by them, except to the extent such power may be shared
with a spouse. Common stock beneficially owned and percentage ownership are
based on 59,572,725 shares of common stock currently outstanding (reflects a
1-for-50 reverse stock-split of our common stock that occurred in 1997 and a
1-for-20 reverse stock-split of our common stock that occurred on March 18,
1998) and 2,400,000 additional shares potentially acquired within sixty days,
for a total of 61,972,725 shares. The address of each person listed is in care
of Findex.com, Inc., 620 North 129th Street,
Omaha, Nebraska 68154.
Certain
Beneficial Owners
|
Title
of Class
|
Name
of Beneficial Owner
|
Amount
and Nature of Beneficial Owner
|
Percent
of Class
|
||||||
|
Common
Stock
|
Barron
Partners, LP (1)
|
20,875,000 | 33.68 | % | |||||
|
Common
Stock
|
Gordon
A. Landies (2)
|
4,811,904 | 7.76 | % | |||||
|
Common
Stock
|
John
A. Kuehne (3)
|
4,312,371 | 6.96 | % | |||||
|
Common
Stock
|
Steven
Malone (4)
|
3,333,033 | 5.38 | % | |||||
|
(1)
|
Consists
20,875,000 shares of common stock directly
owned.
|
|
(2)
|
Consists
of warrants to acquire up to 2,300,000 shares of common stock, all of
which are presently exercisable, 2,111,904 shares of common stock directly
owned, and 400,000 shares of common stock indirectly owned through
children.
|
|
(3)
|
Consists
of stock options to acquire up to 175,000 shares of common stock, all of
which are presently exercisable and 4,137,371 shares of common stock
directly owned.
|
|
(4)
|
Consists
of stock options to acquire up to 250,000 shares of common stock, all of
which are presently exercisable, 2,674,033 shares of common stock directly
owned, and stock options to acquire up to 110,000 shares of common stock
all of which are presently exercisable and 299,000 shares of common stock
indirectly owned through spouse.
|
Management
|
Title
of Class
|
Name
of Beneficial Owner
|
Amount
and Nature of Beneficial Owner
|
Percent
of Class
|
||||||
|
Common
Stock
|
Steven
Malone (1)
|
3,333,033 | 5.38 | % | |||||
|
Common
Stock
|
Kirk
R. Rowland (2)
|
2,366,890 | 3.82 | % | |||||
|
Common
Stock
|
William
Terrill (3)
|
2,298,906 | 3.71 | % | |||||
|
Common
Stock
|
Gordon
A. Landies (4)
|
4,811,904 | 7.76 | % | |||||
|
Common
Stock
|
John
A. Kuehne (5)
|
4,312,371 | 6.96 | % | |||||
|
Common
Stock
|
William
J. Bush (6)
|
1,173,810 | 1.89 | % | |||||
|
Common
Stock
|
All
officers and directors as
a group (6 persons)
|
18,296,914 | 29.52 | % | |||||
|
(1)
|
Consists
of stock options to acquire up to 250,000 shares of common stock, all of
which are presently exercisable, 2,674,033 shares of common stock directly
owned, and stock options to acquire up to 110,000 shares of common stock
all of which are presently exercisable and 299,000 shares of common stock
indirectly owned through spouse.
|
|
(2)
|
Consists
of stock options to acquire up to 150,000 shares of common stock, all of
which are presently exercisable and 2,216,890 shares of common stock
directly owned.
|
|
(3)
|
Consists
of stock options to acquire up to 1,000,000 shares of common stock, all of
which are presently exercisable and 1,298,906 shares of common stock
directly owned.
|
|
(4)
|
Consists
of warrants to acquire up to 2,300,000 shares of common stock, all of
which are presently exercisable, 2,111,904 shares of common stock directly
owned, and 400,000 shares of common stock indirectly owned through
children.
|
|
(5)
|
Consists
of stock options to acquire up to 175,000 shares of common stock, all of
which are presently exercisable and 4,137,371 shares of common stock
directly owned.
|
|
(6)
|
Consists
of 1,173,810 shares of common stock directly
owned.
