UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB
(Mark
One)
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[X]
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ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the
fiscal year ended December 31, 2005.
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[_]
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TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the
transition period from ________ to _________.
Commission
file number: 0-29963
FINDEX.COM,
INC.
(Name
of
small business issuer in its charter)
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Nevada
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88-0379462
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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11204
Davenport Street, Suite 100, Omaha, Nebraska
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68154
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(Address
of principal executive offices)
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(Zip
Code)
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(402)
333-1900
(Issuer’s
telephone number)
Securities
registered under Section 12(b) of the Exchange Act:
None
Securities
registered under Section 12(g) of the Exchange Act:
Common
Stock, $.001 par value
(Title
of
class)
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act.
[_]
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes
[X] No [_]
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [_]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
[_] No [X]
Revenues
for the fiscal year ended December 31, 2005 totaled $5,337,342.
As
of
March 31, 2006, 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
$2,542,000.
At
March
31, 2006, the registrant had outstanding 49,058,317 shares of common stock,
of
which there is only a single class.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
Transitional
Small Business Disclosure Format (check one):
Yes
__ No
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SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
annual report on Form 10-KSB, press releases and certain information provided
periodically in writing or verbally by our officers or our agents contain
statements which constitute forward-looking statements. The words “may”,
“would”, “could”, “will”, “expect”, “estimate”, “anticipate”, “believe”,
“intend”, “plan”, “goal”, and similar expressions and variations thereof are
intended to specifically identify forward-looking statements. These statements
appear in a number of places in this Form 10-KSB and include all statements
that
are not statements of historical fact regarding the intent, belief or current
expectations of us, our directors or our officers, with respect to, among other
things: (i) our liquidity and capital resources, (ii) our financing
opportunities and plans, (iii) our ability to attract customers to generate
revenues, (iv) competition in our business segment, (v) market and other trends
affecting our future financial condition or results of operations, (vi) our
growth strategy and operating strategy, and (vii) the declaration and/or payment
of dividends.
Investors
and prospective investors are cautioned that any such forward-looking statements
are not guarantees of future performance and involve risks and uncertainties,
and that actual results may differ materially from those projected in the
forward-looking statements as a result of various factors. Factors that might
cause such differences include, among others, those set forth in Part II, Item
6
of this annual report on Form 10-KSB, entitled “Management’s Discussion and
Analysis or Plan of Operation”, and including without limitation the “Risk
Factors” section contained therein. Except as required by law, we undertake no
obligation to update any of the forward-looking statements in this annual report
on Form 10-KSB after the date hereof.
OVERVIEW
We
develop, publish, market, and distribute and directly sell off-the-shelf
consumer and organizational software products for PC, Macintosh®
and PDA
platforms. We develop our software products through in-house initiatives
supplemented by outside developers. We market and distribute our software
products principally through direct marketing and Internet sales programs,
but
also through secular and non-secular wholesale retailers.
We
were
incorporated in the State of Nevada on November 7, 1997 as EJH Entertainment,
Inc. On December 4, 1997, a predecessor corporation with the same name as our
own but domiciled in Idaho was merged with and into us. Although the predecessor
Idaho corporation was without material assets or operations as of the time
of
the merger, since being organized in 1968, it had historically been involved
in
mining and entertainment businesses unrelated to our current business.
Beginning
in 1997, and although we were not then a reporting company under the Securities
Exchange Act, our common stock was quoted on the OTC Bulletin Board (originally
under the symbol “TIXX”, which was later changed to “TIXXD”). On May 13, 1999,
we changed our name to FINdex.com, Inc. On March 7, 2000, in an effort to
satisfy a newly imposed NASD Rule eligibility requirement that companies quoted
on the OTC Bulletin Board be fully reporting under the Securities Exchange
Act
(thereby requiring recently audited financial statements) and current in their
filing obligations, we acquired, as part of a share exchange in which we issued
150,000 shares of our common stock, all of the outstanding capital stock of
Reagan Holdings, Inc., a Delaware corporation. At the time of this transaction,
Reagan Holdings was subject to the requirements of having to file reports
pursuant to Section 13 of the Securities Exchange Act, had recently audited
financial statements and was current in its reporting obligations. Having no
operations, employees, revenues or other business plan at the time, however,
it
was a public shell company. As a result of this transaction, Reagan Holdings,
Inc. became our wholly owned subsidiary and we became the successor issuer
to
Reagan Holdings for reporting purposes pursuant to Rule 12g-3 of the Securities
Exchange Act. Shortly thereafter, we changed our stock symbol to “FIND”. Though
it does not currently have any operations, employees, or revenues, Reagan
Holdings remains our wholly owned subsidiary.
In
addition to Reagan Holdings, we also have one other wholly owned subsidiary,
Findex.com, Inc. (i.e.
the same
name as our own), a Delaware corporation. Like Reagan Holdings, this entity,
too, does not currently have any operations, employees, or revenues. This
subsidiary resulted from an acquisition on April 30, 1999 pursuant to which
we
acquired all of the issued and outstanding capital stock of FINdex Acquisition
Corp., a Delaware corporation, from its then stockholders in exchange for
4,700,000 shares of our common stock, which, immediately following the
transaction, represented 55% of our total outstanding common stock. Our purpose
for this acquisition was to broaden our then-existing stockholder base, an
important factor in our effort to develop a strong market for our common stock.
On May 12, 1999, in exchange for the issuance of 457,625 shares of FINdex
Acquisition Corp. common stock, FINdex.com, Inc., another Delaware corporation
(originally incorporated in December 1995 as FinSource, Ltd.), was merged with
and into FINdex Acquisition Corp., with FINdex Acquisition Corp. remaining
as
the surviving entity. Our purpose for this merger was to acquire a proprietary
financial information search engine for the Internet which was to serve as
the
cornerstone for a Web-based development-stage business, but which has since
been
abandoned. As part of the certificate of merger relating to this transaction,
FINdex Acquisition Corp. changed its name to FINdex.com, Inc. We currently
own
4,700,000 shares of FINdex.com, Inc. (the Delaware corporation), representing
100% of its total outstanding common stock.
STRATEGY
The
common thread among our current software products is their target constituency,
consumers that share a devotion to or interest in Christianity and faith-based
“inspirational” values. Our focus is to become the largest worldwide provider of
Bible study and related faith-based software products as well as to continue
our
double-digit sales growth across all distribution channels and our double-digit
market share growth in all of our current product categories. We plan for the
continued broadening of our product lines through marketing and sales
initiatives, ongoing internal development of new products, expansion and upgrade
of existing products and strategic product line and/or corporate acquisitions
and licensing. Specifically, our development strategy includes:
Creating
and Maintaining Diversity in Our Product Titles, Platforms and Market
Demographic
We
are
committed to creating and maintaining a diversified mix of titles and title
versions to mitigate our operating risks, and broaden market appeal within
our
demographic. Therefore, we strive to develop and publish titles and title
versions spanning a wide range of categories, including bible study, financial
and church management, pastoral products, children’s software and language
tutorials. We may also design our software for use on multiple platforms in
order to reach a greater potential audience. There are a number of factors
that
we take into consideration when determining the appropriate platform for each
of
our titles and title versions, including, among others, economic cost, the
platform’s user demographics and the competitive landscape at the time of a
title or title version’s release.
Creating,
Acquiring and Maintaining Strong Brands
We
attempt to focus our development and publishing activities principally around
software products that are, or have the potential to become, titles and title
versions possessing sustainable consumer appeal and brand recognition. To that
end, we are continually in pursuit of intellectual property licensing
opportunities with respect to software titles and title versions that are
strategically aligned with our existing product line and focus. We have entered
into a number of such strategic relationships with the owners of various forms
of intellectual property which have allowed us to acquire the rights to publish
content and develop titles and title versions based upon such intellectual
properties. In addition, we may acquire intellectual property licenses in the
future for products outside of our current area of focus.
Our
development strategy further includes the pursuit of acquisition and related
strategic growth opportunities involving other companies that sell faith-based
merchandise and services. As part of this strategy, we may acquire businesses
that (i) only recently commenced operations, (ii) are development-stage
enterprises in need of additional funds to expand into new products or markets,
or (iii) are established businesses that may be experiencing financial or
operating difficulties and need additional capital. We may also pursue other
strategic growth opportunities, including, but not limited to, the acquisition
of new product lines, content licensing, proprietary technology licensing or
acquisitions, asset acquisitions, or acquisitions of other operating businesses,
provided, however, that any such opportunities fit our corporate growth strategy
and provide immediate or near term added value and provide a measurable increase
in our existing customer base or a new, related customer base to which we can
cross-market our products and produce greater revenues and/or earnings.
Furthermore, although we have no current intentions or plans to do so, we have
not ruled out the pursuit of transactional opportunities in areas outside the
faith-based market demographic.
There
are
significant risks and complexities associated with any such growth opportunities
and/or acquisitions including but not limited to due diligence investigation,
comparative investigation, comparative analysis, financing, operational
transitions, and growth control or abatement. Because acquisition and related
opportunities may occur in relation to businesses at various stages of
development, the task of comparative investigation and analysis of such business
opportunities is likely to be extremely difficult and complex. In connection
with our pursuit of such opportunities, we are also likely to incur significant
transition and integration costs, ongoing operations costs, legal and accounting
costs, including the legal fees for preparing acquisition documentation, due
diligence investigation costs and the costs of preparing reports and filings
with the SEC.
Disciplined
Product Selection and Development Processes
The
success of our business depends, in significant part, on our ability to develop
titles and title versions that will generate appreciable unit volume sales
while
simultaneously meeting our high quality standards. We use a formal control
process for the selection, development, production and quality assurance of
our
titles and title versions. We apply this process to products under development
with external, as well as internal, resources. This control process includes
upfront concept evaluation as well as in-depth reviews of each project on
numerous levels and at various intervals during the development process by
a
team that includes our senior management and a number of our key technical,
marketing and product development personnel.
Internal
and External Development Groups
We
develop our titles and title versions using a strategic combination of our
internal development group and external, independently contracted developers,
a
team of which are located in the former Soviet Union and several others of
which
are located in the United States.
We
strive
to provide our in-house team the independence and flexibility needed to foster
creativity and teamwork. Employing an in-house development team provides us
with
the following advantages:
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our
developers work collaboratively, sharing development techniques,
software
tools, software engines and useful experience, to form a strong collective
and creative environment;
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the
ability to re-focus efforts quickly to meet the changing needs of
key
projects;
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more
control over product quality, scheduling and costs; and
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our
developers are not subject to the competing needs of other software
publishers.
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In
March
2004, we opened an in-house development office in Naperville, Illinois.
We
select
our external developers based on their track record and expertise in producing
titles and title versions within certain categories. This selection process
allows us to strengthen and leverage the particular expertise of our internal
and external development resources, as well as to scale up and down as
necessary, to maximize the productivity of our development budget.
PRODUCT
DEVELOPMENT
We
are
committed to the ongoing development of our existing software as well as the
development of new software titles and title versions. Our product development
methodology is modeled around elements of the consumer packaged goods and
software industry. Within this model, our management assesses the current market
and establishes a direction for each of our products, while key personnel
monitor quality, delivery schedules, development milestones and budget. Prior
to
final approval, whether developed internally or externally by our third-party
developers, we test all new titles and title versions for bugs.
The
manufacturing time and gross margin percentages for each of our products can
vary significantly from platform to platform. For each of our products we
establish and periodically review an individual product development timeline
and
expenditure budget, taking into consideration, among others, the following
business factors:
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prior
year or season selling rates for existing and competitive products;
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known
or estimated growth rates for existing and competitive
products;
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new
market opportunities for products, product categories, or product
platforms;
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competitive
products and known competitive strategies;
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general
consumer market and consumer economic sentiments including past,
present,
and projected future conditions and/or events;
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technological
changes, improvements, new platforms, and platform market share
shifts;
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general
distribution channels and customer feedback;
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current
and perceived corporate cash flow;
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availability
and limitations related to knowledgeable/expert talent and workforce;
and
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known
or projected risks associate with each of these
factors.
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Our
total
product development costs incurred during the years ended December 31, 2004
and
2005, were approximately $757,000 and approximately $1,029,000, respectively,
of
which capitalized costs accounted for approximately $692,000 and approximately
$812,000, respectively and expensed costs accounted for $65,000 and
approximately $217,000, respectively.
OUR
PRODUCTS
Our
focus
is to become the largest worldwide provider of Bible study and related
faith-based software products. To that end, we utilize a brand structure and
market our largest selling titles and title versions under the distinct key
brand: QuickVerse®
and
Membership Plus®.
We
support this strategy through the regularly scheduled introduction of new titles
and title versions featuring this brand. In the year ended December 31, 2005
we
released a total of seventeen titles and title versions for PC,
Macintosh®
and PDA
platforms. Through the remainder of the fiscal year 2006 we currently plan
on
releasing a total of approximately sixteen titles and title version for PC,
Macintosh®
and PDA
platforms.
Our
faith-based software titles and title versions are currently divided among
the
following six categories:
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Bible
Study;
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Financial/Office
Management Products for Churches and other Faith-Based
Ministries;
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Print
& Graphic Products;
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Pastoral
Products;
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Children’s
Products; and
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Language
Tutorial Products.
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Bible
Study
For
the
fiscal year ended December 31, 2005, approximately 66% of our revenues were
derived from sales of our flagship QuickVerse®,
an
industry-leading Bible-study software now in its 17th
year and
10th
version,
which is available in an array of content package variations ranging in retail
price from $9.95 to $799.95. Originally introduced into the market in 1989,
QuickVerse®
has sold
over one million copies since its introduction and is currently believed by
us
to be the market leader in its category.
QuickVerse®
simplifies biblical research, allowing users to view multiple reference
materials, including Bibles, dictionaries, commentaries and encyclopedias,
side-by-side on the computer screen. A built-in “QuickSearch” feature enables
the user to highlight a word or Bible verse and find all of its occurrences
in a
particular text. Advanced search features enable users to search by word, phrase
or verse across multiple books, offering search options that find 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®
2006,
our latest version, is currently available in eight CD-Rom editions for PC.
Each
edition of QuickVerse®
contains
several Bible translations (e.g.,
the
King James Version, the American Standard Version, etc.) along with numerous
reference titles (e.g.,
dictionaries, commentaries, encyclopedias, etc.). The QuickVerse®
family
of products for PC includes: the QuickVerse®
Starter
Edition (which includes 1 Bible and 3 reference titles, retail price: $9.95),
the QuickVerse®
Parable®
Edition
(which includes 6 Bibles and 44 reference titles, retail price: $49.95), the
QuickVerse®
Bible
Suite (which contains 8 Bibles and 40 reference titles, retail price: $29.95),
the QuickVerse®
Essentials Edition (which includes 9 Bibles and 41 reference titles, retail
price: $49.95), the QuickVerse®
Standard
Edition (which includes 13 Bibles and 62 reference titles, retail price:
$99.95), the QuickVerse®
Expanded
Edition (which includes 15 Bibles and 100 reference titles, retail price:
$199.95), the QuickVerse®
Deluxe
Edition (which includes 21 Bibles and 147 reference titles, retail price:
$299.95), and the QuickVerse®
Platinum
Edition (which includes 23 Bibles and 261 reference titles, retail price:
$799.95). Each QuickVerse®
purchase
includes access to additional books and content, which can be unlocked or
downloaded and made accessible for an additional fee.
QuickVerse®
Mobile,
an industry-leading Mobile Bible-study software, is compatible with both
Pocket
PC®
and
Palm®
OS
operating systems, and is currently in its 4th
year and
3rd
version.
This program provides the same simplified access and many of the personal
Bible
study features found in the desktop QuickVerse®
versions. QuickVerse®
Mobile
is currently available in four editions as a download and in CD-Rom. Each
edition of QuickVerse®
Mobile
contains several Bible translations (e.g.,
the
King James Version, the American Standard Version, etc.) along with numerous
reference titles (e.g.,
dictionaries, commentaries, encyclopedias, etc.). The QuickVerse®
Mobile
family of products includes: the Standard Edition (which includes 3 Bibles
and 5
reference titles, retail price: $29.95), the Deluxe Edition (which includes
5
Bibles and 8 reference titles, retail price: $39.95), the Platinum Edition
(which includes 7 Bibles and 13 reference titles, retail price: $69.95),
and the
Life Application Study Bible (which includes 1 Bible and 8 reference titles,
retail price: $39.95). Each edition contains 100 scripture reading plans
and
provides the user with the ability to create their own.
During
the fiscal year 2005, we introduced QuickVerse®
Macintosh, which is compatible with Macintosh® OS X 10.3 or higher
operating systems. This program is available in two editions and provides access
to several Bible translations (e.g.,
the
King James Version, the American Standard Version, etc.) along with numerous
reference titles (e.g.,
dictionaries, commentaries, encyclopedias, etc.). The QuickVerse®
Macintosh family of products includes the QuickVerse®
White
Box Edition (which includes 9 Bibles and 40 reference titles, retail price:
$49.95) and the QuickVerse®
Black
Box Edition (which includes 12 Bibles and 56 reference titles, retail price:
$99.95). Each QuickVerse®
Macintosh product contains numerous “Search Panel” features, including
user-defined book categorization, desktop books, download books, interactive
workbooks and daily reading plans, as well as an exclusive “Preview Drawer”,
allowing users to have an unlimited number of books open at any
time.
QuickVerse®
customers include (i) individuals devoted to or otherwise interested in studying
Christianity and (ii) religious and other spiritual organizations including
schools, churches and other faith-based ministries.
In
addition to QuickVerse®,
we also
develop and market certain other Bible study software packages. These include
the Warren Wiersbe®
Collection, the John MacArthur®
Collection, the Life Application Bible Commentary®
Collection, the Willmington Guide to the Bible®
Collection, and the Fisherman Study Guide®
Collection. Although our prices are subject to change from time to time, these
titles currently range in retail price from $9.95 to $249.95 per unit.
Financial/Office
Management Products for Churches and other Christian Faith-Based
Ministries
For
the
fiscal year ended December 31, 2005, approximately 26% of our revenues were
derived from sales of Membership Plus®,
an
industry-leading church management software now in its 10th
version.
Membership Plus®
is
available in each of a standard and a deluxe package at retail prices of $149.95
and $349.95 respectively. Each of these product packages provides church
database, financial management and church productivity tools, including those
designed to streamline church office accounting, tasks and scheduling, track
membership and contributions, organize membership databases, and provide
efficiency in producing targeted mailings, attendance reports and IRS-compliant
contribution receipts. The deluxe package is equipped with a broader
functionality and range of features, including, for example, a number of
templates for legal agreements frequently used by these types of organizations
and a fund based accounting function.
Membership
Plus®
is
designed to serve the unique needs of churches, “para-church” organizations and
ministries, and non-profit entities. The term “para-church” has been developed
by the religious community to refer to religious organizations which have some
of the characteristics of a church, but which are not what most people would
generally consider to constitute a church including a defined congregation.
Some
“para-church” organizations are treated as churches for some reasons, and as
religious organizations which are not churches for others. A few examples of
“para-church” organizations are Campus Crusade for Christ, Promise
Keepers®, and Josh McDowell Ministry.
Over
80,000 churches and faith-based organizations have purchased Membership
Plus®
since
its introduction in 1990. Membership Plus®
2005,
our latest version, is currently available in two CD-Rom editions: Membership
Plus®
Standard
and Membership Plus®
Deluxe.
We have approximately 50,000 registered users for this product.
Print
& Graphic Products
We
currently sell/distribute ClickArt Christian Publishing®
Suite
III (retail price: $39.95), which is a full desktop publishing package
containing over 13,000 Christian images, icons, maps, Catholic and Jewish
imagery and ethnically diverse, family-oriented illustrations to be used in
the
creation of a wide range of printed materials including newsletters, bulletins,
posters, fliers, mailings, calendars, and reports. We also publish/distribute
ClickArt Christian Graphics Deluxe®
(retail
price: $29.95), which contain faith-based and Christian graphical images that
can be used in the production of other content related projects. We also
distribute several titles produced and distributed by International
Microcomputer Software, Inc. (“IMSI”) a developer of software for both
professional and home users, including ClipArt & More 2.5 Million (retail
price: $29.99) and Print Studio Pro Deluxe (retail price: $19.99). In addition,
we distribute titles produced and distributed by SummitSoft Corporation a
publisher of productivity software for professional and home users, including
Logo Design Studio (retail price: $29.99) and Essential Office Font Pack (retail
price: $19.99).
Although
our prices are subject to change from time to time, our print and graphic
products range in price from $9.99 to $39.99 per unit. In the aggregate, and
for
the fiscal year ended December 31, 2005, 2% of our revenues were derived from
sales of these products.