|
As of
April 15, 2009, we are not aware of any contract or other arrangement, including
a pledge of the company’s securities that could result in a change in the
control of the company.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
On July
19, 2004, we entered into a certain Stock Purchase Agreement pursuant to which
we agreed to issue and sell 21,875,000 restricted shares of our common stock to
Barron Partners, LP, a New York based institutional investor, at a price of
$0.08 per share. Under the terms of transaction, Barron Partners, LP received
two of our common stock purchase warrants. The first warrant entitles the
holder, for a period of up to five years, to purchase up to 10,937,500 common
shares at a price of $0.18 per share, subject to standard adjustment
provisions. The second warrant entitles the holder, also for a period
of up to five years, to purchase up to 10,937,500 additional common shares at a
price of $0.60 per share, subject to standard adjustment provisions. As part of
the financing transaction, we also entered into a certain Registration Rights
Agreement with Barron Partners, LP pursuant to which we became committed to
registering all of the shares issued as part of such transaction, including
those issuable under the warrants.
Upon
receipt of the requisite stockholder approval to increase the number of
authorized common shares so as to allow us to deliver the warrants, effectively
obtained and effectuated as of November 10, 2004, we had 30 days within which to
file a registration statement on Form SB-2 covering the shares issued to Barron
Partners, as well as the shares underlying the warrants issued to Barron
Partners. Accordingly, this registration statement was filed on
November 22, 2004. On February 1, 2006, the SEC declared this registration
statement effective. Due to continued delays in effectiveness of this
registration statement (due principally to ongoing efforts made necessary by our
determination to restate certain of our historical financial information), and
in accordance with the Registration Rights Agreement, we accrued a total of
approximately $490,000 (284 days at $1,726 per day) in penalties, of which we
had paid $150,000 prior to April 7, 2006. On April 7, 2006, we issued a two-year
promissory note for $336,000 together with simple interest at the rate of 8% per
annum to Barron Partners for the unpaid registration rights penalties. The note
agreement calls for monthly installments for the first twelve months of $10,000,
beginning May 1, 2006 and $20,000 per month thereafter. The accrual and payment
on the registration rights penalties has had a material adverse effect on our
business, our financial condition, including liquidity and profitability, and
our results of operations.
On March
6, 2008, we entered into and consummated an agreement with Barron Partners, L.P.
pursuant to which the outstanding common stock purchase warrants (referenced
above) held by Barron Partners, L.P. were immediately canceled in exchange for a
single cash payment that was made by us to Barron Partners, L.P. in the amount
of $150,000. As a result of this transaction, these warrants are now
null and void for all purposes.
As of the
date hereof, Barron Partners, LP owns 35% of our outstanding common stock and,
subject to the restrictions contained in Article VII, subsection B of our
Articles of Incorporation, controls the vote associated with such
shares.
On March
6, 2007, we entered into an agreement for business development advisory services
with GL Ventures, LLC, which is owned by Gordon Landies and who was appointed to
fill a vacancy on our Board of Directors on December 14, 2007. This
agreement provides for monthly cash compensation of $5,000, reimbursement for
all pre-approved travel expenses related to meetings or work related to service
under the agreement, cash compensation of $1,500 per day for any special project
work or meetings that require the consultant to travel, and annual compensation
of 5% of our fiscal 2007 earnings before interest, taxes, depreciation and
amortization (EBITDA) in excess of $500,000 (excluding all non-cash
charges). This agreement was amended on July 9, 2007 to extend the
expiration to June 30, 2008 (from March 15, 2008), extend the annual EBITDA
bonus to include fiscal 2008, and provide for additional compensation consisting
of warrants to purchase up to 2,300,000 shares of common stock at $0.032 per
share. In June 2008, this agreement was verbally amended to extend
the expiration to August 31, 2008. For the years ended December 31,
2007 and 2008 we have accrued $40,784 and $0, respectively, related to the
annual EBITDA bonus. On December 1, 2008, we entered into a new
agreement for business development advisory services with GL Ventures,
LLC. This agreement provides for monthly cash compensation of $2,500,
reimbursement for all pre-approved travel expenses related to meetings or work
related to service under the agreement, and cash compensation of $1,500 per day
for any special project work or meetings that require the consultant to
travel. This agreement shall continue until December 31,
2010.
On
February 25, 2008 we acquired the FormTool® software
product line from ORG Professional, LLC. Our director, Mr. Landies,
currently has a 5% equity interest in ORG Professional, LLC, which ownership
interest pre-dated the Asset Acquisition. Despite the ownership
interest, Mr. Landies agreed to forego any direct personal economic benefit to
which he would otherwise be entitled as a result of the
transaction.
We rely
on our board to review related party transactions on an ongoing basis to prevent
conflicts of interest. Our board reviews a transaction in light of the
affiliations of the director, officer or employee and the affiliations of such
person’s immediate family. Transactions are presented to our board for approval
before they are entered into or, if this is not possible, for ratification after
the transaction has occurred. If our board finds that a conflict of interest
exists, then it will determine the appropriate remedial action, if any. Our
board approves or ratifies a transaction if it determines that the transaction
is consistent with the best interests of the Company.
DIRECTOR
INDEPENDENCE
We
currently have five directors serving on our Board of Directors, Mr. Malone, Mr.
Rowland, Mr. Kuehne, Mr. Landies and Mr. Bush. We are not a listed
issuer and, as such, are not subject to any director independence
standards. Using the definition of independence set forth in the rules of
the American Stock Exchange, Mr. Kuehne and Mr. Bush would be considered
independent directors of the Company.
The
following table sets forth the aggregate amount of various professional fees
billed by our principal independent accountants, Brimmer, Burek & Keelan
LLP, for our last two fiscal years.
|
2008
|
2007
|
|||||||
|
Audit
Fees (1)
|
$ | 74,288.00 | $ | 68,798.00 | ||||
|
Audit-Related
Fees
|
$ | --- | $ | --- | ||||
|
Tax
Fees (2)
|
$ | 1,075.00 | $ | --- | ||||
|
All
Other Fees (3)
|
$ | 1,023.00 | $ | 4,403.00 | ||||
|
(1)
Consists of fees for professional services rendered in connection with the
audit of our financial statements included in our annual report on Form
10-KSB for the year-ending 2007, and the review of our financial
statements included in our quarterly reports on Form 10-Q for the periods
ending March 31, 2008, June 30, 2008, and September 30,
2008.
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||||||||
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(2)
Consists of fees for professional services rendered in connection with
research on certain tax issues.
|
||||||||
|
(3)
Consists of fees for professional services rendered in connection with a
comment letter received from the Securities and Exchange
Commission.
|
||||||||
All audit
fees are approved by our audit committee and board of directors.
|
(a)(1)
|
Financial
Statements: The following financial statements are included in Item 8
herein:
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|
Page
Number
|
|
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F-1
|
|
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F-2
|
|
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F-3
|
|
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F-4
|
|
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F-5
|
|
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F-6
|
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(a)(2)
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Financial
Statement Schedules:
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All other
schedules are omitted because they are either not required, are not applicable,
or the information is included in the consolidated financial statements and
notes thereto.
|
(a)(3)
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Exhibits:
|
Exhibits
required by Item 601 of Regulation S-K.
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EXHIBIT
INDEX
|
|
|
No.
|
Description
of Exhibit
|
|
2.1
|
Share
Exchange Agreement between Findex.com, Inc. and the stockholders of Reagan
Holdings, Inc. dated March 7, 2000, incorporated by reference to Exhibit
2.1 on Form 8-K filed March 15, 2000.
|
|
3(i)(1)
|
Restated
Articles of Incorporation of Findex.com, Inc. dated June 1999 incorporated
by reference to Exhibit 3.1 on Form 8-K filed March 15,
2000.
|
|
3(i)(2)
|
Amendment
to Articles of Incorporation of Findex.com, Inc. dated November 10, 2004
incorporated by reference to Exhibit 3.1(ii) on Form 10-QSB filed November
10, 2004.
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|
3(ii)
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Restated
By-Laws of Findex.com, Inc., incorporated by reference to Exhibit 3.3 on
Form 8-K filed March 15, 2000.
|
|
10.1
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Stock
Incentive Plan of Findex.com, Inc. dated May 7, 1999, incorporated by
reference to Exhibit 10.1 on Form 10-KSB/A filed May 13,
2004.
|
|
10.2
|
Share
Exchange Agreement between Findex.com, Inc. and the stockholders of Reagan
Holdings Inc., dated March 7, 2000, incorporated by reference to Exhibit
2.1 on Form 8-K filed March 15, 2000.