Pastoral
Products
We
currently produce and distribute/sell a line of pastoral products designed
to
assist faith-based ministries in streamlining sermon development and research
tasks and in organizing responsibilities. These titles include the following:
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Sermon
Builder®
4.0 Deluxe (retail price: $69.95), which is a database compilation
of
illustrations, anecdotes, quotations, proverbs and bits of humor
from
general topics like children and angels to specific Bible passages,
which
users can use to bring messages to a congregation or classroom.
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Ministry
Notebook®
2.0 (retail price: $29.95), which is an organizational tool for users
to
keep better track of ministry-related paperwork including sermons,
prayer
requests, personal libraries, telephone contacts, and expense reports.
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Today’s
Best Sermons®
(retail
price: $99.95), which is a three volume collection of the best
sermons from the Preaching
Today
monthly audiotape series, which users can use to gain spiritual
refreshment and strengthen their preaching.
|
Although
our prices are subject to change from time to time, our pastoral products range
in price from $29.95 to $99.95 per unit. In the aggregate, and for the fiscal
year ended December 31, 2005, 3% of our revenues were derived from sales of
these products.
Children’s
Products
We
currently produce and distribute/sell a line of children’s CD-Rom products
designed to appeal to faith-conscious families interested in
spiritually-enriched entertainment and play-along educational content.
Collectively, these titles include Jonah and the Whale®
(retail
price: $5.97), Noah and the Ark®
(retail
price: $5.97), Daniel in the Lion’s Den®
(retail
price: $5.97), The Story of Creation®
(retail
price: $5.97), and American History Explorer®
(retail
price: $29.95). In addition, we also distribute the Veggie Tales®
(retail
price: $5.97), a popular line of children’s software programs involving
interactive adventures with biblical themes and the DVD video Junior’s
Giants®
(retail
price: $12.95) produced by Divine Comedy Productions.
Although
our prices are subject to change from time to time, our children’s products
range in price from $5.97 to $39.97 per unit. In the aggregate, and for the
fiscal year ended December 31, 2005, less than 1% of our revenues were derived
from sales of these products.
Language
Tutorial Products
We
currently produce tutorial software programs for learning Greek and Hebrew
languages frequently studied in conjunction with a Bible-study curriculum or
by
biblical scholars. Each of these two programs, Greek Tutor®
and
Hebrew Tutor®
(retail
price: $49.95 each), covers all of the essential language development skills,
including letters, vocabulary and grammar. Although our prices are subject
to
change from time to time, our language tutorial products range in price from
approximately $10.00 to $69.95 per unit. In the aggregate, and for the fiscal
year ended December 31, 2005, 3% of our revenues were derived from sales of
these products.
Other
Products
In
addition to our own software products, we resell certain titles and title
versions that we purchase at a discount and that are published by others,
including IMSI, SummitSoft, Veggie Tales®,
Divine
Comedy Productions and Webroot®.
These
are non-exclusive, purchase-order only type arrangements in connection with
which we carry only limited inventory. Sales from these titles are derived
exclusively online through our Website and, apart from on our Website, we do
not
promote these products. Although prices are subject to change from time to
time,
these software products range in price from approximately $5.97 to $39.99 per
unit. In the aggregate, and for the fiscal year ended December 31, 2005, less
than 1% of our revenues were derived from sales of these products.
OUR
MARKET
According
to a Gallup poll released in January 2006, 50% of Americans identified
themselves as Protestant, while 25% identified themselves as Catholic, and
13%
identified themselves as Other Christian. According to the same survey, 59%
of
Americans say that religion is very important to them in their own lives, and
another 25% say that religion is fairly important in their lives. Additionally,
41% describe themselves as “born-again” or evangelical Christian.
According
to the most recent survey released in July 2003 by the Christian Bookseller’s
Association (“CBA”), Christian-product sales for the year 2002 were $4.2
billion. The survey also revealed that $2.4 billion of the $4.2 billion total
was sold through Christian retail, with $1.1 billion sold through general
retail, and $725 million sold direct-to-consumer, and through ministry sales
channels. The 2,300-store CBA segment includes several different chains, Family
Christian Stores being the largest with 325 stores. As faith-based retailing
increases, secular stores are offering more faith-based products as evidenced
by
the $1.1 billion sales figure in 2002 as reported by the CBA. It is this
faith-based demographic that we seek to target.
MARKETING
AND ADVERTISING
In
developing a marketing strategy for our consumer software products, we seek
brands or titles and title versions that we believe will appeal to the interests
of our target consumers. We strive to create marketing campaigns which are
consistent with this strategy and generally market our software
through:
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our
Website (www.quickverse.com) and the Internet sites of
others;
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print
advertising;
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opt-in
e-mail campaigns;
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affiliate
merchants;
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product
sampling through demonstration software;
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in-store
promotions, displays and retailer assisted co-operative
advertising;
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publicity
activities; and
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trade
shows.
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SALES
Direct
Marketing / Online Sales
Direct
sales accounted for approximately 61% of our 2005 fiscal year revenue. Over
the
past three years, we have devoted significant and increasing resources to the
development of our direct-marketing program. Through this program, we market
our
products directly to consumers and church and “para-church” organizations
through a combination of direct-mailings and opt-in e-mailings of our product
title catalogs and brochures. An important aspect of this initiative is our
online sales. In May of 2004, we launched a full-service online store with
many
of the kinds of features and capabilities that online shoppers have come to
expect from cutting-edge Internet retailers. We are currently marketing our
products online through multiple sources including our own www.quickverse.com
Internet Website, other Internet Websites such as www.amazon.com, as well as
several widely used search engines such as Google®
and
Yahoo®.
Furthermore, in October of 2005 we joined an affiliate network through
www.shareasale.com and have gained approximately 100 affiliate merchants that
market our products through their Websites. While we market our products through
these other Internet Websites, search engines and affiliate merchants, we are
not substantially dependent upon these marketing relationships and have no
written agreements with any one or more of them. The revenue generated from
these Internet Websites, search engines and affiliate merchants, excluding
our
own www.quickverse.com Internet Website, accounted for less than approximately
1% of our 2005 fiscal year revenue.
We
anticipate online orders will continue to increase as we expand our software
product base and enhance our marketing efforts in this area.
Retail
Sales
Retail
sales accounted for approximately 39% of our 2005 fiscal year revenue. Our
domestic retail sales involve thousands of retail stores across the United
States through which our products are sold, many of which are members of the
CBA. These stores vary from small, family-owned Christian bookstores to large
chain bookstores such as LifeWay Christian Stores, Family Christian
Stores®
and
Berean Christian Stores. We face the continuing challenge of reaching these
stores on a consistent basis to keep them informed of new releases, promotional
offers, etc. In addition to advertising in trade publications and maintaining
visibility at CBA trade shows and events, we believe that it is critical to
be
in direct personal contact with each customer routinely, in order to maintain
or
increase our market position. Towards that end, our sales representatives are
expected to contact each of our customers as well as each of the independent
stores that are not yet our customers regularly and present them with the latest
in our products and promotions. We believe our personalized approach to
marketing provides us with an edge over our competition, which we believe rely
predominantly on advertising to maintain and develop their relations with CBA
customers.
In
the
secular retail market, which includes chains such as Best Buy™,
CompUSA®,
OfficeMax™ and Apple®
Stores
we believe that we continue to be a top seller of Bible study software and
we
are developing additional product offerings and promotions to grow our market
share.
International
Sales
International
sales accounted for approximately 3% of our 2005 fiscal year revenue. We
currently sell to distributors and retailers in Canada, New Zealand, Australia,
Philippines, Faroe Island, Korea, Africa, the United Kingdom, and Singapore.
These distributors and retailers, in turn, sell our products into both Christian
and large, secular retail outlets that sell off-the-shelf consumer software
packages.
Returns
and Price Concessions
At
the
time we ship our products we establish reserves, including reserves that
estimate the potential for future product returns and price concessions.
Management makes these estimates and assumptions based on actual historical
experience regarding allowances for estimated price concessions and product
returns. In determining the percentage of sales for product return reserves,
management considers a number of different statistical factors. First, it
reviews the rate of actual product returns (in total) for the period. Second,
it
reviews return rates for the same period(s) of prior years. Third, it reviews
its sales by individual retail customers to assess any unusual return exposure.
Fourth, it reviews actual return rates of specific title and title versions
to
determine if there are any unusual trends taking place. Fifth, the potential
for
an increase in actual returns resulting from upcoming new title or title version
releases is reassessed. Sixth, and finally, management reviews the actual
returns from the balance sheet date to the date of calculation to determine
if
anything unexpected has taken place.
We
give
all of our distributors and retail customers a written product return policy
providing for returns, upon written request, within nine months of the invoice
date for credit only. If a new title or title version release falls within
that
nine month time span, a distributor has 60 days from the announced release
date
to return the old title or title version in exchange for the new title or title
version only. We provide our end-user consumers with a 45 day satisfaction
guarantee, allowing them to return a title or title version within that time
frame if for any reason unsatisfied. Our warranty policy for defective software
is to provide replacement or repair for a period of 45 days from the invoice
date. We believe that these measurement dates provide a consistent period for
assessment and the opportunity to adequately estimate channel inventory levels
for appropriately estimating our return reserves.
We
generally grant price concessions to our wholesale retail customers when we
deem
those concessions necessary to maintain our relationships with those retailers
and maintain continued access to their retail channel customers. Further, if
consumer demand for a specific title falls below expectations or significantly
declines below previous rates of wholesale retail sell-through, then a price
concession or credit may be requested by our retail customers to spur further
retail channel sell-through.
Trends
that our returns typically follow include (i) the seasonality of sales, and
(ii)
the fact that, generally, relatively higher return rates occur during periods
of
new title or title version releases. Historically, actual returns have been
within management’s prior estimates, however, we cannot be certain that any
future write-offs exceeding reserves will not occur or that amounts written
off
will not have a material adverse effect on our business, our financial
condition, including liquidity and profitability, and our results of operations.
Management continually monitors and adjusts these allowances to take into
account actual developments and sales results in the marketplace. In the past,
particularly during title and title version transitions, we have had to increase
price concessions to our retail customers.
MANUFACTURING
AND FULFILLMENT
We
prepare a set of master program copies, documentation and packaging materials
for each platform on which a title or title version is available. All of our
software products are manufactured through third-party subcontractors, with
orders for PC-based titles and title versions generally taking seven to ten
days, and reorders taking three to five days. Packaging, printing and assembly
are also performed by third-party subcontractors. To date, we have not
experienced any material returns due to product defects.
We
currently fulfill all of our direct-to-consumer sales out of our own warehouse
located in Omaha, Nebraska and a third-party fulfillment company, also located
in Omaha, Nebraska, fulfills our bulk retail sales.
SIGNIFICANT
CUSTOMERS AND SUPPLIERS
During
the fiscal years ended December 31, 2005 and 2004, we had no major customers
that individually accounted for 10% or more of annual sales. As we introduce
new
and enhanced software titles into the market, we anticipate our sales to a
single customer, as a percentage of gross consolidated revenue, will continue
to
remain below 10%.
Also
for
the fiscal years ended December 31, 2005 and 2004, product and material
purchases from IsoDisc accounted for 24% and 29%, respectively, Frogs Copy
and
Graphics accounted for 23% and 17%, respectively, Midlands Packaging Corporation
accounted for 19% and 18%, respectively, S.P.A., Inc. accounted for 6% and
0%,
respectively, and GP Direct, LLC accounted for 5% and 0%, respectively, of
the
total product and material purchases made by us. We currently have no long-term
written agreements with any of these suppliers. The payment terms are generally
net 30 days, and we are not substantially dependent upon any one or more of
them; all are easily replaceable with any locally available supplier.
REGULATION
We
are
not currently subject to direct regulation by any government agency, other
than
regulations applicable to businesses generally.
COMPETITION
The
market for our products is rapidly evolving and intensely competitive as new
software products and platforms are regularly introduced. Competition in the
software industry is based primarily upon:
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brand
name recognition;
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availability
of financial resources;
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the
quality of titles;
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reviews
received for a title from independent reviewers who publish reviews
in
magazines, Websites, newspapers and other industry
publications;
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publisher’s
access to retail shelf space;
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the
price of each title; and
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the
number of titles then available.
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We
face
competition from other software publishers, all of which generally sell through
the same combination of channels that we do, including chain store, secular,
CBA, direct and online sales.
Specifically,
and in relation to our QuickVerse®
family
of products, we believe we are the market leader in our category. We currently
compete with the following companies and products, among others, in the PC
category:
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Logos
Research Systems, Inc. - Logos Series X®
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Biblesoft,
Inc. - BibleSoft PC Bible Study®
Version 4
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Thomas
Nelson, Inc. - Nelson eBible®
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WordSearch
Bible Publishers - WordSearch®
7
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Zondervan
- Zondervan Bible Study Library®
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Although
each of these companies publishes software packages in several different
variations, generally in a range that includes a standard package, an expanded
package, and a deluxe package (the same way that we do), in each of these
respective categories we believe that we tend to be the least expensive but
the
most comprehensive in terms of the number of Bibles and reference titles
included. We believe QuickVerse’s®
reputation to be among the most well-respected in its category.
In
relation to our QuickVerse®
Mobile
products, we currently compete with the following companies and products, among
others:
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Laridian
- My Bible®
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Thomas
Nelson, Inc. - Nelson eBible®
for PDA
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Zondervan
- NIV Bible Study Suite PDA®
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WordSearch
Bible Publishers - Life Application Bible Pocket Library®
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Olive
Tree Bible Publishers - Olive Tree Bible Software®
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We
believe that QuickVerse®
Mobile
is the market leader in CBA retail and a top performer in overall sales in
the
PDA Bible Software market. We believe QuickVerse®
Mobile
offers a high quality product along with a substantial amount of content at
an
affordable price.
Furthermore,
we currently compete with the following companies and comparable products,
among
others, in relation to our QuickVerse®
Macintosh products:
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Zondervan
- Zondervan Bible Study Suite®
for Macintosh®
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Oak
Tree Software, Inc. - Accordance Bible Software®
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QuickVerse®
Macintosh was released in June 2005, and we believe that it is the market leader
in CBA retail. QuickVerse®
Macintosh was developed from the ground up to be a truly native OS-X
application. As with the other QuickVerse®
family
of products, we believe QuickVerse®
Macintosh tends to be the least expensive product in its category given its
features and extensive collection of Bibles and Bible reference content.
In
relation to our Membership Plus®
products, we currently compete with the following companies and comparable
products, among others:
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ACS
Technologies®
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CCIS
Church Software®
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Church
Data Master Plus®
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Church
Windows/Computer Helper®
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Church
Office®
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Logos
Management Software®
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Power
Church Software®
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Servant
PC®
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Shelby
Systems®
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Shepherd’s
Staff®
(Concordia Publishing House)
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Specialty
Software®
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We
believe that Membership Plus®
is the
market leader by a margin of over 100% in the church management software
publishing category in terms of registered users. Our Membership
Plus®
packages
are also among the least expensive products in the category.
We
rely
upon our product quality, marketing and sales abilities, proprietary technology
and product development capability, the depth of our retail distribution
channels and management experience to compete in the software industry. Although
we believe that we are among the market leaders in each of our primary product
categories, some of our competitors have longer operating histories, larger
customer bases and greater financial, marketing, service, support, technical
and
other resources than we do. Due to these greater resources, certain of our
competitors have the ability to undertake more extensive marketing campaigns,
adopt more aggressive pricing policies, pay higher fees to licensors and pay
more to third-party software developers than we can. Moreover, we believe that
competition from new entrants will increase as the market for faith-based
products and services expands.
INTELLECTUAL
PROPERTY
Overview
We
rely
for our business on a combination of copyrights, trademarks, and trade secrets
to protect our intellectual property. Our copyrighted software content and
the
brand recognition associated with our related product trademarks are among
the
most important assets that we possess in our present ability to generate
revenues and profits, and we rely very significantly on these intellectual
property assets in being able to effectively compete in our market. Our
intellectual property rights derive from a combination of licenses from third
parties, internal development and confidentiality and non-disclosure
agreements.
We
cannot
be certain that the precautions we have taken will provide meaningful protection
from unauthorized use by others. If we must pursue litigation in the future
to
enforce or otherwise protect our intellectual property rights, or to determine
the validity and scope of the proprietary rights of others, we may not prevail
and will likely have to make substantial expenditures and divert valuable
resources in the process. Finally, we may not have adequate remedies if our
proprietary content is appropriated, our proprietary rights are violated or
our
trade secrets are disclosed.
Copyrights
Our
copyrights, some of which have been registered and others of which remain
unregistered, derive from a combination of program and source code embodied
in
software titles that we license from third parties, as well as program and
source code embodied in software titles that we have internally developed on
our
own.
We
entered into a license agreement in June 1999 with Parsons Technology, Inc.
which forms the basis of our copyright protection for products that accounted
for approximately 99% of our revenues in 2005, including those generated from
sales of QuickVerse®
and
Membership Plus®,
by far
our two largest selling software titles. A copy of the license that we obtained
from Parsons Technology, which has since been assigned to Riverdeep, Inc.,
the
latest licensor-assignee in a succession of assignments by Parsons Technology
that have occurred since June 1999, is incorporated by reference into this
annual report on Form 10-KSB for the year ended December 31, 2005 as Exhibit
10.3. At the time, it was acquired as part of a combination of related
transactions involving ourselves, Parsons Technology, then a wholly owned
subsidiary of Mattel, Inc.®, and TLC Multimedia Inc., then also a
wholly owned subsidiary of Mattel, Inc.® Aside from the license, the
transactions involved an asset sale, a product distribution agreement, and
a
related services agreement. Taken as a whole, and essentially, we had acquired
from TLC Multimedia a software publishing and sales division (known and referred
to by many then as the “Parsons Church Group”). In accordance with its terms, we
agreed to pay a one-time non-recurring fee of $5 million to obtain the license,
which fee was payable over a subsequent approximate one year period. The related
asset sale involved separate consideration.
The
license that we acquired in 1999 provided us with the right, originally for
a
term of ten years, to publish, use, distribute, sublicense and sell, exclusively
worldwide in non-secular channels and non-exclusively (with the continuing
right
retained by Riverdeep, Inc., successor to Parsons Technology) on an unrestricted
basis in secular channels, a collection of 65 individual top-selling
Christian-related software titles owned by Parsons Technology, including
QuickVerse®
and
Membership Plus®,
among
others. The license covered a variety of other add-on content titles
(e.g.,
various Bible translations, study guides and sermon preparation tools). The
license also included the right for us to modify the programs (including the
source code) in order to prepare derivative works and future versions of the
programs, and stated that we would exclusively own all rights associated with
any such modifications.
Beginning
in 2000, we became involved in a series of mediations arising out of or
otherwise in connection with the 1999 license. The first of these involved
the
payment terms of the $5 million licensing fee. Rather than making payments
in
accordance with the fee schedule as originally set forth in the agreement,
we
entered into an arrangement with Parsons Technology’s direct sales group whereby
we provided resale products and in turn received an offset credit against the
balance due under the fee provision in the license. The dispute centered on
the
amount of product actually resold, and, therefore, the amount of offset credit
to which we were entitled. Prior to the resolution of this contest, a second
dispute arose, naming Parsons Technology and ourselves, among others, as parties
thereto. The first mediation was set aside, and ultimately resolved in
conjunction with the latter proceeding as described in the following
paragraph.
In
October 2001, due to being in arrears with respect to certain royalty payments
owed to The Zondervan Corporation then, a content provider to
QuickVerse®,
we
became party to a second mediation ultimately resulting in a multi-party
settlement agreement, on October 20, 2003, the terms of which provided for
our
payment to Zondervan of $500,000 plus 5% simple interest in installments, as
well as for our destruction of all inventory containing Zondervan-owned content,
all of which we satisfied within months thereafter. As part of the settlement
agreement, we received a covenant in perpetuity with respect to our rights
under
the 1999 license, effectively extending it indefinitely with no continuing
financial obligations owed by us. A copy of the settlement agreement which
resulted in the effective extension is incorporated by reference into this
annual report on Form 10-KSB for the fiscal year ended December 31, 2005 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
five
subsequent versions, eight different editions and three new platforms of
QuickVerse®,
four
subsequent versions and one new edition of Membership Plus®,
and
various subsequent versions of some of the other titles to which we acquired
rights under the license (including those in each of the print and graphics,
pastoral, children’s, and language tutorial product categories), we believe that
the real value of the copyrights associated with these titles lay almost
exclusively at this point in the improvements that we own rather than the base
copyrights that we were originally granted and that continue to be owned by
Riverdeep, Inc. Moreover, it is our belief that the original source code covered
by the license has been effectively rendered valueless by virtue of these
subsequent modifications and improvements. Although we do not believe that
any
third parties have been granted any rights to date in addition to our own to
publish or sell these titles into secular channels, and do believe that, even
if
this has occurred or should occur in the future, the barriers to entry created
by the extensive developments that we have made and now own to these otherwise
licensed titles would make it practically infeasible for any third party to
effectively compete with us in relation to these products in any market, there
can be no assurance that one or more competitors will not emerge at some point
or that they will not impact on our sales and revenues.
As
noted
above, our largest-selling title, QuickVerse®,
is one
from which we originally derived our rights under the 1999 license. One of
the
features that make QuickVerse®
such a
popular title is its breadth of content. A very significant percentage of this
content is licensed by us from various third-party content providers for
inclusion in QuickVerse®.
We are
therefore responsible for paying royalties on a regular basis to these providers
in connection with our sales of QuickVerse®.
In
total, we currently have content licensing agreements with 45 different
publishers for approximately 765 individual Bible translations and other
Biblical or related scholarly works which are incorporated in various editions
of our QuickVerse®
products, or in some cases sold as stand-alone or add-on content. These
licensing agreements are typically non-exclusive and for a fixed duration
(e.g.,
a term
of 3 or 5 years). Royalties are generally paid within 30 days following the
end
of a quarter and are calculated as a percentage of net sales from a work
(e.g.,
ranging from 3% to 10% according to the licensing agreements), based upon
factors such as value as a stand-alone product as compared to, for example,
value when bundled with other titles within a collective work. These license
agreements typically cover content in the context of both stand-alone products
and as bundled works. For example, consumers who purchase QuickVerse®
pay the
suggested retail price and are in part paying for the technology within the
program along with the content. QuickVerse®
titles
sold to new consumers or new users are subject to royalties on all content
within each specific QuickVerse®
title.
However, upgrade sales to existing users are only subject to royalties on new
content additions of the upgraded version.
In
addition to the copyrights associated with the 1999 license described above,
copyright protection exists in relation to the software titles that we resell
published by others. These copyrights, however, are held by the publishers
and/or their respective third-party content providers.
Trademarks
As
part
of the 1999 license, we acquired the unlimited right to use the registered
trademarks associated with the various titles licensed thereunder exclusively
worldwide in non-secular channels and non-exclusively in secular channels.
Because of the fact that each of QuickVerse®
and
Membership Plus®
had been
on the market for approximately ten years by the time we acquired the license,
and each had a substantial existing user base, the trademarks for these products
alone were deemed at the time to be of great importance and value. We believe
that our initiatives in introducing subsequent versions, editions and platforms
of these titles since then, as well as our having maintained extremely high
publishing standards throughout the period that we have been publishing these
titles, have served to sustain and enhance the importance and value of these
trademarks.
Trade
Secrets
Whenever
we deem it important for purposes of maintaining competitive advantages, our
policy requires parties with whom we share, or who otherwise are likely to
become privy to, our trade secrets or other confidential information, including
source code, to execute and deliver to us confidentiality and/or non-disclosure
agreements prior to their exposure to any such information. Among others, this
includes employees, consultants and other advisors, including our in-house
and
outsourced software developers and collaborators, each of whom we require to
execute such an agreement upon commencement of their employment, consulting
or
advisory relationships. These agreements generally provide that all confidential
information developed or made known to the individual by us during the course
of
the individual’s relationship with us is to be kept confidential and not to be
disclosed to third parties except in specific circumstances. In the case of
employees and consultants, the agreements provide that all inventions conceived
by the individual in the course of their employment or consulting relationship
shall be our exclusive property.
EMPLOYEES
As
of
March 31, 2006, we had thirty full-time employees. Of those thirty, four were
part of the senior-level executive and financial management team, five were
in
the product development team, eleven were on the sales team, and ten were in
fulfillment, administration, and related support positions. For the fiscal
year
ended December 31, 2005, our annual payroll was approximately $1,603,000,
equivalent to 25% 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 and marketing.
We
rely
heavily on our current officers and directors in operating the business. We
are
not subject to any collective bargaining agreements and believe that our
relationships with our employees are good.
SEASONALITY
Our
business is highly seasonal. More than 50% of our annual sales are expected
to
occur in the five months of September through January; the five months of April
through August are generally our weakest, generating only about 29% of our
annual sales.
Our
principal executive offices are located at 11204 Davenport Street, Suite 100,
Omaha, Nebraska. We lease this 6,500 square foot premises under a five year
lease agreement with 11204, LLC. Our monthly rent is $7,094.79 and, as of March
31, 2006, there were approximately fourteen months remaining under the
lease.
We
maintain additional leased office space in Naperville, Illinois for certain
product development activity. We lease this 880 square foot premises under
a
three year lease agreement with Transwestern Great Lakes, L.P. Our monthly
rent
is $1,320.00 and there are twelve months remaining under the lease.
Three
of
our full-time employees work in home offices located in Cedar Rapids, Iowa.
We
do not pay for any space associated with these operations.
As
of the
date of this annual report on Form 10-KSB for the year fiscal year ended
December 31, 2005, there were no pending material legal proceedings to which
we
were a party and we are not aware that any were contemplated. There can be
no
assurance, however, that we will not be made a party to litigation in the
future. Moreover, there can be no assurance that our insurance coverage will
prove adequate to cover all liabilities arising out of any claims that may
be
initiated against us in the future. Any finding of liability imposed against
us
coupled with a lack of corresponding insurance coverage is likely to have an
adverse effect on our business, our financial condition, including liquidity
and
profitability, and our results of operations.
No
matters were submitted to a vote of our stockholders during the fourth quarter
of the fiscal year ended December 31, 2005.
RECENT
SALES OF UNREGISTERED SECURITIES
There
were no previously unreported sales of unregistered securities during the fiscal
years ended December 31, 2004 or 2005.
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 BigCharts.com.
The
prices are inter-dealer prices, do not include retail mark-up, markdown or
commission and may not necessarily represent actual transactions.
|
Common
Stock
|
|||||||
|
2004
|
High
|
Low
|
|||||
|
First
Quarter
|
|
$0.055
|
|
$0.020
|
|||
|
Second
Quarter
|
|
$0.400
|
|
$0.018
|
|||
|
Third
Quarter
|
|
$0.250
|
|
$0.090
|
|||
|
Fourth
Quarter
|
|
$0.190
|
|
$0.060
|
|||
|
2005
|
High
|
Low
|
|||||
|
First
Quarter
|
|
$0.150
|
|
$0.070
|
|||
|
Second
Quarter
|
|
$0.150
|
|
$0.090
|
|||
|
Third
Quarter
|
|
$0.140
|
|
$0.070
|
|||
|
Fourth
Quarter
|
|
$0.170
|
|
$0.070
|
|||
STOCKHOLDERS
As
of
March 31, 2006, there were approximately 800 holders of record of our common
stock, with any shares held by persons or companies in street or nominee name
counted only under such street or nominee name.
DIVIDENDS
During
the last two years, no dividends have been paid on our common stock and we
do
not anticipate paying any dividends in the foreseeable future. Although it
is
our intention to utilize all available funds for the development of our
business, no restrictions are in place that would limit or restrict our ability
to pay dividends.
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
EQUITY
COMPENSATION PLAN INFORMATION
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
(a)
|
Weighted-average
exercise price of outstanding options, warrants and
rights
(b)
|
Number
of Securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
(c)
|
||||||||
|
Equity
compensation plans approved by security holders
|
855,000
|
|
$0.11
|
645,000
|
||||||
|
Equity
compensation plans not approved by security holders
|
2,800,000
|
|
$0.0879
|
---
|
||||||
|
Total
|
3,655,000
|
|
$0.093
|
645,000
|
||||||
Our
1999
Stock Incentive Plan authorizes the issuance of various forms of stock-based
awards including incentive and nonqualified stock options, stock appreciation
rights attached to stock options, and restricted stock awards to our directors,
officers and other key employees. The plan has been approved by our stockholders
and as such, provides certain income tax advantages to employees as provided
under Sections 421, 422, and 424 of the Internal Revenue Code. Stock options
are
granted at an exercise price as determined by our board at the time the option
is granted and may not be less than the par value of such shares of common
stock. Stock options vest quarterly over three years and have a term of up
to
ten years. The plan authorizes an aggregate of 1,500,000 shares of common stock
that may be issued.
In
addition, we issue various forms of stock-based awards including nonqualified
stock options and restricted stock awards to directors, officers, other key
employees and third-party consultants, outside of the Stock Incentive Plan.
Awards granted outside of the plan have been granted pursuant to equity
compensation arrangements that have not been approved by our stockholders.
These
awards are granted at an exercise price as determined by our board at the time
of grant and are not less than the par value of such shares of common stock.
Stock options granted outside of the plan vest as determined by our board at
the
time of grant and have a term of up to ten years. Non-employee directors, though
treated as employees for financial reporting purposes under Financial Accounting
Standards Board Interpretation No. 44, are excluded from the income tax
advantages afforded employees by the Internal Revenue Code.
All
issued options, whether under the plan or not, create the obligation for stock
issuance at the established exercise price.
The
following discussion should be read together with our consolidated financial
statements for the period ended December 31, 2005 and the notes to the
consolidated financial statements.
CRITICAL
ACCOUNTING POLICIES
Our
critical accounting policies, including the assumptions and judgments underlying
them, are more fully described in the Notes to the Financial Statements.
We have
consistently applied these policies in all material respects. These policies
primarily address matters of expense recognition and revenue recognition,
including amortization of software development cost and the calculation
of
reserve for returns. Investors are cautioned that these policies are not
guarantees of future performance and involve risks and uncertainties, and
that
actual results may differ materially. Below are the accounting policies
that we
believe are the most critical in order to gain an understanding of our
financial
results and condition.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with Generally
Accepted Accounting Principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and the
accompanying notes. Significant estimates used in the consolidated financial
statements include the estimates of (i) doubtful accounts, sales returns,
price
protection and rebates, (ii) provision for income taxes and realizability
of the
deferred tax assets, (iii) the life and realization of identifiable intangible
assets, and (iv) provisions for obsolete inventory. The amounts we will
ultimately incur or recover could differ materially from current estimates.
Royalty
Agreements
We
have
entered into certain agreements whereby we are obligated to pay royalties
for
content of software published. We generally pay royalties based on a percentage
of sales on respective products or on a fee per unit sold basis. We expense
software royalties as product costs during the period in which the related
revenues are recorded.
Accounts
Receivable
Accounts
receivable arise in the normal course of business. It is the policy of
management to continuously review the outstanding accounts receivable,
as well
as the bad debt write-offs experienced in the past, and establish an allowance
for doubtful accounts for uncollectible amounts. Individual accounts are
charged
against the allowance when they are deemed uncollectible.
Inventory
Inventory,
including out on consignment, consists primarily of software media, manuals
and
related packaging materials and is recorded at the lower of cost or market
value, determined on a first-in, first-out, and adjusted on a per-item,
basis.
Intangible
Assets
In
accordance with SFAS No. 142, Goodwill
and Other Intangible Assets,
intangible assets with an indefinite useful life are not amortized. Intangible
assets with a finite useful life are amortized on the straight-line method
over
the estimated useful lives. All intangible assets are tested for impairment
annually during the fourth quarter.
Software
Development Costs
In
accordance with SFAS No. 86, Accounting
for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed,
software development costs are expensed as incurred until technological
feasibility and marketability has been established, generally with release
of a
beta version for customer testing. Once the point of technological feasibility
and marketability is reached, direct production costs (including labor
directly
associated with the development projects), indirect costs (including allocated
fringe benefits, payroll taxes, facilities costs, and management supervision),
and other direct costs (including costs of outside consultants, purchased
software to be included in the software product being developed, travel
expenses, material and supplies, and other direct costs) are capitalized
until
the product is available for general release to customers. We amortize
capitalized costs on a product-by-product basis. Amortization for each
period is
the greater of the amount computed using (i) the straight-line basis over
the
estimated product life (generally from 12 to 18 months), or (ii) the ratio
of
current revenues to total projected product revenues.
Capitalized
software development costs are stated at the lower of amortized costs or
net
realizable value. Recoverability of these capitalized costs is determined
at
each balance sheet date by comparing the forecasted future revenues from
the
related products, based on management’s best estimates using appropriate
assumptions and projections at the time, to the carrying amount of the
capitalized software development costs. If the carrying value is determined
not
to be recoverable from future revenues, an impairment loss is recognized
equal
to the amount by which the carrying amount exceeds the future
revenues.
SFAS
No.
2, Accounting
for Research and Development Costs,
establishes accounting and reporting standards for research and development.
In
accordance with SFAS No. 2, costs we incur to enhance our existing products
after general release to the public (bug fixes) are expensed in the period
they
are incurred and included in research and development costs.
We
capitalize costs related to the development and maintenance of our Website
in
accordance with Financial Accounting Standard Board’s (“FASB’s”) Emerging Issues
Task Force (“EITF”) Issue No. 00-2, Accounting
for Website Development Costs.
Under
EITF Issue No. 00-2, costs expensed as incurred are as follows:
|
▪
|
planning
the Website,
|
|
|
▪
|
developing
the applications and infrastructure until technological feasibility
is
established,
|
|
|
▪
|
developing
graphics such as borders, background and text colors, fonts,
frames, and
buttons, and
|
|
|
▪
|
operating
the site such as training, administration and
maintenance.
|
Capitalized
costs include those incurred to:
|
▪
|
obtain
and register an Internet domain name,
|
|
|
▪
|
develop
or acquire software tools necessary for the development
work,
|
|
|
▪
|
develop
or acquire software necessary for general Website
operations,
|
|
|
▪
|
develop
or acquire code for web applications,
|
|
|
▪
|
develop
or acquire (and customize) database software and software to
integrate
applications such as corporate databases and accounting systems
into web
applications,
|
|
|
▪
|
develop
HTML web pages or templates,
|
|
|
▪
|
install
developed applications on the web server,
|
|
|
▪
|
create
initial hypertext links to other Websites or other locations
within the
Website, and
|
|
|
▪
|
test
the Website applications.
|
We
amortize Website development costs on a straight-line basis over the estimated
life of the site, generally 36 months.
Revenue
Recognition
We
derive
revenues from the sale of packaged software products, product support and
multiple element arrangements that may include any combination of these
items.
We recognize software revenue for software products and related services
in
accordance with American Institute of Certified Public Accountants Statement
of
Position (“SOP”) 97-2, Software
Revenue Recognition,
as
modified by SOP 98-9, Modification
of SOP 97-2, With Respect to Certain Transactions.
We
recognize revenue when persuasive evidence of an arrangement exists (generally
a
purchase order), we have delivered the product, the fee is fixed or determinable
and collectibility is probable.
In
some
situations, we receive advance payments from our customers. We defer revenue
associated with these advance payments until we ship the products or offer
the
support.
In
accordance with EITF Issue No. 01-9, Accounting
for Consideration Given by a Vendor to a Customer or a Reseller of the
Vendor’s
Product,
we
generally account for cash considerations (such as sales incentives - rebates
and coupons) that we give to our customers as a reduction of revenue rather
than
as an operating expense.
We
reduce
product revenue for estimated returns and price protections that are based
on
historical experience and other factors such as the volume and price mix
of
products in the retail channel, trends in retailer inventory and economic
trends
that might impact customer demand for our products. We also reduce product
revenue for the estimated redemption of end-user rebates on certain current
product sales. Our rebate reserves are estimated based on the terms and
conditions of the specific promotional rebate program, actual sales during
the
promotion, the amount of redemptions received and historical redemption
trends
by product and by type of promotional program.
We
record
the amounts we charge our customers for the shipping and handling of our
software products as product revenue and we record the related costs as
cost of
sales on our consolidated statements of operations.
Derivatives
We
account for warrants issued with shares of common stock in a private placement
according to EITF Issue 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled
in, a
Company’s Own Stock.
In
accordance with accounting mandate, the derivative liability associated
with the
warrants has been and shall continue to be adjusted to fair value (calculated
using the Black Scholes method) at each balance sheet date and is accordingly
reassessed at each such time to determine whether the warrants should be
classified (or reclassified, as appropriate) as a liability or as equity.
The
corresponding fair value adjustment is included in the consolidated statements
of operations as other expenses as the value of the warrants increases
from an
increase in our stock price at the balance sheet date and as other income
as the
value of the warrants decreases from a decrease in our stock price.
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.
|
Statement
of Operations for Years Ended December 31
|
2005
|
2004
|
Change
|
|
%
|
||||||||
|
Net
revenues
|
$
|
5,337,342
|
$
|
5,322,842
|
$
|
14,500
|
0
|
%
|
|||||
|
Cost
of sales
|
|
1,973,944
|
|
1,721,298
|
|
252,646
|
15
|
%
|
|||||
|
Gross
profit
|
|
3,363,398
|
|
3,601,544
|
|
(238,146
|
)
|
-7
|
%
|
||||
|
Total
operating expenses
|
|
(4,425,429
|
)
|
|
(4,177,705
|
)
|
|
(247,724
|
)
|
6
|
%
|
||
|
Other
income
|
|
14,855
|
|
1,012,744
|
|
(997,889
|
)
|
-99
|
%
|
||||
|
Other
adjustments
|
|
(436,686
|
)
|
|
(154,569
|
)
|
|
(282,117
|
)
|
183
|
%
|
||
|
Loss
on fair value adjustment of derivatives
|
|
(33,797
|
)
|
|
(291,672
|
)
|
|
257,875
|
-88
|
%
|
|||
|
Other
expenses
|
|
(12,898
|
)
|
|
(42,148
|
)
|
|
29,250
|
-69
|
%
|
|||
|
Loss
before income taxes
|
|
(1,530,557
|
)
|
|
(51,806
|
)
|
|
(1,478,751
|
)
|
2854
|
%
|
||
|
Provision
for income taxes
|
|
(50,709
|
)
|
|
1,015,859
|
|
(1,066,568
|
)
|
-105
|
%
|
|||
|
Net
income (loss)
|
$
|
(1,581,266
|
)
|
$
|
964,053
|
$
|
(2,545,319
|
)
|
-264
|
%
|
Despite
a
modest increase in our gross revenue, our net loss before income taxes
increased
approximately $1,479,000 from a loss of approximately $52,000 for the year
ended
December 31, 2004 to a loss of approximately $1,531,000 for the year ended
December 31, 2005. Further, we incurred a net loss of approximately $1,581,000
for the year ended December 31, 2005, representing a reduction of approximately
$2,545,000 in our net income of approximately $964,000 for the year ended
December 31, 2004. These negative results of operations are primarily
attributable to the following:
| 1) |
For
the year ended December 31, 2004:
|
a) write
downs of each the following:
| § |
a
reserve for rebates payable from a change in accounting estimate
of
approximately $142,000 (and recognized as an adjustment to revenue);
|
| § |
actual
rebates payable of approximately $61,000 due to an overstatement
(and
recognized as an adjustment to revenue); and
|
| § |
obsolete
inventory of approximately $32,000 (which is included in cost
of
sales);
|
b) we
recognized a gain of approximately $1,000,000 from extinguishment of debt
(classified as other income) which resulted from our having settled with
various
vendors and content providers for lump-sum payments at reduced amounts
of
balances previously owed;
c)
we
recognized an expense of approximately $155,000 (classified as other
adjustments) related to a settlement with an institutional private equity
investor; and
d) we
recognized a loss of approximately $292,000 related to the fair value adjustment
of derivatives.
|
2)
|
For
the year ended December 31, 2005:
|
a)
our
cost
of sales increased approximately $253,000 from the year ended December
31, 2004
despite an increase in net sales year over year of only $14,500, due for
the
most part to an increase of approximately $231,000 in amortization expense
related to software development costs resulting from the increased number
of
development projects completed and shipped in late 2004 and 2005 (including
QuickVerse®
2005 in
December 2004, Membership Plus®
2005 in
February 2005, QuickVerse®
Macintosh in June 2005, QuickVerse®
2006 in
September 2005, and QuickVerse®
2006
Mobile in October 2005);
b) our
bad
debt expense (included in total operating expenses) increased approximately
$114,000 from the year ended December 31, 2004 due primarily to our inability
to
collect on a balance due of $42,000 from a single liquidation customer.