|
|
10.3
|
License
Agreement between Findex.com, Inc. and Parsons Technology, Inc. dated June
30, 1999, incorporated by reference to Exhibit 10.3 on Form 10-KSB/A filed
May 13, 2004.
|
|
10.4
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Employment
Agreement between Findex.com, Inc. and Steven Malone dated July 25, 2003,
incorporated by reference to Exhibit 10.4 on Form 10-KSB/A filed May 13,
2004.
|
|
10.5
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Employment
Agreement between Findex.com, Inc. and Kirk Rowland dated July 25, 2003,
incorporated by reference to Exhibit 10.5 on Form 10-KSB/A filed May 13,
2004.
|
|
10.6
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Employment
Agreement between Findex.com, Inc. and William Terrill dated June 7, 2002,
incorporated by reference to Exhibit 10.6 on Form 10-KSB/A filed May 13,
2004.
|
|
10.7
|
Restricted
Stock Compensation Agreement between Findex.com, Inc. and John A. Kuehne
dated July 25, 2003, incorporated by reference to Exhibit 10.7 on Form
10-KSB/A filed May 13, 2004.
|
|
10.8
|
Restricted
Stock Compensation Agreement between Findex.com, Inc. and Henry M.
Washington dated July 25, 2003, incorporated by reference to Exhibit 10.8
on Form 10-KSB/A filed May 13, 2004.
|
|
10.9
|
Restricted
Stock Compensation Agreement between Findex.com, Inc. and William Terrill
dated July 25, 2003, incorporated by reference to Exhibit 10.9 on Form
10-KSB/A filed May 13, 2004.
|
|
10.10
|
Stock
Purchase Agreement, including the form of warrant agreement, between
Findex.com, Inc. and Barron Partners, LP dated July 19, 2004, incorporated
by reference to Exhibit 10.1 on Form 8-K filed July 28,
2004.
|
|
10.11
|
Amendment
No. 1 to Stock Purchase Agreement between Findex.com, Inc. and Barron
Partners, LP dated September 30, 2004, incorporated by reference to
Exhibit 10.3 on Form 8-K filed October 6,
2004.
|
|
10.12
|
Registration
Rights Agreement between Findex.com, Inc. and Barron Partners, LP dated
July 26, 2004, incorporated by reference to Exhibit 10.2 on Form 8-K filed
July 28, 2004.
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|
10.13
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Waiver
Certificate between Findex.com, Inc. and Barron Partners, LP dated
September 16, 2004, incorporated by reference to Exhibit 10.4 on Form 8-K
filed October 6, 2004.
|
|
10.14
|
Settlement
Agreement between Findex.com, Inc., The Zondervan Corporation, Mattel,
Inc., TLC Multimedia, Inc., and Riverdeep, Inc. dated October 20, 2003,
incorporated by reference to Exhibit 10.14 on Form 10-KSB/A filed December
14, 2005.
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|
10.15
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Employment
Agreement Extension between Findex.com, Inc and Steven Malone dated March
31, 2006, incorporated by reference to Exhibit 10.1 on Form 8-K filed
April 6, 2006.
|
|
10.16
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Employment
Agreement Extension between Findex.com, Inc and William Terrill dated
March 31, 2006, incorporated by reference to Exhibit 10.2 on Form 8-K
filed April 6, 2006.
|
|
10.17
|
Employment
Agreement Extension between Findex.com, Inc and Kirk R. Rowland dated
March 31, 2006, incorporated by reference to Exhibit 10.3 on Form 8-K
filed April 6, 2006.
|
|
10.18
|
Promissory
Note to Barron Partners, LP dated April 7, 2006, incorporated by reference
to Exhibit 10.1 on Form 8-K filed April 13, 2006.
|
|
10.19
|
Share
Exchange Agreement between Findex.com, Inc. and the stockholders of Reagan
Holdings Inc., dated March 7, 2000, incorporated by reference to Exhibit
2.1 on Form 8-K filed March 15, 2000.
|
|
10.20
|
Convertible
Secured Promissory Note between FindEx.com, Inc. and W. Sam Chandoha,
dated July 20, 2006, incorporated by reference to Exhibit 10.1 on Form 8-K
filed July 26, 2006.
|
|
10.21
|
Security
Agreement between FindEx.com, Inc. and W. Sam Chandoha, dated July 20,
2006 incorporated by reference to Exhibit 10.2 on Form 8-K filed July 26,
2006.