In
addition, we wrote off approximately $58,000 related to uncollectible
receivables arising out of a sales campaign that we initiated in 2005 which
focused on offering new churches a beginning line of credit of approximately
$500, and which has since been discontinued;
c) we
incurred liquidated damage penalties of approximately $437,000 in connection
with our continued failure to meet certain contractual registration obligations
(which are included in other adjustments);
d) our
legal
expenses (included in general and administrative) increased approximately
$117,000 from the year ended December 31, 2004 attributable in large part
to
ongoing matters associated with fulfillment of our contractual registration
obligations and related restatements of certain of our historical financial
statements; and
e) we
recognized a loss of approximately $34,000 related to the fair value
adjustment
of derivatives.
Offsetting
to some degree the negative results of operations detailed above were two
positive developments during the year ended December 31, 2005. First, non-cash
expenses related to equity-based compensation for services decreased by
approximately $179,000 for the year ended December 31, 2005 as a result
of our
not having issued any. Second, interest expense for the year ended December
31,
2005 decreased, by approximately $42,000, from the year ended December
31, 2004,
due to a reduction in trade payables coupled with an increase in timely
payments.
Revenues
We
derive
revenues from the sale of packaged software products, product support and
multiple element arrangements that may include any combination of these
items.
Revenue is recognized when persuasive evidence of an arrangement exists
(generally a purchase order), we have delivered the product, the fee is
fixed or
determinable and collectibility is probable. For our packaged software
products,
we typically recognize revenue from the sale when we ship the product.
We sell
some of our products on consignment to a limited number of resellers. We
recognize revenue for these consignment transactions only when the end-user
sale
has occurred. Service revenue resulting from technical support plans is
recognized over the life of the plan, which is generally one year. Revenue
associated with advance payments from our customers is deferred until we
ship
the product or offer the support service. Revenue for software distributed
electronically via the Internet is recognized when the customer has been
provided with the access codes that allow the customer to take immediate
possession of the software on its hardware and evidence of the arrangement
exists. For revenue arrangements involving multiple products or product
and
service packages, we allocate and defer revenue for the undelivered products
or
product and service packages based on their vendor-specific objective evidence
of fair value, which is generally the price charged when that product or
product
and service package is sold separately.
We
reduce
product revenue for estimated returns and price protections that are based
on
historical experience and other factors such as the volume and price mix
of
products in the retail channel, trends in retailer inventory and economic
trends
that might impact customer demand for our products. Estimated returns are
also
based upon a percentage of total retail and direct sales. Direct sales
accounted
for approximately 61% of our 2005 fiscal year revenue. We account for cash
considerations (such as sales incentives - rebates and coupons) that we
give our
customers as a reduction of revenue rather than as an operating expense.
Product
revenue is also reduced for the estimated redemption of end-user rebates
on
certain current product sales. We did not have any rebate programs during
the
years ended December 31, 2004 and 2005, respectively.
Trends
that our returns typically follow include (i) the seasonality of sales,
and (ii)
the fact that, generally, relatively higher return rates occur during periods
of
new title or title version releases. Historically, actual returns have
been
within management’s prior estimates, however, we cannot be certain that any
future write-offs exceeding reserves will not occur or that amounts written
off
will not have a material adverse effect on our business, our financial
condition, including liquidity and profitability, and our results of operations.
Management continually monitors and adjusts these allowances to take into
account actual developments and sales results in the marketplace. In the
past,
particularly during title and title version transitions, we have had to
increase
price concessions to our retail customers.
Product
returns from distributors and Christian bookstores are allowed primarily
in
exchange for new products or for credit towards purchases as part of a
stock-balancing program. These returns are subject to certain limitations
that
may exist in the contract. Under certain circumstances, such as termination
or
when a product is defective, distributors and bookstores could receive
a cash
refund if returns exceed amounts owed. Returns from sales made directly
to the
consumer are accepted within 45 days of purchase and are issued a cash
refund.
Product returns, price protections or price concessions that exceed our
reserves
could materially adversely affect our business and operating results and
could
increase the magnitude of quarterly fluctuations in our operating and financial
results. We did implement a price protection program within the third quarter
of
2005 on our QuickVerse®
2005
titles within the Christian Booksellers Association retail channel due
to our
updated release of QuickVerse®
2006.
QuickVerse®
2006 was
released in late September 2005, and we believe we reserved appropriately
for
the price protections.
Software
products are sold separately, without an obligation of future performance
such
as upgrades, enhancements or additional software products, and are sold
with
post contract customer support services such as customer service and technical
support assistance. In connection with the sale of certain products, we
provide
a limited amount of free technical support assistance to our customers.
We do
not defer the recognition of any revenue associated with sales of these
products, since the cost of providing this free technical support is
insignificant. The technical support is provided within one year after
the
associated revenue is recognized and free product enhancements (bug fixes)
are
minimal and infrequent. We accrue the estimated cost of providing this
free
support upon product shipment and include it in cost of sales.
Shipping
and handling costs in connection with our software products are expensed
as
incurred and included in cost of sales.
|
Revenues
for Years Ended December 31
|
2005
|
%
to Sales
|
2004
|
%
to Sales
|
Change
|
|
%
|
||||||||||||||
|
Gross
sales
|
$
|
6,309,017
|
100
|
%
|
$
|
5,786,427
|
100
|
%
|
$
|
522,590
|
9
|
%
|
|||||||||
|
Add
rebate adjustment
|
19,640
|
0
|
%
|
203,313
|
4
|
%
|
(183,673
|
)
|
0
|
%
|
|||||||||||
|
Less
reserve for sales returns and allowances
|
(991,315
|
)
|
-16
|
%
|
(666,898
|
)
|
-12
|
%
|
(324,417
|
)
|
49
|
%
|
|||||||||
|
Net
sales
|
$
|
5,337,342
|
84
|
%
|
$
|
5,322,842
|
92
|
%
|
$
|
14,500
|
0
|
%
|
Gross
revenues increased approximately $523,000 from approximately $5,786,000
for the
year ended December 31, 2004 to approximately $6,309,000 for the year ended
December 31, 2005. We believe that this increase was attributable primarily
to
the following product releases throughout the year:
First
Quarter 2005
|
▪
|
an
enhanced version of our top financial and data management product,
Membership Plus®,
including Membership Plus®
Standard Edition (retail price: $149.95) and Membership Plus®
Deluxe Edition (retail price of $349.95); and
|
|
|
▪
|
an
enhanced version of QuickVerse®
2005 Essentials (retail price: $49.95) and QuickVerse®
2005 Platinum Edition (retail price: $799.95).
|
Second
Quarter 2005
|
▪
|
our
first product release on the Macintosh®
Operating System platform, QuickVerse® Macintosh,
including QuickVerse®
Macintosh White Box edition, (retail price: $49.95) and
QuickVerse®
Macintosh Black Box edition (retail price: $99.95) and
;
|
|
|
▪
|
an
enhanced version of Bible Illustrator®
3.0 titled Sermon Builder®
4.0 (retail price: $69.95), which marked the first update to
this program
in over six years.
|
Third
Quarter 2005
|
▪
|
an
upgrade to our flagship product, QuickVerse®
(three months earlier within the calendar year than our 2004
upgrade
release of this product, and the first QuickVerse®
upgrade
release in over five years that was shipped early enough to be
in retail
stores prior to the beginning of the holiday sales season), including
QuickVerse®
2006 Starter Edition (retail price: $9.95), QuickVerse®
2006 Parable®
Edition (retail price: $49.95), QuickVerse®
2006 Bible Suite (retail price: $29.95), QuickVerse®
2006 Essentials (retail price: $49.95), QuickVerse®
2006 Standard (retail price: $99.95), QuickVerse®
2006 Expanded (retail price: $199.95), QuickVerse®
2006 Deluxe (retail price: $299.95), and QuickVerse®
2006 Platinum (retail price:
$799.95).
|
Fourth
Quarter 2005
|
▪
|
an
upgrade to our four editions of QuickVerse®
2006 Mobile, including Standard (retail price: $29.95), Deluxe
(retail
price: $39.95), Platinum Edition (retail price: $69.95), and
Life
Application Study Bible (retail price:
$39.95).
|
During
the year ended December 31, 2004, our product releases included Membership
Plus®
8.0
(retail price: $199.95 to $299.95), QuickVerse®
2005 PDA
(retail price: $14.95 to $39.95), and QuickVerse®
2005
(retail price: $99.95 to $299.95). Of note, and generally, the retail price
points for the products released during the year ended December 31, 2004
were
significantly less than those released during the year ending December
31, 2005.
Furthermore, due to delays in programming, duplication, packaging and
distribution, QuickVerse®
2005
began shipping in early-December 2004, several months after the holiday
sales
season had already begun. Due to these delays, we believe that we lost
otherwise
realizable sales revenues of approximately $500,000 for the year ended
December
31, 2004.
During
each of the years ending December 31, 2004 and 2005, our sales efforts
were
focused on directly targeting end-users through telemarketing and Internet
sales, resulting in more consistent sales. While sales into the retail
market
(both CBA and secular) have continued to increase, they have not returned
to the
levels of 1999 or 2000. Upgrade sales, however are not increasing at a
rapid
rate due to the consistency in our development schedule and the annual
releases
of our flagship product, QuickVerse®.
We
anticipate that revenues will continue to increase through 2006 the following
year as we continue to expand the content available for our
QuickVerse®
products, develop new products for multiple platforms, as well as offer
our
products at a range of price points intended to appeal to various market
sub-segments.
Sales
returns and allowances increased approximately $324,000 from approximately
$667,000 for the year ended December 31, 2004 to approximately $991,000
for the
year ended December 31, 2005, and increased as a percentage of gross sales
from
approximately 12% for the year ended December 31, 2004 to approximately
16% for
the year ended December 31, 2005. This increase is largely attributable
to the
following:
|
▪
|
price
protections afforded to consumers and retailers who had purchased
prior
versions of Membership Plus®
and
QuickVerse®
within
one year or less of our release of upgraded versions of each
of Membership
Plus®,
in February 2005, and QuickVerse®,
in September 2005. Historically, our product upgrades have
extended over
two to three years and therefore, price protections were not
issued;
|
|
|
▪
|
a
single return from a liquidator of approximately $42,000 during
the fourth
quarter of the year end December 31, 2005, which although we
were not
obligated to accept, we did accept based on a conclusion that
it was in
our best interest to do so;
|
|
|
▪
|
the
unexpected loss of our primary developer for Membership Plus®
in
May 2005, together with certain unresolved maintenance issues
at the time,
of which are now resolved, led to higher actual returns on
the Membership
Plus®
2005 product line; and
|
|
|
▪
|
increased
price points associated with recently introduced
products.
|
As
a
result of the overall increase in sales returns and allowances, we have
increased our reserves from approximately $100,000 to approximately $125,000
to
cover estimated retail channel inventory levels. Moreover, we expect
to release
enhanced versions of our biggest-selling products on an annual basis
generally
going forward, and anticipate sales returns and allowances as a percentage
of
gross revenues to decrease over time as a result of increased stability
in the
functionality of our products, decreasing reliance on retail sales and
increasing reliance on direct sales, which have historically resulted
in fewer
returns, and improved planning in the timing of new product version releases.
For
the
year ended December 31, 2004, and due to a change in accounting estimate
of
approximately $142,000, we wrote down a reserve for rebates payable. Due
to
overstatements of approximately $20,000 and $61,000, we additionally wrote
down
actual rebates payable, both of which are included as an adjustment to
revenue
(in accordance with EITF Issue No. 01-09) for the years ended December
31, 2005
and 2004, respectively.
Cost
of Sales
|
Cost
of Sales for Years Ended December 31
|
2005
|
%
to Sales
|
2004
|
%
to Sales
|
Change
|
|
%
|
||||||||||||||
|
Direct
costs
|
$
|
601,156
|
13
|
%
|
$
|
579,946
|
15
|
%
|
$
|
21,210
|
4
|
%
|
|||||||||
|
Less
reserve for sales returns and allowances
|
(148,245
|
)
|
-3
|
%
|
|
(99,255
|
)
|
-3
|
%
|
(48,990
|
)
|
49
|
%
|
||||||||
|
Amortization
of software development costs
|
806,531
|
17
|
%
|
575,480
|
15
|
%
|
231,051
|
40
|
%
|
||||||||||||
|
Royalties
|
471,651
|
10
|
%
|
417,604
|
11
|
%
|
54,047
|
13
|
%
|
||||||||||||
|
Freight-out
|
171,904
|
4
|
%
|
172,634
|
4
|
%
|
(730
|
)
|
0
|
%
|
|||||||||||
|
Fulfillment
|
70,947
|
1
|
%
|
74,889
|
2
|
%
|
(3,942
|
)
|
-5
|
%
|
|||||||||||
|
Cost
of sales
|
$
|
1,973,944
|
42
|
%
|
$
|
1,721,298
|
44
|
%
|
$
|
252,646
|
15
|
%
|
Cost
of
sales consists primarily of royalties paid to third party providers of
intellectual property and the direct costs and manufacturing overhead required
to reproduce, package, fulfill and ship the software products. Direct costs
and
manufacturing overhead also include the amortized software development
costs and
the non-capitalized technical support wages. The direct costs and manufacturing
overhead increased approximately $198,000 from approximately $1,304,000
for the
year ended December 31, 2004 to approximately $1,502,000 for the year ended
December 31, 2005 and decreased slightly as a percentage of gross revenues
approximately 1% for the year ended December 31, 2005. The overall increase
resulted directly from amortization of software development costs. The
amortization recognized during the year ended December 31, 2005 resulted
from
several new software releases in 2005 including Membership Plus®2005,
QuickVerse®
Macintosh, Sermon Builder®
4.0,
QuickVerse®
2006 and
QuickVerse®
2006
Mobile. The shorter timeframes between our product upgrades during the
year of
2005 as compared to 2004, especially QuickVerse®
2005 and
QuickVerse®
2006,
also led to the increased amount of amortization recognized. During the
year
ended December 31, 2004 we continued to amortize the costs associated with
QuickVerse®
8.0
along with Membership Plus®
8.0, the
updated release of QuickVerse®
PDA 2005
and the release of QuickVerse®
2005.
The
slight decrease in the percentage of cost of sales reflects the continual
software development cycle of enhancing our two major product lines within
a one
year timeframe or less and the increased amortization of those software
development costs. The direct costs and manufacturing overhead percentage
are
expected to continue at the 2005 levels as working capital remains more
consistent and as more development projects are implemented in a shortened
timeframe. Fulfillment costs from a third-party warehouse and included
in the
manufacturing overhead costs noted above decreased approximately $4,000
from
approximately $75,000 for the year ended December 31, 2004 to approximately
$71,000 for the year ended December 31, 2005 as a direct result of having
moved
our retail fulfillment operations to a new outside entity in late October
2004.
Furthermore, our fulfillment center continues to improve its efficiency
which
has led to a decrease in fulfillment, as well as freight, costs. The write
down
of a distinct category of obsolete inventory of approximately $32,000 is
included in the direct costs and manufacturing overhead for the year ended
December 31, 2004.
Royalties
paid to third party providers of intellectual property increased approximately
$54,000 from approximately $418,000 for the year ended December 31, 2004
to
approximately $472,000 for the year ended December 31, 2005 and decreased
approximately 1% as a percentage of gross revenues for the year ended December
31, 2005. The overall increase in royalties paid for the year ended December
31,
2005 reflects the following:
|
▪
|
the
release of the QuickVerse®
2005 editions in early December 2004;
|
|
|
▪
|
the
release of three additional QuickVerse®
2005 editions , QuickVerse®
Essentials, QuickVerse®
Platinum, and QuickVerse®
Macintosh;
|
|
|
▪
|
the
release of Sermon Builder®
4.0 in June 2005, which was an update to Bible Illustrator®
3.0, and the first update to Bible Illustrator®
3.0 in over six years (including not only technological updates
but
content additions);
|
|
|
▪
|
the
release of the QuickVerse®
2006 editions in September of 2005, which was three months earlier
in the
calendar year than was the case in 2004, and which allowed us
to
capitalize much more upon the holiday selling season;
and
|
|
|
▪
|
the
release of the QuickVerse®
2006 Mobile editions in October of 2005.
|
During
the year ended December 31, 2004, we renegotiated several royalty contracts
which resulted, in some cases, in a higher royalty rate but more content.
The
royalty rate as a percentage of gross sales is expected to increase in
the
future as sales to new users are expected to increase, more development
projects
are implemented for new and/or enhanced products, and as we continue to
expand
the content available for our QuickVerse®
line of
products.
The
slight decrease in cost of sales as a percentage of gross sales reflects
the
fact that our sales results continue to be largely influenced by our reliance
on
direct marketing initiatives aimed at our consumers rather than retail
distribution initiatives, and that upgrade sales are only subject to royalties
on their content additions.
Software
development costs are expensed as incurred as research and development
until
technological feasibility and marketability have been established, at which
time
development costs are capitalized until the software title is available
for
general release to customers. Software development is segregated by title
and
technology platform. Once a product has been successfully released, subsequent
revisions and upgrades are deemed to constitute development, and, accordingly,
the costs of the revision and upgrade are capitalized. Capitalized costs
are
amortized on a product-by-product basis using the greater of (i) straight-line
amortization over the estimated life of the product or (ii) the ratio of
current
revenues from the product to the total projected revenue over the life
of the
product. Generally, we consider technological feasibility to have been
established with the release of a beta version for testing.
Our
software development costs for the years ending December 31, 2004 and 2005
are
summarized in the table below. These costs, consisting primarily of direct
and
indirect labor and related overhead charges, and capitalized during the
years
ended December 31, 2004 and 2005, were approximately $692,000 and approximately
$812,000, respectively. Accumulated amortization of these development costs,
which were included in cost of sales, totaled approximately $575,000 and
approximately $807,000 for the years ended December 31, 2004 and 2005,
respectively. The increase in both the capitalization and amortization
is a
direct result of the increase in the number of development projects.
|
Software
Development Costs For Years Ended December 31
|
2005
|
2004
|
|||||
|
Beginning
balance
|
$
|
701,289
|
$
|
584,706
|
|||
|
Capitalized
|
812,309
|
692,063
|
|||||
|
Amortized
(cost of sales)
|
806,531
|
575,480
|
|||||
|
Ending
balance
|
$
|
707,067
|
$
|
701,289
|
|||
|
Research
and development expense (General and administrative)
|
$
|
216,397
|
$
|
64,653
|
Sales,
General and Administrative
|
Sales,
General and Administrative Costs for Years Ended December
31
|
2005
|
%
to Sales
|
2004
|
%
to Sales
|
Change
|
|
%
|
||||||||||||||
|
Selected
expenses:
|
|||||||||||||||||||||
|
Commissions
|
$
|
695,914
|
15
|
%
|
$
|
814,623
|
21
|
%
|
$
|
(118,709
|
)
|
-15
|
%
|
||||||||
|
Advertising
and direct marketing
|
577,317
|
12
|
%
|
466,138
|
12
|
%
|
111,179
|
24
|
%
|
||||||||||||
|
Total
sales and marketing
|
$
|
1,273,231
|
27
|
%
|
$
|
1,280,761
|
33
|
%
|
$
|
(7,530
|
)
|
-1
|
%
|
||||||||
|
Research
and development
|
$
|
216,397
|
5
|
%
|
$
|
64,653
|
2
|
%
|
$
|
151,744
|
235
|
%
|
|||||||||
|
Personnel
costs
|
1,237,706
|
26
|
%
|
1,310,506
|
34
|
%
|
(72,800
|
)
|
-6
|
%
|
|||||||||||
|
Legal
|
187,499
|
4
|
%
|
71,003
|
2
|
%
|
116,496
|
164
|
%
|
||||||||||||
|
Accounting
|
27,735
|
1
|
%
|
10,709
|
0
|
%
|
17,026
|
159
|
%
|
||||||||||||
|
Rent
|
82,172
|
2
|
%
|
75,555
|
2
|
%
|
6,617
|
9
|
%
|
||||||||||||
|
Telecommunications
|
53,092
|
1
|
%
|
149,443
|
4
|
%
|
(96,351
|
)
|
-64
|
%
|
|||||||||||
|
Corporate
services
|
73,972
|
2
|
%
|
87,223
|
2
|
%
|
(13,251
|
)
|
-15
|
%
|
|||||||||||
|
Administration
|
18,762
|
0
|
%
|
118,474
|
3
|
%
|
(99,712
|
)
|
-84
|
%
|
|||||||||||
|
Other
general and administrative costs
|
535,332
|
11
|
%
|
422,272
|
11
|
%
|
113,060
|
27
|
%
|
||||||||||||
|
Total
general and administrative
|
$
|
2,432,667
|
51
|
%
|
$
|
2,309,838
|
59
|
%
|
$
|
122,829
|
5
|
%
|
|||||||||
With
gross revenues increasing approximately $523,000 from 2004 to 2005, total
sales,
general and administrative costs also increased approximately $115,000
from
approximately $3,591,000 for the year ended December 31, 2004 to approximately
$3,706,000 for the year ended December 31, 2005. Of the total sales, general
and
administrative costs, sales and marketing expenses decreased approximately
$8,000 from approximately $1,281,000 for the year ended December 31, 2004
to
approximately $1,273,000 for the year ended December 31, 2005. Included
in sales
expenses, third-party telemarketing commissions decreased approximately
$119,000
from approximately $815,000 for the year ended December 31, 2004 to
approximately $696,000 for the year ended December 31, 2005, and decreased
as a
percentage of gross revenues from approximately 21% to approximately 15%
for the
year ended December 31, 2004 and 2005, respectively. This decrease is attributed
to the use of our own in-house direct telemarketing sales team which was
developed specifically to reduce our reliance on third-party telemarketing
services. Advertising and direct marketing costs increased approximately
$111,000 from approximately $466,000 for the year ended December 31, 2004
to
approximately $577,000 for the year ended December 31, 2005 and remained
consistent as a percentage of gross revenues at approximately 12% over
both
years. The net increase in advertising and direct marketing costs year
over year
is the combined result of our continuing efforts to enhance our product
visibility online, to increase and focus more on our direct marketing efforts,
and our having increased the scope and frequency of our print advertising
campaigns in order to maximize sales associated with the new product
enhancements of Membership Plus®
2005,
the three new QuickVerse®
editions
(QuickVerse®
Platinum, Macintosh and Essentials), the updated Sermon Builder®
4.0,
QuickVerse®
2006,
and QuickVerse®
2006
Mobile during the year ended December 31, 2005.
Research
and development costs include direct production costs (including labor
directly
associated with the development projects), indirect costs (including allocated
fringe benefits, payroll taxes, facilities costs and management supervision),
and other direct costs (including costs of outside consultants, purchased
software to be included in the software product being developed, travel
expenses, material and supplies, and other direct costs). Software development
costs related to third-party developers and direct labor expensed as research
and development (see table above) amounted to approximately $65,000 for
the year
ended December 31, 2004 compared to approximately $216,000 incurred for
the year
ended December 31, 2005. The increase in 2005 reflects more research and
development costs associated with maintenance issues on titles following
release
as well as experimentation and development in connection with new system
platforms for future products. Research and development expenses are expected
to
increase in future periods as we add new products and product versions,
and as
we continue to expand the array of platforms upon which are products are
made
available.
Total
personnel costs decreased approximately $73,000, from approximately $1,310,000
for the year ended December 31, 2004, to approximately $1,238,000 for the
year
ended December 31, 2005 despite the fact that direct salaries and wages
increased approximately $80,000, from approximately $1,523,000 to approximately
$1,603,000, over the same period. The increase in direct salaries and wages
was
a direct result of expanding our sales and marketing team, including the
addition of our own telemarketing sales team, and expanding our product
development staff. As a percentage of gross revenues, direct salaries and
wages
decreased approximately 1% from approximately 26% for the year ended December
31, 2004 to approximately 25% for the year ended December 31, 2005. The
direct
salaries and wages include approximately $67,000 and $-0- in expense for
upper
management year-end bonus accrual for the years ending December 31, 2004
and
2005, respectively. Furthermore, we recognized approximately $14,000 of
expense
in connection with the issuance to various employees of 635,000 restricted
common shares during the year ended December 31, 2004. As a result of having
restructured our health benefits plans in October 2004, our employment-related
health care costs decreased approximately $15,000 from approximately $155,000
for the year ended December 31, 2004 to approximately $140,000 for the
year
ended December 31, 2005. The capitalization of direct and indirect labor
and
related overhead charges as software development costs (see “Cost of Sales”
above) increased by approximately $16,000 from approximately $379,000 for
the
year ended December 31, 2004 to approximately $395,000 for the year ended
December 31, 2005. This increase is due to the addition of development
staff and
an increase in new development projects. It is anticipated that personnel
costs
will continue to increase in future periods as operating capital is available
and deployed to further fund staffing requirements of our product development
and direct sales teams.
Direct
legal costs increased approximately $117,000 for the year ended December
31,
2005 as a result of ongoing registration initiatives with the SEC, increased
current reporting requirements on Form 8-K, increased compliance initiatives
associated with the Sarbanes-Oxley Act of 2002, and preparation for our
first
annual meeting of shareholders in over five years. This year over year
change
was also due in part to the fact that approximately $44,000 of legal costs
for
the year ended December 31, 2004 were related to the stock offering costs
incurred in July 2004, the related preparation of a 14C information statement
related to an increase in our authorized capital stock, and the preparation
and
filing of a related registration statement, all of which was recorded as
a
reduction to additional paid-in capital. It is anticipated that legal costs
will
continue at increased levels as we continue to meet our ongoing SEC reporting
and corporate governance obligations, possibly raise additional capital,
and
pursue our business plan for growth by potentially acquiring other companies
or
product lines.
Accounting
and audit related expenses increased approximately $17,000 for the year
ended
December 31, 2005 as a result of continuing delays in the effectiveness
of a
registration statement, due principally to efforts made necessary by our
determination to restate certain of our historical financial information.
It is
anticipated that accounting costs will continue to increase in the future,
and
that such increases may be substantial. Our expectation in this regard
derives
from the fact that we have recently engaged a new principal accounting
firm for
our year end 2005 audit, and we expect that our fees payable to such firm,
which
we expect to utilize on an ongoing basis, will generally be higher than
those
payable to our former auditors.
Rent
costs increased approximately $7,000 for the year ended December 31, 2005
as a
result of provisions in our leases calling for periodic percentage increases.
Telecommunications
costs decreased approximately $96,000 for the year ended December 31, 2005
resulting from switching our local and long-distance carriers. Our increased
call volume enabled us to change our service to dedicated T-1 lines which
in
turn reduced the long-distance charges. We also invested in internet protocol
phones for our remote locations which reduced the overall local and long
distance charges in our Illinois and Iowa locations. The increased call
volume
in the technical support and customer service departments resulted from
the
multiple product releases in 2005 including Membership Plus®2005,
QuickVerse®
Macintosh, Sermon Builder®
4.0,
QuickVerse®
2006 and
QuickVerse®
2006
Mobile.
Corporate
service fees decreased approximately $13,000 for the year ended December
31,
2005 resulting from the expiration of an independent consulting agreement
and
the resultant ability on our part to cease carrying the associated expense
for a
2004 issuance to such consultant of a warrant to purchase 600,000 shares
of
common stock which had been allocated over the term of the agreement.
Administration
expenses decreased approximately $100,000 for the year ended December 31,
2005
due to our not having incurred interest and penalty fees on back payroll
taxes
as we had during the year ended December 31, 2004.
Finally,
bad debt expense increased approximately $114,000 for the year ended December
31, 2005 due primarily to our inability to collect on a balance due of
$42,000
from a single liquidation customer. In addition, we wrote off approximately
$58,000 related to uncollectible receivables arising out of a sales campaign
that we initiated in 2005 which focused on offering new churches a beginning
line of credit of approximately $500, and which has since been discontinued.
Other
Income and Adjustments
During
the year ended December 31, 2004, we recognized an approximately $1,000,000
gain
from extinguishment of debt which is included in other income. The
extinguishment of debt is a direct result from one-time settlement arrangements
with various vendors and content providers for lump-sum payments ranging
from
approximately 17% to approximately 60% of balances owed at the time. Vendors
who
were offered the settlement had previously provided services and/or goods
to us,
and the content providers were owed royalties from us in connection with
our
prior sales of product. We do not anticipate this to be a recurring event
in the
future. Below is a list of the vendors and content providers who we settled
with:
|
▪
|
American
Bible Society (content provider)
|
|
|
▪
|
David
Epstein (content provider)
|
|
|
▪
|
Depository
Trust Company (corporate services)
|
|
|
▪
|
Explorer’s
Bible Study (content provider)
|
|
|
▪
|
Genesis
Marketing Group (sales services)
|
|
|
▪
|
Historical
Exegetical Electronic Publishing (content provider)
|
|
|
▪
|
Innovative
Church Marketing Group (advertising services)
|
|
|
▪
|
Interactive
Pictures Corporation (content provider)
|
|
|
▪
|
InterVarsity
Press (content provider)
|
|
|
▪
|
Ivy
Hill/Warner Media Services (manufacturing services)
|
|
|
▪
|
Lernout
& Hauspie Speech Products (content provider)
|
|
|
▪
|
MicroBytes,
Inc. (CD duplication services)
|
|
|
▪
|
Moody
Publishers (content provider)
|
|
|
▪
|
National
Council of the Churches of Christ in the United States of America
(content
provider)
|
|
|
▪
|
NavPress
Publishing Group (content provider)
|
|
|
▪
|
Oxford
University Press (content provider)
|
|
|
▪
|
Pillsbury,
Madison & Sutro LLP (legal services)
|
|
|
▪
|
Rutledge
Hill Press (content provider)
|
|
|
▪
|
Sonopress
(manufacturing services)
|
|
|
▪
|
Standard
Publishing (content provider)
|
|
|
▪
|
The
Lockman Foundation (content provider)
|
|
|
▪
|
World
Publishing (content provider)
|
During
the year ended December 31, 2004, we additionally incurred approximately
$155,000 in expenses related to a settlement agreement with Swartz Private
Equity, an institutional private equity investor, for early termination
of the
agreement. As part of a settlement agreement, we issued 295,692 shares
of common
stock and paid a cash lump sum of $125,000. The shares were valued at $0.10
per
share. This has been included in other adjustments.
On
July
19, 2004, we completed an equity financing in the amount of $1,750,000
through a
private placement with Barron Partners, LP in which Barron Partners purchased
21,875,000 restricted shares of common stock and received two warrants
to
purchase up to an additional 21,875,000 shares of common stock. As part
of the
financing transaction, we also entered into a certain Registration Rights
Agreement with Barron Partners 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. Such registration statement was
filed on
November 22, 2004. In accordance with the terms of the Registration Rights
Agreement, as amended, we had another 150 days, until April 22, 2005, to
cause
such registration statement to be declared effective by the SEC, with any
delays
in meeting this obligation resulting in our being liable to Barron Partners
in
an amount equal to $630,000 per year, pro-rated for the duration of any
such
delay, which amounts to $1,726 per day. As of December 31, 2005, we had
accrued
a total of approximately $437,000 (253 days at $1,726 per day) in penalties
under the terms of the Registration Agreement, inclusive of an adjustment
made
pursuant to an agreement reached with Barron Partners in April 2005, wherein,
in
relation to the associated accruing penalties, we agreed to pay Barron
Partners
an amount in cash equal to $100,000 to toll the accrual of further penalties
until June 21, 2005. Although this amount has been paid in full, in two
equal
installments of $50,000 on each of April 22, 2005 and July 8, 2005, penalties
in
the amount of $1,726 per day continued to accrue from June 21, 2005 until
the
registration statement was declared effective on February 1, 2006 by the
SEC. We
had experienced continued delays in effectiveness of the registration statement
due principally to ongoing efforts made necessary by our determination
to
restate certain of our historical financial information. The amount paid
by us
to date ($150,000 as of March 31, 2006) to satisfy this obligation, and
the
continued delays in our ability to cause the registration statement to
be
declared effective coupled with additional amounts which we are required
to pay,
has had a material adverse effect on our business, our financial condition,
including liquidity and profitability, and our results of operations, including
a corresponding reduction in our net income and the net loss for the
year.
Derivatives
In
November 2004, we issued two warrants to purchase an aggregate of 21,875,000
shares of our common stock in connection with a certain Stock Purchase
Agreement
completed with Barron Partners, LP, on July 19, 2004. The first warrant
entitles
the holder to purchase up to 10,937,500 shares of our common stock at a
price of
$0.18 per share, and the second warrant entitles the holder to purchase
up to
10,937,500 additional shares of our common stock at a price of $0.60 per
share.
Each warrant is subject to standard adjustment provisions and each provides
for
settlement in registered shares of our common stock and may, at the option
of
the holder, be settled in a cashless, net-share settlement. These warrants
have
been accounted for as a liability according to the guidance of EITF 00-19,
Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled
in, a
Company’s Own Stock.
In
accordance with the accounting mandate, the derivative liability associated
with
these warrants has been and shall continue to be, until each is either
fully
exercised or expires, adjusted to fair value at each balance sheet date
and is
accordingly reassessed at each such time to determine whether the warrants
should be classified (or reclassified, as appropriate) as a liability or
as
equity. The fair value of each warrant was initially assessed at $2,187,500
($4,375,000 total) using the Black-Scholes valuation method. At December
31,
2004 and 2005, the fair value of the derivative liability was approximately
$1,969,000 and $2,062,000, respectively, and a fair value adjustment of
approximately $292,000 and $34,000, respectively, has been included in
other
expenses for the years then ended.
Amortization
Amortization
expense increased approximately $12,000 for the year ended December 31,
2005.
The software license acquired from TLC in July of 1999 is amortized over
a 10
year useful life. Amortization expense for 2005 reflects the continual
amortization of the software license as well as the amortization of our
new
Website, www.quickverse.com, which we launched during the second quarter
of
2004.
Income
Tax Benefits
Our
effective tax rate differs from the statutory federal rate due to differences
between income and expense recognition prescribed by the Internal Revenue
Code
and Generally Accepted Accounting Principles. We utilize different methods
and
useful lives for depreciating property and equipment. Changes in estimates
(reserves) are recognized as expense for financial reporting but are not
deductible for income tax purposes.
We
have
recognized a net deferred tax asset whose realization depends on generating
future taxable income. At December 31, 2005, management adjusted the amount
of
valuation allowance based on the assessment that we will produce sufficient
income in the future to realize our net deferred tax asset. The resulting
deferred tax liability reflects income taxes payable in future periods
on the
net deductible differences related to the 1999 license. We currently have
net
operating loss carryforwards, for income tax purposes, of approximately
$8,462,000. The carryforwards are the result of income tax losses generated
in
2000 ($2,338,000 expiring in 2020), 2001 ($5,168,000 expiring in 2021)
and 2005
($956,000 expiring in 2025). We will need to achieve a minimum annual taxable
income, before deduction of operating loss carryforwards, of approximately
$527,000 to fully utilize the current loss carryforwards. We believe this
is
achievable through careful expense management and continued introduction
of new
products and enhanced versions of our existing products.
Although
there can be no assurance, management expects the deductible temporary
differences (reserves) to reverse sometime beyond the next fiscal year.
LIQUIDITY
AND CAPITAL RESOURCES
Our
primary needs for liquidity and capital resources are the funding of our
continued operations, which includes the ongoing internal development of
new
products and expansion and upgrade of existing products. We believe our
future
cash provided by operations will be sufficient to fund our continued operations.
However, our pursuit of future strategic product line and/or corporate
acquisitions and licensing will require funding from outside sources. Funding
from outside sources may include but are not limited to the exercise of
outstanding warrants and pursuit of other financing options such as commercial
loans, common stock and/or preferred stock issuances and convertible notes.
At
this time, we have no legally committed funds for future capital expenditures
including software development.
|
Working
Capital at December 31
|
2005
|
2004
|
Change
|
|
%
|
||||||||
|
Current
assets
|
$
|
867,750
|
$
|
1,551,447
|
$
|
(683,697
|
)
|
-44
|
%
|
||||
|
Current
liabilities
|
$
|
3,893,447
|
$
|
3,351,893
|
$
|
541,554
|
16
|
%
|
|||||
|
Retained
deficit
|
$
|
(7,752,097
|
)
|
$
|
(6,170,831
|
)
|
$
|
(1,581,266
|
)
|
26
|
%
|
As
of
December 31, 2005, we had $867,750 in current assets, $3,893,447 in current
liabilities and a retained deficit of $7,752,097. We had a loss before
income
taxes of $1,530,557 and a net loss after income taxes of $1,581,266 for
the year
ended December 31, 2005. Non-recurring expenses for 2005 included registration
rights penalties totaling approximately $437,000and a related loss of
approximately $34,000 from the fair value adjustment of derivatives. See
“Results Of Operations” above. By contrast, as of December 31, 2004 we had
$1,551,447 in current assets, $3,351,893 in current liabilities and a retained
deficit of $6,170,831. Operating expenses for 2004 included approximately
$149,000 in non-cash expenses related to shares of common stock and warrants
issued for services, and approximately $30,000 in non-cash expenses related
to
shares of common stock issued in connection with a settlement agreement.
Other
income for 2004 included approximately $1,000,000 from extinguishment of
debt,
and other expenses for 2004 included a loss of approximately $292,000 from
the
fair value adjustment of derivatives.
|
Cash
Flows for Years Ended December 31
|
2005
|
2004
|
Change
|
|||||||
|
Cash
flows provided (used) by operating activities
|
$
|
612,345
|
$
|
(643,668
|
)
|
$
|
1,256,013
|
|||
|
Cash
flows (used) by investing activities
|
$
|
(801,422
|
)
|
$
|
(746,932
|
)
|
$
|
(54,490
|
)
|
|
|
Cash
flows provided (used) by financing activities
|
$
|
(32,722
|
)
|
$
|
1,690,291
|
$
|
(1,723,013
|
)
|
Net
cash
used by operating activities was approximately $644,000 for the year ended
December 31, 2004, while net cash provided by operating activities was
approximately $612,000 for the year ended December 31, 2005. The increase
was
primarily due to an increase in the amounts received from customers resulting
from increased sales coupled with a decrease in the amount paid out to
suppliers
and employees.
Net
cash
used in investing activities was approximately $747,000 for the year ended
December 31, 2004 and approximately $801,000 for the year ended December
31,
2005. The increase was mainly the result of our having capitalized costs
associated with software development. Further, during the year ended December
31, 2005, the restriction on the cash held in reserve by our merchant banker
was
lifted, thereby freeing up additional cash not previously accessible by
us.
Net
cash
provided by financing activities was approximately $1,690,000 for the year
ended
December 31, 2004, while net cash used by financing activities was approximately
$33,000 for the year ended December 31, 2005. The 2004 result reflects
final
settlement on our accounts receivable line of credit, payment made on long-term
note payables, stock offering costs associated with the Barron Partners,
LP
equity financing, and the proceeds received from convertible debentures
and the
issuance of stock to Barron Partners. The 2005 result reflects payments
made on
long-term note payables.
As
part
of the July 19, 2004 financing transaction with Barron Partners, LP, we
entered
into a certain Registration Rights Agreement pursuant to which we became
committed to registering all of the shares issued as part of such transaction,
including those issuable under each of two warrants. On November 22, 2004
we
filed a registration statement on Form SB-2 covering the shares issued
to Barron
Partners, as well as the shares underlying the warrants issued to Barron
Partners. In accordance with the terms of the Registration Rights Agreement,
as
amended, we had another 150 days, until April 22, 2005, to cause such
registration statement to be declared effective by the SEC, with any delays
in
meeting this obligation resulting in our being liable to Barron Partners
in an
amount equal to $630,000 per year, pro-rated for the duration of any such
delay,
which amounts to $1,726 per day. As of December 31, 2005, we had accrued
a total
of approximately $437,000 (253 days at $1,726 per day) in penalties under
the
terms of the Registration Agreement, inclusive of an adjustment made pursuant
to
a tentative verbal agreement reached with Barron Partners in April 2005,
wherein, in relation to the associated accruing penalties, we agreed to
pay
Barron Partners an amount in cash equal to $100,000 to toll the accrual
of
further penalties until June 21, 2005. Although this amount has been paid
in
full, in two equal installments of $50,000 on each of April 22, 2005 and
July 8,
2005, penalties in the amount of $1,726 per day continued to accrue from
June
21, 2005 until the registration statement was declared effective on February
1,
2006 by the SEC. We had experienced continued delays in effectiveness of
the
registration statement due principally to ongoing efforts made necessary
by our
determination to restate certain of our historical financial information.
The
amount paid by us to date ($150,000 as of March 31, 2006) to satisfy this
obligation, and the continued delays in our ability to cause the registration
statement to be declared effective coupled with additional amounts which
we are
required to pay, has had a material adverse effect on our business, our
financial condition, including liquidity and profitability, and our results
of
operations, including a corresponding reduction in our net income and the
net
loss for the year.
Contractual
Liabilities
We
lease
office space/warehouse facilities in Omaha, Nebraska under an operating
lease
with a third-party with terms extending through 2007. We are responsible
for all
taxes, insurance and utility expenses associated with this lease. There
is no
lease renewal option contained in the lease.
We
lease
office space in Naperville, Illinois under an operating lease with a third-party
with terms extending through March 2007. We are responsible for all insurance
expenses associated with this lease.