|
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10.22
|
Common
Stock Purchase Warrant between FindEx.com, Inc. and W. Sam Chandoha, dated
July 20, 2006 incorporated by reference to Exhibit 10.3 on Form 8-K filed
July 26, 2006.
|
|
10.23
|
Modification
and Extension Agreement Between FindEx.com, Inc. and W. Sam Chandoha,
dated September 20, 2006, incorporated by reference to Exhibit 10.1 on
Form 8-K filed September 25,2006.
|
|
10.24
|
Employment
Agreement Extension Amendment between Findex.com, Inc. and Steven Malone
dated April 13, 2007, incorporated by reference to Exhibit 10.24 on Form
10-KSB filed April 17, 2007.
|
|
10.25
|
Employment
Agreement Extension Amendment between Findex.com, Inc. and William Terrill
dated April 13, 2007, incorporated by reference to Exhibit 10.25 on Form
10-KSB filed April 17, 2007.
|
|
10.26
|
Employment
Agreement Extension Amendment between Findex.com, Inc. and Kirk R. Rowland
dated April 13, 2007, incorporated by reference to Exhibit 10.26 on Form
10-KSB filed April 17, 2007.
|
|
10.27
|
Asset
Purchase Agreement between Findex.com, Inc. and ACS Technologies Group,
Inc. dated October 18, 2007, incorporated by reference to Exhibit 10.27 on
Form 8-K filed October 24, 2007.
|
|
10.28
|
Partial
Assignment of License Agreement Among Findex.com, Inc., Riverdeep,
Inc.,LLC and ACS Technologies Group, Inc. dated October 11, 2007,
incorporated by reference to Exhibit 10.28 on Form 8-K filed October 24,
2007.
|
|
10.29
|
Asset
Purchase Agreement between Findex.com, Inc. and ORG Professional, LLC
dated February 25, 2008, incorporated by reference to Exhibit 10.29 on
Form 8-K filed on February 28, 2008.
|
|
10.30
|
Warrant
Cancellation Agreement between Findex.com, Inc. and Barron Partners, L.P.
dated March 6, 2008, incorporated by reference to Exhibit 10.30 on Form
8-K filed on March 10, 2008.
|
|
10.31
|
Employment
Agreement Extension Amendment between Findex.com, Inc. and Steven Malone
dated April 14, 2008, incorporated by reference to Exhibit 10.31 on Form
10-KSB filed on April 15, 2008.
|
|
10.32
|
Employment
Agreement Extension Amendment between Findex.com, Inc. and William Terrill
dated April 14, 2008, incorporated by reference to Exhibit 10.32 on Form
10-KSB filed on April 15, 2008.
|
|
10.33
|
Employment
Agreement Extension Amendment between Findex.com, Inc. and Kirk R. Rowland
dated April 14, 2008, incorporated by reference to Exhibit 10.33 on Form
10-KSB filed on April 15, 2008.
|
|
14.1
|
Code
of Ethics, adopted by Board of Directors April 15, 2009. FILED
HEREWITH.
|
|
21.1
|
Subsidiaries
of Findex.com, Inc. as of December 31, 2008. FILED
HEREWITH.
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 and dated April 15, 2009. FILED HEREWITH.
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 and dated April 15, 2009. FILED HEREWITH.
|
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 and dated April 15,
2009. FILED HEREWITH.
|
Signatures
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
FINDEX.COM,
INC.
|
|||
|
By: /s/ Steven Malone
|
|||
|
Steven
Malone
|
|||
|
President
and Chief Executive Officer
|
Date:
April 15, 2009
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/ Steven Malone
|
Chairman
of the Board, President and Chief
|
April
15, 2009
|
||
|
Steven
Malone
|
Executive
Officer (principal executive officer)
|
|||
|
/s/ Kirk R. Rowland
|
Director
and Chief Financial Officer
|
April
15, 2009
|
||
|
Kirk
R. Rowland
|
(principal
financial and accounting officer)
|
|||
|
/s/ John A. Kuehne
|
Director
|
April
15, 2009
|
||
|
John
A. Kuehne
|
||||
|
/s/ William J. Bush
|
Director
|
April
15, 2009
|
||
|
William
J. Bush
|