At
December 31, 2005, the future minimum rental payments required under these
leases are as follows:
|
2006
|
$
|
81,331
|
||
|
2007
|
31,248
|
|||
|
Total
future minimum rental payments
|
$
|
112,579
|
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. Minimum
future lease payments under capital leases as of December 31, 2005 for
each of
the next five years and in the aggregate are:
|
2006
|
$
|
13,726
|
||
|
2007
|
13,726
|
|||
|
2008
|
13,726
|
|||
|
2009
|
12,582
|
|||
|
2010
|
---
|
|||
|
Total
minimum lease payments
|
53,760
|
|||
|
Less:
Amount representing interest
|
10,788
|
|||
|
Total
obligations under capital lease
|
42,972
|
|||
|
Less:
Current installments of obligations under capital lease
|
9,185
|
|||
|
Long-term
obligation under capital lease
|
$
|
33,787
|
The
Potential Impact of Known Facts, Commitments, Events and Uncertainties
on Future
Operating Results or Future Liquidity Requirements
New
Accounting Pronouncements
In
the
past, we have applied Accounting Principles Board (“APB”) Opinion No. 25,
Accounting
for Stock Issued to Employees,
and
related interpretations in accounting as allowed by SFAS No 123, Accounting
for Stock Based Compensation,
for
various forms of share-based awards including incentive and nonqualified
stock
options and stock appreciation rights attached to stock options; and therefore,
no compensation cost had been recognized. However, in December 2004, the
FASB
issued SFAS No 123 (R), Share-Based
Payment,
which
replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123 (R)
requires compensation costs related to share-based payment transactions
to be
recognized in the financial statements. With limited exceptions, the amount
of
compensation cost will be measured based on the fair value on the grant
date of
the equity or liability instruments issued. Compensation cost will be recognized
over the period that the service is provided for that award. This new standard
will be effective for us the first quarter of fiscal 2006. We did not grant
any
form of share-based awards during the year ended December 31, 2005.
RISK
FACTORS
Several
of the matters discussed in this annual report on Form 10-KSB for the fiscal
year ended December 31, 2005 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, 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. Although there can be
no
assurance, and it may be possible to borrow funds as required, any such
additional capital is likely to require that we sell and issue additional
equity
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. Given our initiative towards rapid revenue
growth, there can be no assurance, however, that our operations and access
to
external sources of financing will continue to provide resources sufficient
to
satisfy our liabilities arising in the ordinary course of business.
There
is uncertainty as to our ability to continue as a going concern.
Our
financial statements for the period ending December 31, 2005, including
the
footnotes thereto, call into question our ability to operate as a going
concern.
This conclusion is 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 uncertainty in securing financing
for
continued operations, created an uncertainty at the time regarding our
ability
to continue as a going concern. (See Note 20 in the Notes to the Consolidated
Financial Statements for the year ended December 31, 2005).
Our
accumulated deficit makes it harder for us to borrow
funds.
As
of
December 31, 2005, and as a result of historical losses in prior years,
our
accumulated deficit was $7,752,097. 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.
RISKS
ASSOCIATED WITH OUR BUSINESS AND INDUSTRY
We
face serious competition in our business segment.
The
market for our products is rapidly evolving and intensely competitive as
new
consumer software products and platforms are regularly introduced. Competition
in the consumer software industry is based primarily upon:
|
▪
|
brand
name recognition;
|
|
|
▪
|
availability
of financial resources;
|
|
|
▪
|
the
quality of titles;
|
|
|
▪
|
reviews
received for a title from independent reviewers who publish reviews
in
magazines, Websites, newspapers and other industry publications;
|
|
|
▪
|
publisher’s
access to retail shelf space;
|
|
|
▪
|
the
price of each title; and
|
|
|
▪
|
the
number of titles then available.
|
We
face
competition from other software publishers, all of which generally sell
through
the same combination of channels that we do, including chain store, secular,
CBA, direct and online sales. Specifically, we currently compete with Logos
Research Systems, Inc., Biblesoft, Inc., Thomas Nelson, Inc., WordSearch
Bible
Publishers and The Zondervan Corporation, among others.
To
remain
competitive in our market segment we rely heavily upon our product quality,
marketing and sales abilities, proprietary technology and product development
capability. However, some of our competitors have longer operating histories,
larger customer bases and greater financial, marketing, service, support,
technical and other resources than we do. Due to these greater resources,
certain of our competitors have the ability to undertake more extensive
marketing campaigns, adopt more aggressive pricing policies, pay higher
fees to
licensors and pay more to third-party software developers than we can.
Only a
small percentage of titles introduced into the software market achieve
any
degree of sustained market acceptance. If our titles, including special
editions, are not successful, our business, our financial condition, including
liquidity and profitability, and our results of operations will be negatively
impacted. Moreover, we believe that competition from new entrants will
increase
as the market for faith-based products and services continues to expand.
We
depend on only two titles for the overwhelming majority of our
revenue.
In
fiscal
year 2005, approximately 92% of our total revenue was derived from two
software
titles; QuickVerse®,
comprising 66% of total revenue, and Membership Plus®,
comprising 26% of total revenue. We expect that a very limited number of
popular
products will continue to produce a disproportionately large amount of
our
revenue for the foreseeable future. Due to this dependence on a limited
number
of titles, the failure of one or more titles or title versions to achieve
anticipated results would likely have a material adverse effect on our
business,
our financial condition, including liquidity and profitability, and our
results
of operations.
We
have experienced, and may continue to experience, reduced revenues and
fluctuations in our quarterly operating results due to delays in the
introduction and distribution of our products.
A
significant portion of our revenue for any given quarter is generated by
the
sale of new titles and title versions introduced during that quarter or
shipped
in the immediately preceding quarter. Our inability to timely begin volume
shipments of a new title or title version in accordance with our internal
development schedule, as has repeatedly been the case in the past, will
cause
earnings fluctuations and will negatively impact our business, our financial
condition, including liquidity and profitability, and our results of operations.
Timely introduction of a new title or title version is largely contingent
upon
the timing of a variety of other factors. Included among these are development
processes themselves, debugging, approval by third-party content licensors
and
duplication and packaging processes. Furthermore, the complexity of
next-generation systems (such as PDA) and platforms has resulted in longer
development cycles, higher development expenditures and the need to more
carefully monitor and plan development processes associated with these
products.
We
cannot
be certain that we will be able to meet planned release dates for some
or all of
our new titles or title versions. In the past, we have experienced significant
delays in our introduction of some new titles and title versions. For instance,
delays in duplication, packaging and distribution caused our
QuickVerse®
2005 to
begin shipping in early-December 2004, long after the holiday season had
been
underway. As a result, we experienced fewer sales than we might otherwise
have
had the product been available before the holiday selling season began,
which we
believe had a material adverse effect on our results of operations for
the 2004
fourth quarter. Presently, we are behind schedule in our annual release
of
Membership Plus®
2006,
which had been scheduled to commence shipping in February 2006 but which,
due to
delays associated with the loss of one of our key developers, has not yet
been
released. 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 or the expectations of public market analysts
and
investors, having a negative impact on our business, our financial condition,
including liquidity and profitability, and our results of operations in
that
period.
Due
to the limited life cycle of our products, we have experienced, and may
continue
to experience, reductions and fluctuations in our quarterly revenues that
could
adversely affect our operating results.
The
average life cycle of a new title ranges anywhere from a few years to
indefinitely, and the average life cycle of a new title version ranges
anywhere
from twelve to upwards of eighteen months, making our revenue and operating
results difficult to predict and susceptible to substantial fluctuations
from
quarter to quarter. While there can be no assurance, we expect, based on
experience, that a majority of sales for any 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 high percentage of the total net revenue
over
the life of the title or title version. For example, our QuickVerse®
2006
began shipping in September 2005, nine months following the release of
QuickVerse®
2005 and
three months following the release of QuickVerse®
2005
Platinum, resulting, we believe, in a product market overlap causing fewer
of
our customers to upgrade upon the initial release QuickVerse®
2006 and
leading to lower initial sales. 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 concessions that exceed our anticipated reserves
could result in worse than expected operating
results.
At
the
time we ship our products we establish reserves, including reserves that
estimate the potential for future product returns and price concessions.
In the
past, particularly during title version transitions, we have had to increase
price concessions to our wholesale retail customers. If consumer demand
for a
specific title or title version falls below expectations or significantly
declines below previous rates of retail sell-through, then a price concession
or
credit may be requested by our wholesale retail customers to spur further
retail
channel sell-through. Coupled with more competitive pricing, if product
returns,
price protections or price concessions exceed our reserves the magnitude
of
quarterly fluctuations will increase and our operating and financial results
will be negatively impacted. Furthermore, if we incorrectly assess the
creditworthiness of any one of our wholesale customers who take delivery
of our
products on credit, we could be required to significantly increase reserves
previously established.
Typically
we experience the highest reserves at the end of the first quarter and
fourth
quarter and the lowest at the end of the third quarter. Historically, actual
returns have been within management’s prior estimates, however, we cannot be
certain that any future write-offs exceeding reserves will not occur or
that
amounts written off will not have a material adverse effect on our business,
our
financial condition, including liquidity and profitability, and our results
of
operations.
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. To date we have not discovered any material errors, however,
future
errors and defects could result in adverse product reviews and a loss of,
or
delay in, market acceptance of our products.
We
may not have available funds to develop products that consumers
want.
The
Bible-study, inspirational content and organizational management software
markets are subject to rapid technological developments. Although the life
of
most of our titles may be quite long, the life of any given version tends
to be
relatively short, in many cases less than three years. To develop products
that
consumers, church and other faith-based organizations desire, we must
continually improve and enhance our existing products and technologies
and
develop new products and technologies that incorporate these technological
developments. Our inability to do this would likely have a material adverse
effect on our business, our financial condition, including liquidity and
profitability, and our results of operations.
We
focus
our development and publishing activities principally on new versions of
our
existing titles. We cannot, however, be certain that we will have the financial
and technical resources available to continue to develop these new title
versions particularly since we must undertake these initiatives while remaining
competitive in terms of performance and price. This will require substantial
investments in research and development, often times well in advance of
the
widespread release of a product into the market and any revenues these
products
may generate.
Our
cash
outlays for product development for the fiscal year ended December 31,
2005 were
higher than the fiscal year ended December 31, 2004, and our product development
cash outlays may continue to 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 our existing key 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.
The
successful development of our products depends on our ability to attract,
integrate, motivate and retain highly skilled
personnel.
Our
success depends to a large extent on our ability to attract, hire and retain
skilled software developers, programmers and other highly skilled technical
personnel. The software industry is characterized by a high level of employee
mobility and aggressive recruiting among competitors for personnel with
programming, technical and product development skills. We may not be able
to
attract and retain skilled personnel or may incur significant costs in
order to
do so. If we are unable to attract additional qualified employees or retain
the
services of key personnel, our business, our financial condition, including
liquidity and profitability, and our results of operations could be negatively
impacted.
Our
intellectual property may not be adequately protected from unauthorized
use by
others, which could increase our litigation costs and adversely affect
our
sales.
Our
copyrighted software content and the brand recognition associated with
our
related product trademarks are the most important assets that we possess
in our
ability to generate revenues and profits, and we rely very significantly
on
these intellectual property assets in being able to effectively compete
in our
market. There can be no assurance that these intellectual property assets
will
provide meaningful protection to us from unauthorized use by others, which
could
result in an increase in competing products and a reduction in our own
sales. If
we must pursue litigation in the future to enforce or otherwise protect
our
intellectual property rights, or to determine the validity and scope of
the
proprietary rights of others, we may not prevail and will likely have to
make
substantial expenditures and divert valuable resources in any case. This
is
particularly true given the fact that the copyrights that we own to the
source
code and other improvements made to our largest-selling products since
1999 have
not been registered, which means that we may not rely upon the otherwise
existing advantage of a rebuttable presumption of ownership in the event
of, and
in connection with, any such litigation.
Our
exclusive rights to publish and sell our largest-selling titles are limited
to
non-secular channels.
Approximately
99% of our revenues in 2005, including those generated from sales of
QuickVerse®
and
Membership Plus®,
by far
our two largest selling software titles, were derived from the publication
and
sale of software titles to which we have only the exclusive license to
publish
and sell into non-secular channels. Although to date 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 impact on our sales and revenues.
If
our products infringe any proprietary rights of others, a lawsuit may be
brought
against us that could require us to pay large legal expenses and judgments
and
redesign or discontinue selling one or more of our
products.
We
are
not aware of any circumstances under which our products infringe upon any
valid
existing proprietary rights of third parties. Any infringement claims,
however,
whether or not meritorious, could result in costly litigation or require
us to
enter into royalty or licensing agreements. If we are found to have infringed
the proprietary rights of others, we could be required to pay damages,
redesign
the products or discontinue their sale. Any of these outcomes, individually
or
collectively, could have a material adverse effect on our business, our
financial condition, including liquidity and profitability, and our results
of
operations.
New
Internet access devices may change the way information is displayed requiring
us
to change our products.
Recent
increases in the use of Internet devices to access inspirational content
and the
continued development of Internet devices as a medium for the delivery
of
network-based information, content, and services may require us to change
our
products. Our success depends on our ability to understand the method upon
which
our search engines operate and our ability to service new and emerging
devices
to access the Internet, such as browser phones, personal digital assistants,
and
other wireless devices. To the extent these new Internet access devices
change
the way that information is displayed to the end-user or causes a change
in the
medium that is searched, we may be required to revise the methodology of
our
products. We cannot predict the impact that new devices will have on our
services across the entire spectrum of developing technologies, and any
required
product adaptations may result in loss of revenue and goodwill, increased
expenses, and reduced operating margins.
Revenue
varies due to the seasonal nature of consumer software purchases.
Our
business is highly seasonal. More than 50% of our annual sales are expected
to
occur in the five months of September through January; the five months
of April
through August are generally our weakest, generating only about 29% of
our
annual sales. The seasonal pattern is due primarily to the increased consumer
demand for software during the year-end holiday selling season and the
reduced
demand for software during the summer months. Our earnings vary significantly
and are materially affected by releases of popular titles and title versions
and, accordingly, may not necessarily reflect the seasonal patterns of
the
industry as a whole. We expect that operating results will continue to
fluctuate
seasonally in the future.
RISKS
ASSOCIATED WITH AN INVESTMENT IN OUR COMMON STOCK
We
may incur derivative liabilities in an as yet unknown amount in connection
with
our issuance of two common stock warrants.
In
November 2004, in connection with a certain Stock Purchase Agreement,
we issued
two warrants to purchase an aggregate of 21,875,000 shares of our common
stock
to Barron Partners, LP. Subject to standard adjustment provisions, each
warrant
provides for settlement in registered shares of our common stock and
each, for
the duration of any period in which there is not an effective registration
statement covering the shares underlying the warrants, may be settled
in a
cashless, net-share settlement. In accordance with applicable accounting
mandates, until each
of
the warrants issued to Barron Partners are either fully exercised or
expire
the
derivative liability associated with these warrants must
continuously
be
adjusted
to fair value at each balance sheet date and accordingly reassessed at
each such
time to determine whether the warrants should be classified (or reclassified,
as
appropriate) as a liability or as equity. The fair value of each warrant
was
initially assessed at $2,187,500
using
the Black-Scholes valuation method,
with such
fair
value directly
relating
and
fluctuating
in
response to the share price of our common stock. At December
31, 2005,
the
fair value of the derivative liability was approximately $2,062,000,
and a
fair value adjustment of approximately $34,000
will be
included in other expenses for our fiscal year
then
ended.
In
the
event that the fair value of the derivative liability exceeds the amount
of any
cashless, net-share settlement under the warrants, we may find it necessary
to
compensate the holder through cash payments, which would have a material
adverse
effect on our business, our financial condition, including liquidity
and
profitability, and our results of operations, including a corresponding
reduction in our net income and the likelihood of a net loss for the
year. See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Derivatives”.
Up
to 47,491,666 shares of our common stock are eligible for public sale as
a
result of a resale registration statement filing which is likely to depress
our
stock price.
As
of the
date of the filing of this annual report on Form 10-KSB for the fiscal
year
ended December 31, 2005, we also have on file with the SEC a registration
statement on Form SB-2, declared effective on February 1, 2006, which
registration statement caused to be eligible for immediate resale on the
public
market 24,341,666 shares of our common stock and an additional 23,150,000
shares
of our common stock underlying warrants (the resale offering of which shall
only
be made by means of a separate prospectus). As a percentage of our total
outstanding common stock, this represents 65.8%. If a significant number
of
shares are offered for sale simultaneously, which is likely to occur, it
would
have a depressive effect on the trading price of our common stock on the
public
market. Any such depressive effect may encourage short positions and short
sales, which could place further downward pressure on the price of our
common
stock. Moreover, all of the shares sold in the offering are freely transferable
without restriction or further registration under the Securities Act (except
for
any shares purchased by our “affiliates”, as defined in Rule 144 of the
Securities Act), which could place even further downward pressure on the
price
of our common stock. Furthermore, should a simultaneous sell-off occur,
and due
to the thinly-traded market for our common stock, stockholders may have
difficulty selling shares of our common stock, at or above the price paid,
at a
fair market value or even at all.
Unless
an active trading market develops for our common stock, you may not be
able to
sell your shares.
We
are a
reporting company and our common stock is listed on the OTC Bulletin Board
(owned and operated by the Nasdaq Stock Market, Inc.), however, there is
no
active trading market for our common stock. There can be no assurance that
an
active trading market will ever develop for our common stock or, if it
does
develop, that it will be maintained. Failure to develop or maintain an
active
trading market will have a generally negative effect on the price of our
common
stock, and you may be unable to sell your shares or any attempted sale
of such
shares may have the effect of lowering the market price, and therefore
your
investment could be a complete or partial loss.
Unless
and until we garner analyst research coverage, we are unlikely to create
long-term market value in our common stock.
Although
we are a reporting company and our common shares are listed on the OTC
Bulletin
Board, we are unaware of any investment banking firms, large or small,
that
currenlty provide buy-side 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 buy-side 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 (owned and operated by the
Nasdaq
Stock Market, Inc). 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 National
Market, you may have difficulty reselling any of the shares of our common
stock
that you purchase from the selling stockholders.
Our
common stock is subject to the “penny stock” regulations, which is likely to
make it more difficult to sell.
Our
common stock is considered a “penny stock”, which generally is a stock trading
under $5.00 and not registered on national securities exchanges or quoted
on the
Nasdaq National Market. The SEC has adopted rules that regulate broker-dealer
practices in connection with transactions in penny stocks. This regulation
generally has the result of reducing trading in such stocks, restricting
the
pool of potential investors for such stocks, and making it more difficult
for
investors to sell their shares. Prior to a transaction in a penny stock,
a
broker-dealer is required to:
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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.
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 2005, our trading price fluctuated from a low of $0.07
to a
high of $0.17 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, any shares owned by our officers or directors
which are registered, or which otherwise may be sold in the future without
registration under the Securities Act to the extent permitted by Rule 144
or
other exemptions under the Securities Act, may be sold. 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 the mere perception that these sales could occur.
Future
issuances of our common or preferred stock may depress our stock price
and
dilute your interest.
We
may
want to issue additional shares of our common stock in future financings
and may
grant stock options to our employees, officers, directors and consultants
under
our stock incentive plan. Any such issuances could have the effect of depressing
the market price of our common stock and, in any case, would dilute the
interests of our common stockholders. In addition, we could issue serial
preferred stock having rights, preferences and privileges senior to those
of our
common stock, including the right to receive dividends and/or preferences
upon
liquidation, dissolution or winding-up in excess of, or prior to, the rights
of
the holders of our common stock. This could depress the value of our common
stock and could reduce or eliminate the amounts that would otherwise have
been
available to pay dividends on our common stock (which are unlikely in any
case)
or to make distributions on liquidation.
If
you require dividend income, you should not rely on an investment in our
common
stock.
Because
we have very limited cash resources and a substantial accumulated deficit
relative to recent earnings, we have not declared or paid any dividends
on our
common stock since our inception and we do not anticipate declaring or
paying
any dividends on our common stock in the foreseeable future. Rather, we
intend
to retain earnings, if any, for the continued operation and expansion of
our
business. It is unlikely, therefore, that holders of our common stock will
have
an opportunity to profit from anything other than potential appreciation
in the
value of our common stock held by them. If you require dividend income,
you
should not rely on an investment in our common stock.
The
lack of a majority of independent directors on our board of directors may
affect
our ability to be listed on a national securities exchange or quotation
system.
We
are
not currently subject to the listing requirements of any national securities
exchange or quotation system. The listing standards of the national securities
exchanges and automated quotation systems require that a company’s board of
directors consist of a majority of directors who are independent as defined
by
the Sarbanes-Oxley Act of 2002 and as defined by applicable listing standards,
and that the audit committee of the board of directors must consist of
at least
two members, both of whom are independent. Similarly, the compensation
and
nominating committees of company boards of directors must also consist
of
independent directors. As of March 31, 2006, only two of our directors,
who were
the only members of our audit committee, met the definition of an “independent”
director as defined by the Sarbanes-Oxley Act of 2002 and as defined by
listing
standards. On March 31, 2006, however, one of our independent directors
resigned
as a result of other professional obligations, leaving us with only one
independent director, and as of the date of the filing of this annual report
on
Form 10-KSB for the fiscal year ended December 31, 2005, and despite our
efforts
to do so, we have not yet identified a suitable replacement. Two of our
remaining three directors are currently serving as our executive officers
and
thereby do not qualify as independent. There is no guarantee that we will
be
able to appoint an additional director who will satisfy these independence
requirements. For so long as we remain unable to appoint an additional
independent director to our board, we will be unqualified to list any of
our
capital stock on a national securities exchange or quotation system.
There
may exist a potential conflict of interest between us and each of our former
and
current counsel.
In
the
past we have issued, and we may continue in the future to issue, warrants
to
purchase our common stock as equity compensation for legal and other services
rendered in connection with the preparation of our securities filings.
Specifically, we have issued warrants to the law firm of Membrado & Montell,
LLP, and to Michael M. Membrado, our corporate counsel. Due to these issuances,
there exists the potential for a conflict of interest between us and each
of our
current and former counsel insofar as the recipients may have been or may
be
motivated by personal interests that are not necessarily aligned with our
own.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors
FindEx.com
Inc.
We
have
audited the accompanying consolidated balance sheets of FindEx.com Inc. and
subsidiaries as of December 31, 2005 and the related consolidated statements
of
operations, changes in shareholders’ equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The restated consolidated financial statements
of
FindEx.com, Inc. as of December 31, 2004, were audited by other auditors
whose
report dated February 18, 2005 except for Notes 1, 5, 8, 9, 10, 11, 12, 13,
15,
16 and 19 dated December 13, 2005, expressed an unqualified opinion on those
statements.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the
accounting principles used and significant estimates made by management,
as well
as evaluating the overall consolidated financial statement presentation.
We
believe that our audit provides a reasonable basis for our opinion.
The
Company is not required to have, nor were we engaged to perform, an audit
of its
internal control over financial reporting. Our audit included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of FindEx.com Inc. and subsidiaries
as
of December 31, 2005 and the results of operations and cash flows for the
year
ended December 31, 2005 in conformity with accounting principles generally
accepted in the United States of America.
/s/
BRIMMER, BUREK & KEELAN LLP
Brimmer,
Burek & Keelan LLP
Tampa,
Florida
April
12,
2006
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of Findex.com, Inc.:
We
have
audited the accompanying consolidated balance sheets of Findex.com, Inc.
as of
December 31, 2004 and 2003 and the related consolidated statements of
operations, stockholders’ equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated 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 audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The
Company
has determined that it 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 consolidated financial statements. An audit
also
includes assessing the accounting principles used and significant estimates
made
by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a reasonable
basis
for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the consolidated financial position of Findex.com,
Inc. as of December 31, 2004 and 2003 and the results of its operations
and cash
flows for the years then ended in conformity with U.S. Generally Accepted
Accounting Principles.
As
discussed in Note 19 to the consolidated financial statements, there were
errors
in reporting the Company’s settlement agreement for the software license, errors
in reporting some of the classifications, errors in reporting the rebate
reserve
adjustment, and errors in reporting the warrants issued in connection with
a
private placement in the balance sheets and the statements of operations
that
were discovered by management as a result of a regulatory review. Accordingly,
the consolidated financial statements have been restated to correct the
errors.
Chisholm,
Bierwolf & Nilson, LLC
Bountiful,
UT
February
18, 2005 except for Notes 1, 5, 8, 9, 10, 11, 12, 13, 15, 16, and 19 dated
December 13, 2005
|
Findex.com,
Inc.
|
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CONDENSED
CONSOLIDATED BALANCE SHEETS
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|
December
31, 2005 and 2004
|
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2005
|
2004
|
|||||
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Assets
|
|||||||
|
Current
assets:
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|||||||
|
Cash
and cash equivalents
|
$
|
119,560
|
$
|
341,359
|
|||
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Accounts
receivable, trade
|
405,380
|
566,819
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|||||
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Inventories
|
214,604
|
234,000
|
|||||
|
Deferred
income taxes, net
|
85,392
|
300,191
|
|||||
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Other
current assets
|
42,814
|
109,078
|
|||||
|
Total
current assets
|
867,750
|
1,551,447
|
|||||
|
Property
and equipment, net
|
114,191
|
131,019
|
|||||
|
Software
license, net
|
1,762,276
|
2,265,783
|
|||||
|
Capitalized
software development costs, net
|
707,067
|
701,289
|
|||||
|
Deferred
income taxes, net
|
183,195
|
157,840
|
|||||
|
Restricted
cash
|
---
|
50,354
|
|||||
|
Other
assets
|
69,806
|
94,101
|
|||||
|
Total
assets
|
$
|
3,704,285
|
$
|
4,951,833
|
|||
|
|
|||||||
|
Liabilities
and stockholders’ equity
|
|||||||
|
Current
liabilities:
|
|||||||
|
Current
maturities of long-term debt
|
$
|
11,955
|
$
|
35,495
|
|||
|
Accrued
royalties
|
472,548
|
287,514
|
|||||
|
Accounts
payable, trade
|
556,042
|
621,804
|
|||||
|
Accrued
registration rights penalties
|
336,686
|
---
|
|||||
|
Accrued
payroll
|
206,988
|
209,984
|
|||||
|
Reserve
for sales returns
|
125,492
|
100,180
|
|||||
|
Derivatives
|
2,062,462
|
1,968,750
|
|||||
|
Other
current liabilities
|
121,274
|
128,166
|
|||||
|
Total
current liabilities
|
3,893,447
|
3,351,893
|
|||||
|
Long-term
debt
|
33,786
|
42,972
|
|||||
|
Deferred
income taxes, net
|
19,105
|
157,840
|
|||||
|
Commitments
and contingencies (Note 17)
|
|||||||
|
Stockholders’
equity:
|
|||||||
|
Common
stock, $.001 par value
|
|||||||
|
120,000,000
shares authorized,
|
|||||||
|
48,619,855
shares issued and outstanding
|
48,620
|
48,620
|
|||||
|
Paid-in
capital
|
7,461,424
|
7,521,339
|
|||||
|
Retained
(deficit)
|
(7,752,097
|
)
|
(6,170,831
|
)
|
|||
|
Total
stockholders’ equity
|
(242,053
|
)
|
1,399,128
|
||||
|
Total
liabilities and stockholders’ equity
|
$
|
3,704,285
|
$
|
4,951,833
|
|||
|
|
|||||||
|
See
accompanying notes.
|
|||||||
|
Findex.com,
Inc.
|
|||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|||||||
|
|
|||||||
|
Year
Ended December 31
|
2005
|
2004
|
|||||
|
Revenues,
net of reserves and allowances
|
$
|
5,337,342
|
$
|
5,322,842
|
|||
|
Cost
of sales
|
1,973,944
|
1,721,298
|
|||||
|
Gross
profit
|
3,363,398
|
3,601,544
|
|||||
|
Operating
expenses:
|
|||||||
|
Sales
and marketing
|
1,273,231
|
1,280,761
|
|||||
|
General
and administrative
|
2,432,667
|
2,309,838
|
|||||
|
Bad
debt expense
|
137,303
|
22,778
|
|||||
|
Amortization
expense
|
531,524
|
519,850
|
|||||
|
Depreciation
expense
|
50,704
|
44,478
|
|||||
|
Total
operating expenses
|
4,425,429
|
4,177,705
|
|||||
|
Loss
from operations
|
(1,062,031
|
)
|
(576,161
|
)
|
|||
|
Interest
income
|
1,059
|
1,378
|
|||||
|
Other
income
|
13,796
|
1,011,366
|
|||||
|
Other
adjustments
|
(436,686
|
)
|
(154,569
|
)
|
|||
|
Loss
on fair value adjustment of derivatives
|
(33,797
|
)
|
(291,672
|
)
|
|||
|
Loss
on disposition of assets
|
(1,869
|
)
|
(141
|
)
|
|||
|
Interest
expense
|
(11,029
|
)
|
(42,007
|
)
|
|||
|
Loss
before income taxes
|
(1,530,557
|
)
|
(51,806
|
)
|
|||
|
Provision
for income taxes
|
(50,709
|
)
|
1,015,859
|
||||
|
Net
income (loss)
|
$
|
(1,581,266
|
)
|
$
|
964,053
|
||
|
|
|||||||
|
Earnings
(loss) per share:
|
|||||||
|
Basic
|
$
|
(0.03
|
)
|
$
|
0.03
|
||
|
Diluted
|
$
|
(0.03
|
)
|
$
|
0.03
|
||
|
|
|||||||
|
Weighted
average shares outstanding:
|
|||||||
|
Basic
|
48,619,855
|
34,520,754
|
|||||
|
Diluted
|
48,619,855
|
35,195,840
|
|||||
|
|
|||||||
|
See
accompanying notes.
|
|||||||
|
Findex.com,
Inc.
|
||||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
||||||||||||||||||||||
|
|
||||||||||||||||||||||
|
|
Retained
|
|||||||||||||||||||||
|
|
Preferred
Stock
|
Common
Stock
|
Paid-In
|
Earnings
|
||||||||||||||||||
|
|
Series
A
|
Series
B
|
Shares
|
Amount
|
Capital
|
(Deficit)
|
|
Total
|
||||||||||||||
|
|
||||||||||||||||||||||
|
Balance,
December 31, 2003
|
$
|
11
|
$
|
40
|
21,011,438
|
$
|
21,011
|
$
|
7,080,629
|
$
|
(7,130,759
|
)
|
$
|
(29,068
|
)
|
|||||||
|
Common
stock issued for services
|
---
|
---
|
2,774,105
|
2,774
|
100,445
|
---
|
103,219
|
|||||||||||||||
|
Common
stock warrants issued for services
|
---
|
---
|
---
|
---
|
75,715
|
---
|
75,715
|
|||||||||||||||
|
Common
stock cancelled
|
---
|
---
|
(48,387
|
)
|
(48
|
)
|
48
|
---
|
---
|
|||||||||||||
|
Preferred
Series A common stock dividend
|
---
|
---
|
56,356
|
56
|
4,069
|
(4,125
|
)
|
---
|
||||||||||||||
|
Conversion
of preferred stock
|
(11
|
)
|
(40
|
)
|
484,677
|
485
|
(434
|
)
|
---
|
---
|
||||||||||||
|
Common
stock issued in connection with
|
||||||||||||||||||||||
|
private
placement, net of $51,047 of issuance costs
|
---
|
---
|
21,875,000
|
21,875
|
---
|
---
|
21,875
|
|||||||||||||||
|
Conversion
of notes payable
|
---
|
---
|
2,466,666
|
2,467
|
260,867
|
---
|
263,334
|
|||||||||||||||
|
Net
income, December 31, 2004
|
---
|
---
|
---
|
---
|
---
|
964,053
|
964,053
|
|||||||||||||||
|
Balance,
December 31, 2004
|
$
|
---
|
$
|
---
|
48,619,855
|
$
|
48,620
|
$
|
7,521,339
|
$
|
(6,170,831
|
)
|
$
|
1,399,128
|
||||||||
|
Common
stock warrant reclassified as derivative
|
---
|
---
|
---
|
---
|
(59,915
|
)
|
---
|
(59,915
|
)
|
|||||||||||||
|
Net
loss, December 31, 2005
|
---
|
---
|
---
|
---
|
---
|
(1,581,266
|
)
|
(1,581,266
|
)
|
|||||||||||||
|
Balance,
December 31, 2005
|
$
|
---
|
$
|
---
|
48,619,855
|
$
|
48,620
|
$
|
7,461,424
|
$
|
(7,752,097
|
)
|
$
|
(242,053
|
)
|
|||||||
|
|
||||||||||||||||||||||
|
See
accompanying notes.
|
||||||||||||||||||||||
|
Findex.com,
Inc.
|
|||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|||||||
|
|
|||||||
|
Year
Ended December 31
|
2005
|
2004
|
|||||
|
Cash
flows from operating activities:
|
|||||||
|
Cash
received from customers
|
$
|
5,369,139
|
$
|
5,062,396
|
|||
|
Cash
paid to suppliers and employees
|
(4,761,153
|
)
|
(5,673,088
|
)
|
|||
|
Other
operating receipts
|
13,796
|
9,276
|
|||||
|
Interest
paid
|
(11,896
|
)
|
(37,928
|
)
|
|||
|
Interest
received
|
1,059
|
1,378
|
|||||
|
Income
taxes (paid) refunded
|
1,400
|
(5,702
|
)
|
||||
|
Net
cash provided (used) by operating activities
|
612,345
|
(643,668
|
)
|
||||
|
Cash
flows from investing activities:
|
|||||||
|
Acquisition
of property, plant and equipment
|
(35,746
|
)
|
(58,247
|
)
|
|||
|
Software
development costs
|
(812,309
|
)
|
(692,063
|
)
|
|||
|
Website
development costs
|
(16,163
|
)
|
(31,838
|
)
|
|||
|
Deposits
refunded (paid)
|
62,796
|
35,216
|
|||||
|
Net
cash (used) by investing activities
|
(801,422
|
)
|
(746,932
|
)
|
|||
|
Cash
flows from financing activities:
|
|||||||
|
Proceeds
from (payments on) line of credit, net
|
---
|
(20,935
|
)
|
||||
|
Payments
made on long-term notes payable
|
(32,722
|
)
|
(227,727
|
)
|
|||
|
Proceeds
from convertible notes payable
|
---
|
240,000
|
|||||
|
Proceeds
from issuance of stock
|
---
|
1,750,000
|
|||||
|
Stock
offering costs paid
|
---
|
(51,047
|
)
|
||||
|
Net
cash provided (used) by financing activities
|
(32,722
|
)
|
1,690,291
|
||||
|
Net
increase (decrease) in cash and cash equivalents
|
(221,799
|
)
|
299,691
|
||||
|
Cash
and cash equivalents, beginning of year
|
341,359
|
41,668
|
|||||
|
Cash
and cash equivalents, end of year
|
$
|
119,560
|
$
|
341,359
|
|||
|
|
|||||||
|
Reconciliation
of net income to cash flows from operating activities:
|
|||||||
|
Net
income (loss)
|
$
|
(1,581,266
|
)
|
$
|
964,053
|
||
|
Adjustments
to reconcile net income (loss) to net cash
|
|||||||
|
provided
(used) by operating activities:
|
|||||||
|
Software
development costs amortized
|
806,531
|
575,481
|
|||||
|
Stock
and warrants issued for services
|
---
|
178,929
|
|||||
|
Rebate
reserve adjustment
|
---
|
(142,039
|
)
|
||||
|
Provision
for bad debts
|
137,303
|
22,778
|
|||||
|
Depreciation
& amortization
|
582,228
|
564,328
|
|||||
|
Debt
forgiveness
|
---
|
(1,002,090
|
)
|
||||
|
Loss
on disposal of property and equipment
|
1,869
|
141
|
|||||
|
Loss
on fair value adjustment of derivatives
|
33,797
|
291,672
|
|||||
|
Change
in assets and liabilities:
|
|||||||
|
(Increase)
decrease in accounts receivable
|
24,136
|
(223,794
|
)
|
||||
|
Decrease
in inventories
|
19,396
|
38,600
|
|||||
|
(Increase)
decrease in refundable taxes
|
1,400
|
(2,948
|
)
|
||||
|
(Increase)
decrease in prepaid expenses
|
64,865
|
(84,211
|
)
|
||||
|
Increase
(decrease) in accrued royalties
|
185,034
|
(324,360
|
)
|
||||
|
(Decrease)
in accounts payable
|
(65,762
|
)
|
(271,198
|
)
|
|||
|
(Decrease)
in income taxes payable
|
---
|
(1,270
|
)
|
||||
|
Increase
(decrease) in deferred taxes
|
50,709
|
(1,017,343
|
)
|
||||
|
Increase
(decrease) in other liabilities
|
352,105
|
(210,397
|
)
|
||||
|
Net
cash provided (used) by operating activities
|
$
|
612,345
|
$
|
(643,668
|
)
|
||
|
|
|||||||
|
See
accompanying notes.
|
|||||||
Findex.com,
Inc.
Notes
to Consolidated Financial Statements
December
31, 2005 and 2004
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, (iii) the life and realization of identifiable intangible
assets, and (iv) provisions for obsolete inventory. The amounts we will
ultimately incur or recover could differ materially from current estimates.
CONCENTRATIONS
Financial
instruments that potentially subject us to concentrations of credit risk
consist
of cash and cash equivalents and accounts receivable. We place our cash and
cash
equivalents at well-known, quality financial institutions. We currently maintain
our cash balances in one financial institution located in Omaha, Nebraska.
The
balances are insured by the Federal Deposit Insurance Corporation up to
$100,000. At December 31, 2005 and 2004, our uninsured cash balance totaled
$-0-
and $336,175, respectively.
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. Our top five customers in aggregate accounted for 16%
of
gross sales for the year ended December 31, 2005. No single customer accounted
for more than 10% of revenue in the years ended December 31, 2005 and 2004.
During
the years ended December 31, 2005 and 2004, we derived 66% and 63%,
respectively, of our total revenue from sales of QuickVerse®,
26% and
28%, respectively, from sales of Membership Plus®,
and 8%
and 9%, respectively, from sales of other software titles.
During
the years ended December 31, 2005 and 2004, four vendors provided purchases
individually of 10% or more of the total product and material purchases as
follows: Vendor A (cd replicator) accounted for 24% and 29%, respectively,
Vendor B (printer) accounted for 23% and 18%, respectively, Vendor C (retail
boxes) accounted for 19% and 17%, respectively, and Vendor D (cd replicator)
accounted for -0-% and 12%, respectively. Accounts payable relating to Vendors
A, B, C, and D were $8,886 and $40,234, $8,820 and $18,426, $17,031 and $34,931,
and $-0- and $-0-, as of December 31, 2005 and 2004, respectively.
ROYALTY
AGREEMENTS
We
have
entered into certain agreements whereby we are obligated to pay royalties
for
content of software published. We generally pay royalties based on a percentage
of sales on respective products or on a fee per unit sold basis. We expense
software royalties as product costs during the period in which the related
revenues are recorded.
CASH
AND CASH EQUIVALENTS
We
consider all highly liquid investments purchased with an original maturity
of
three months or less to be cash equivalents.
RESTRICTED
CASH
Restricted
cash represents cash held in reserve by our merchant banker to allow for
a
potential increase in credit card chargebacks from increased consumer purchases.
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,
one of
which is based on historical collections performance and a second component
based on specific collection issues. If actual bad debts differ from the
reserves calculated based on historical trends and known customer issues,
we
record an adjustment to bad debt expense in the period in which the difference
occurs. Such adjustment could result in additional expense or a reduction
of
expense.
Our
accounts receivable go through a collection process that is based on the
age of
the invoice and requires attempted contacts with the customer at specified
intervals and the assistance from other personnel within the company who
have a
relationship with the customer. If after a number of days, we have been
unsuccessful in our collections efforts, we may turn the account over to
a
collection agency. We write-off accounts to our allowance when we have
determined that collection is not likely. The factors considered in reaching
this determination are (i) the apparent financial condition of the customer,
(ii) the success we’ve had in contacting and negotiating with the customer and
(iii) the number of days the account has been outstanding. To the extent
that
our collections do not correspond with historical experience, we may be required
to incur additional charges.
INVENTORY
Inventory,
including out on consignment, consists primarily of software media, manuals
and
related packaging materials and is recorded at the lower of cost or market
value, determined on a first-in, first-out, and adjusted on a per-item, basis.
PROPERTY
AND EQUIPMENT
Property
and equipment are recorded at cost. Furniture, fixtures and computer equipment
are depreciated over five years using the straight-line method. Software
is
depreciated over three years using the straight-line method. Expenditures
for
maintenance, repairs and other renewals of items are charged to expense when
incurred.
ACCOUNTING
FOR LONG-LIVED ASSETS
We
review
property and equipment and intangible assets for impairment whenever events
or
changes in circumstances indicate that the carrying amount of an asset may
not
be recoverable. Recoverability is measured by comparison of our carrying
amount
to future net cash flows the assets are expected to generate. If such assets
are
considered to be impaired, the impairment to be recognized is measured by
the
amount by which the carrying amount of the asset exceeds its fair market
value.
Property and equipment to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
INTANGIBLE
ASSETS
In
accordance with SFAS No. 142, Goodwill
and Other Intangible Assets,
intangible assets with an indefinite useful life are not amortized. Intangible
assets with a finite useful life are amortized on the straight-line method
over
the estimated useful lives. All intangible assets are tested for impairment
annually during the fourth quarter.
SOFTWARE
DEVELOPMENT COSTS
In
accordance with SFAS No. 86, Accounting
for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed,
software development costs are expensed as incurred until technological
feasibility and marketability has been established, generally with release
of a
beta version for customer testing. Once the point of technological feasibility
and marketability is reached, direct production costs (including labor directly
associated with the development projects), indirect costs (including allocated
fringe benefits, payroll taxes, facilities costs, and management supervision),
and other direct costs (including costs of outside consultants, purchased
software to be included in the software product being developed, travel
expenses, material and supplies, and other direct costs) are capitalized
until
the product is available for general release to customers. We amortize
capitalized costs on a product-by-product basis. Amortization for each period
is
the greater of the amount computed using (i) the straight-line basis over
the
estimated product life (generally from 12 to 18 months), or (ii) the ratio
of
current revenues to total projected product revenues. Total cumulative
capitalized software development costs were $2,561,043 and $1,748,735, less
accumulated amortization of $1,853,976 and $1,047,446 at December 31, 2005
and
2004, respectively.
Capitalized
software development costs are stated at the lower of amortized costs or
net
realizable value. Recoverability of these capitalized costs is determined
at
each balance sheet date by comparing the forecasted future revenues from
the
related products, based on management’s best estimates using appropriate
assumptions and projections at the time, to the carrying amount of the
capitalized software development costs. If the carrying value is determined
not
to be recoverable from future revenues, an impairment loss is recognized
equal
to the amount by which the carrying amount exceeds the future revenues. To
date,
no capitalized costs have been written down to net realizable
value.
SFAS
No.
2, Accounting
for Research and Development Costs,
established accounting and reporting standards for research and development.
In
accordance with SFAS No. 2, costs we incur to enhance our existing products
after general release to the public (bug fixes) are expensed in the period
they
are incurred and included in research and development costs. Research and
development costs incurred prior to determination of technological feasibility
and marketability and after general release to the public and charged to
expense
were $216,397 and $64,653 for the years ended December 31, 2005 and 2004,
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
$102,663 and $86,500, less accumulated amortization of $46,811 and $18,795
at
December 31, 2005 and 2004, respectively.
NET
REVENUE
We
derive
revenues from the sale of packaged software products, product support and
multiple element arrangements that may include any combination of these items.
We recognize software revenue for software products and related services
in
accordance with SOP 97-2, Software
Revenue Recognition,
as
modified by SOP 98-9, Modification
of SOP 97-2, With Respect to Certain Transactions.
We
recognize revenue when persuasive evidence of an arrangement exists (generally
a
purchase order), we have delivered the product, the fee is fixed or determinable
and collectibility is probable.
In
some
situations, we receive advance payments from our customers. We defer revenue
associated with these advance payments until we ship the products or offer
the
support.
In
accordance with EITF Issue No. 01-9, Accounting
for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s
Product,
we
generally account for cash considerations (such as sales incentives - rebates
and coupons) that we give to our customers as a reduction of revenue rather
than
as an operating expense.
Product
Revenue
We
typically recognize revenue from the sale of our packaged software products
when
we ship the product. We sell some of our products on consignment to a limited
number of resellers. We recognize revenue for these consignment transactions
only when the end-user sale has occurred. Revenue for software distributed
electronically via the Internet is recognized when the customer has been
provided with the access codes that allow the customer to take immediate
possession of the software on its hardware and evidence of the arrangement
exists (web order).
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 2005 or 2004 and maintain a reserve for
rebate
claims remaining unpaid from 2000.
Service
Revenue
We
offer
several technical support plans and recognize support revenue over the life
of
the plans, generally one year.
Multiple
Element Arrangements
We
also
enter into certain revenue arrangements for which we are obligated to deliver
multiple products or products and services (multiple elements). For these
arrangements, which include software products, we allocate and defer revenue
for
the undelivered elements based on their vendor-specific objective evidence
(“VSOE”) of fair value. VSOE is generally the price charged when that element is
sold separately.
In
situations where VSOE exists for all elements (delivered and undelivered),
we
allocate the total revenue to be earned under the arrangement among the various
elements, based on their relative fair value. For transactions where VSOE
exists
only for the undelivered elements, we defer the full fair value of the
undelivered elements and recognize the difference between the total arrangement
fee and the amount deferred for the undelivered items as revenue (residual
method). If VSOE does not exist for undelivered items that are services,
we
recognize the entire arrangement fee ratably over the remaining service period.
If VSOE does not exist for undelivered elements that are specified products,
we
defer revenue until the earlier of the delivery of all elements or the point
at
which we determine VSOE for these undelivered elements.
We
recognize revenue related to the delivered products or services only if:
(i) the
above revenue recognition criteria are met; (ii) any undelivered products
or
services are not essential to the functionality of the delivered products
and
services; (iii) payment for the delivered products or services is not contingent
upon delivery of the remaining products or service; and (iv) we have an
enforceable claim to receive the amount due in the event that we do not deliver
the undelivered products or services.
Shipping
and Handling Costs
We
record
the amounts we charge our customers for the shipping and handling of our
software products as product revenue and we record the related costs as cost
of
sales on our consolidated statements of operations.
Customer
Service and Technical Support
Customer
service and technical support costs include the costs associated with performing
order processing, answering customer inquiries by telephone and through
Websites, e-mail and other electronic means, and providing technical support
assistance to our customers. In connection with the sale of certain products,
we
provide a limited amount of free technical support assistance to customers.
We
do not defer the recognition of any revenue associated with sales of these
products, since the cost of providing this free technical support is
insignificant. The technical support is provided within one year after the
associated revenue is recognized and free product enhancements (bug fixes)
are
minimal and infrequent. We accrue the estimated cost of providing this free
support upon product shipment and are recorded as cost of sales.
ADVERTISING
Advertising
costs, including direct response advertising costs, are charged to operations
as
incurred. We have determined that direct response advertising costs are
insignificant. Total advertising costs for the years ended December 31, 2005
and
2004 were approximately, $512,000 and $448,000, respectively.
STOCK-BASED
COMPENSATION
As
permitted under SFAS No. 123, Accounting
for Stock-based Compensation,
and
amended under SFAS No. 148, Accounting
for Stock-based Compensation-Transition and Disclosure,
we have
elected to follow the intrinsic value based method of accounting prescribed
by
APB No. 25, Accounting
for Stock Issued to Employees,
in
accounting for stock-based awards to employees (see Note 14) and, accordingly,
do not recognize compensation cost when employee stock-option grants are
made at
fair-market value. In December 2004, the FASB issued SFAS No. 123(R),
Share-Based
Payment,
which
replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123(R)
requires compensation costs related to share-based payment transactions to
be
recognized in the financial statements. With limited exceptions, the amount
of
compensation cost will be measured based on the fair value on the grant date
of
the equity or liability instruments issued. Compensation cost will be recognized
over the period that the service is provided for that award. This new standard
will be effective for us the first quarter of fiscal 2006.
LEGAL
COSTS RELATED TO LOSS CONTINGENCIES
We
accrue
legal costs expected to be incurred in connection with a loss contingency
as
they occur.
INCOME
TAXES
We
follow
SFAS No. 109, Accounting
for Income Taxes,
which
requires the use of the asset and liability method of accounting for income
taxes. Under this method, deferred income taxes are provided for the temporary
differences between the financial reporting basis and the tax basis of our
assets and liabilities. Deferred tax assets and liabilities are measured
using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
EARNINGS
PER SHARE
We
follow
SFAS No. 128, Earnings
Per Share,
to
calculate and report basic and diluted earnings per share (EPS). Basic EPS
is
computed by dividing income available to common stockholders by the weighted
average number of shares of common stock outstanding for the period. Diluted
EPS
is computed by giving effect to all dilutive potential shares of common stock
that were outstanding during the period. For us, dilutive potential shares
of
common stock consist of the incremental shares of common stock issuable upon
the
exercise of stock options and warrants for all periods, convertible notes
payable and the incremental shares of common stock issuable upon the conversion
of convertible preferred stock.
When
discontinued operations, extraordinary items, and/or the cumulative effect
of an
accounting change are present, income before any of such items on a per share
basis represents the “control number” in determining whether potential shares of
common stock are dilutive or anti-dilutive. Thus, the same number of potential
shares of common stock used in computing diluted EPS for income from continuing
operations is used in calculating all other reported diluted EPS amounts.
In the
case of a net loss, it is assumed that no incremental shares would be issued
because they would be anti-dilutive. In addition, certain options and warrants
are considered anti-dilutive because the exercise prices were above the average
market price during the period. Anti-dilutive shares are not included in
the
computation of diluted EPS, in accordance with SFAS No. 128.
COMPREHENSIVE
INCOME (LOSS)
We
have
adopted SFAS No. 130, Reporting
Comprehensive Income.
SFAS
No. 130 establishes standards of reporting and displaying comprehensive income
and its components of net income and “other comprehensive income” in a full set
of general-purpose financial statements. “Other comprehensive income” refers to
revenues, expenses, gains and losses that are not included in net income,
but
rather are recorded directly in stockholders’ equity. The adoption of this
Statement had no impact on our net income or loss or stockholders’ equity.
TRANSFER
OF FINANCIAL ASSETS
We
have
adopted SFAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.
SFAS
No. 140 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities and provides consistent
standards for distinguishing transfers of financial assets that are sales
from
transfers that are secured borrowings. The adoption of this standard did
not
have a material effect on our results of operations or financial position.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
Unless
otherwise indicated, the fair values of all reported assets and liabilities
that
represent financial instruments (none of which are held for trading purposes)
approximate the carrying values of such instruments because of the short
maturity of those instruments.
DERIVATIVES
We
account for warrants issued with shares of common stock in a private placement
according to EITF Issue 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled
in, a
Company’s Own Stock.
In
accordance with the accounting mandate, the derivative liability associated
with
the warrants has been and shall continue to be adjusted to fair value
(calculated using the Black-Scholes method) at each balance sheet date and
is
accordingly reassessed at each such time to determine whether the warrants
should be classified (or reclassified, as appropriate) as a liability or
as
equity. The corresponding fair value adjustment is included in the consolidated
statements of operations as other expenses as the value of the warrants
increases from an increase in our stock price at the balance sheet date and
as
other income as the value of the warrants decreases from a decrease in our
stock
price.
RECLASSIFICATIONS
Certain
accounts in the 2004 financial statements have been reclassified for comparative
purposes to conform with the presentation in the 2005 financial statements.
NOTE
2 - ACCOUNTS RECEIVABLE
At
December 31, 2005 and 2004, accounts receivable consisted of the following
(see
Note 1 - Concentrations):
|
2005
|
2004
|
||||||
|
Trade
receivables
|
$
|
483,380
|
$
|
584,819
|
|||
|
Less:
Allowance for doubtful accounts
|
78,000
|
18,000
|
|||||
|
Accounts
receivable, trade
|
$
|
405,380
|
$
|
566,819
|
|||
During
the year ended December 31, 2004, we transferred accounts receivable totaling
$300,966 to a factor for cash advances of $180,580. As accounts were
paid, the collected funds (less the amount advanced and appropriate fees)
were
disbursed to us. The transfer agreement included a repurchase requirement
and,
accordingly, the proceeds were accounted for as a secured borrowing. The
agreement was terminated in July 2004.
NOTE
3 - INVENTORIES
At
December 31, 2005 and 2004, inventories consisted of the following:
|
2005
|
2004
|
||||||
|
Raw
materials
|
$
|
118,158
|
$
|
111,300
|
|||
|
Finished
goods
|
96,446
|
122,700
|
|||||
|
Inventories
|
$
|
214,604
|
$
|
234,000
|
|||
During
the year ended December 31, 2004, we wrote-off obsolete inventory with a
carried
cost totaling $32,396. This has been recognized in cost of sales.
NOTE
4 - PROPERTY AND EQUIPMENT, NET
At
December 31, 2005 and 2004, property and equipment consisted of the
following:
|
2005
|
2004
|
||||||
|
Computer
equipment
|
$
|
93,992
|
$
|
84,009
|
|||
|
Computer
software
|
65,442
|
62,861
|
|||||
|
Office
equipment
|
85,431
|
77,947
|
|||||
|
Office
furniture and fixtures
|
68,171
|
62,594
|
|||||
|
Warehouse
equipment
|
12,159
|
23,150
|
|||||
|
325,195
|
310,561
|
||||||
|
Less:
Accumulated depreciation
|
211,004
|
179,542
|
|||||
|
Property
and equipment, net
|
$
|
114,191
|
$
|
131,019
|
|||
At
December 31, 2005 and 2004, Office equipment contained telephone equipment
under
a capital lease obligation with a cost basis of $51,788. See Notes 8 and
15.
NOTE
5 - SOFTWARE LICENSE AGREEMENT, NET
In
July
1999, we completed an exclusive license agreement with Parsons Technology,
Inc.,
a subsidiary of TLC, for the perpetual and fully-paid up right and license
to
publish, use, distribute and sublicense the programs incorporating the
trademarks (i.e. QuickVerse®,
Membership Plus®)
throughout the world and also in the licensed media, for sale, resale and/or
license to churches or other places of worship, religious schools and companies
or individuals for which the majority of sales revenue is derived from sales
of
religious, Christian or Bible products (the “Church Channel”). In addition, the
license agreement provided us the non-exclusive, perpetual and fully-paid
up
right and license to publish, use, distribute and sublicense the programs
incorporating the trademarks throughout the world and also in the licensed
media, for sale, resale and/or license into all channels other than the Church
Channel. This original license agreement carried a 10 year economic
life.
During
the year ended December 31, 2002, we reached tentative settlement in a dispute
with TLC which called for the extension of the term of the license from 10
years
to 50 years.
On
October 20, 2003, we reached settlement in a dispute with The Zondervan
Corporation and TLC which extended indefinitely the term of the software
license
agreement.
As
required by SFAS No. 142, management periodically evaluates the remaining
useful
life of the license agreement and revises the amortization period if it is
determined that the useful life is longer or shorter than originally estimated.
Amortization expense, determined using the straight-line method, has been
calculated using the original 10 year economic life. The software license
is
tested for impairment annually during the fourth quarter.
At
December 31, 2005 and 2004, the software license consisted of the
following:
|
2005
|
2004
|
||||||
|
Software
license cost
|
$
|
5,135,574
|
$
|
5,135,574
|
|||
|
Less:
Accumulated amortization
|
3,373,298
|
2,869,791
|
|||||
|
Software
license, net
|
$
|
1,762,276
|
$
|
2,265,783
|
|||
Amortization
expense related to this intangible asset was $503,508 for both years.
Amortization expense for the next five years is expected to be $503,508 each
year through 2008 and $251,751 for 2009.
NOTE
6 - NOTES PAYABLE
In
September 2004, we borrowed a total of $240,000 from two individuals. Both
notes
were unsecured, carried an annual interest rate of 7.5%, were due August
2005,
and were convertible at the option of the holder into a total of 2,000,000
restricted shares of common stock. Both notes were converted in November
2004 at
the election of the respective holder. See Notes 10 and 16.
NOTE
7 - DERIVATIVES
At
December 31, 2005 and 2004, the derivative liability consisted of the
following:
|
2005
|
2004
|
||||||
|
Warrant
A
|
$
|
47,389
|
$
|
---
|
|||
|
Warrant
B
|
1,030,348
|
984,375
|
|||||
|
Warrant
C
|
984,725
|
984,375
|
|||||
|
Derivatives
|
$
|
2,062,462
|
$
|
1,968,750
|
|||
In
May
2004, we issued a 3-year warrant (Warrant A) to purchase up to 600,000 shares
of
our common stock to a consultant. This warrant may be exercised on a cashless
basis at the option of the warrant holder at a price per share of $0.15.
We will
receive up to $90,000 from the warrant holder upon the exercise of this warrant.
This warrant has been accounted for as a liability according to the guidance
of
EITF 00-19 and the fair value of the warrant has been determined using the
Black-Scholes valuation method with the assumptions listed in the table
below.
In
November 2004, we issued two 5-year warrants to purchase up to an aggregate
of
21,875,000 shares of our common stock in connection with a certain Stock
Purchase Agreement completed with a New York based private investment
partnership on July 19, 2004. The first warrant (Warrant B) entitles the
holder
to purchase up to 10,937,500 shares of our common stock at a price of $0.18
per
share, and the second warrant (Warrant C) entitles the holder to purchase
up to
10,937,500 additional shares of our common stock at a price of $0.60 per
share.
Each warrant is subject to standard adjustment provisions and each provides
for
settlement in registered shares of our common stock and may, at the option
of
the holder, be settled in a cashless, net-share settlement. The warrant holder
is prevented from electing a cashless exercise so long as there is an effective
registration statement for the shares underlying these warrants. The maximum
number of shares of our common stock to be received for each warrant in a
net-share settlement would be 10,937,500 but the actual number of shares
settled
would likely be significantly less and would vary based on the last reported
sale price (as reported by Bloomberg) of our common stock on the date
immediately preceding the date of the exercise notice. These warrants are
accounted for as a liability according to the guidance of EITF 00-19 and
the
fair value of each warrant has been determined using the Black-Scholes valuation
method with the assumptions listed in the table below.
|
|
Warrant
A
|
Warrant
B
|
Warrant
C
|
|||||||
|
Expected
term - years
|
1.33
|
3.55
|
3.55
|
|||||||
|
Stock
price at December 31, 2005
|
$
|
0.10
|
$
|
0.10
|
$
|
0.10
|
||||
|
Expected
dividend yield
|
0
|
%
|
0
|
%
|
0
|
%
|
||||
|
Expected
stock price volatility
|
235
|
%
|
212
|
%
|
212
|
%
|
||||
|
Risk-free
interest rate
|
2.94
|
%
|
3.62
|
%
|
3.62
|
%
|
||||
The
warrants are revalued at each balance sheet date by using the parameters
above,
reducing the expected term to reflect the passing of time, and using the
stock
price at the balance sheet date. Net fair value adjustments of $33,797 and
$291,672 have been included in other expenses on the consolidated statements
of
operations for the years ended December 31, 2005 and 2004,
respectively.
NOTE
8 - LONG-TERM DEBT
At
December 31, 2005 and 2004, long-term debt consisted of the
following:
|
2005
|
2004
|
||||||
|
Unsecured
term note payable to a corporation due October 2004 in monthly
installments of $5,285, including interest at 8%.
|
$
|
2,769
|
$
|
26,679
|
|||
|
Capital
lease obligation payable to a corporation due November 2009 in
monthly
installments of $1,144, including interest at 11.7%. Secured by
telephone
equipment. See Notes 4 and 14.
|
42,972
|
51,788
|
|||||
|
45,741
|
78,467
|
||||||
|
Less:
Current maturities
|
11,955
|
35,495
|
|||||
|
Long-term
debt
|
$
|
33,786
|
$
|
42,972
|
|||
Principal
maturities at December 31, 2005 are as follows:
|
2006
|
$
|
11,955
|
||
|
2007
|
10,318
|
|||
|
2008
|
11,591
|
|||
|
2009
|
11,877
|
|||
|
Total
|
$
|
45,741
|
NOTE
9 - INCOME TAXES
The
provision (benefit) for taxes on income from continuing operations for the
years
ended December 31, 2005 and 2004 consisted of the following:
|
2005
|
2004
|
||||||
|
Current:
|
|||||||
|
Federal
|
$
|
---
|
$
|
---
|
|||
|
State
|
---
|
1,484
|
|||||
|
|
---
|
1,484
|
|||||
|
Deferred:
|
|||||||
|
Federal
|
161,169
|
(1,009,939
|
)
|
||||
|
State
|
(110,460
|
)
|
(7,404
|
)
|
|||
|
50,709
|
(1,017,343
|
)
|
|||||
|
Total
tax provision (benefit)
|
$
|
50,709
|
$
|
(1,015,859
|
)
|
||
The
reconciliation of income tax computed at statutory rates of income tax benefits
is as follows:
|
2005
|
2004
|
||||||
|
Expense
(benefit) at Federal statutory rate - 34%
|
$
|
(520,389
|
)
|
$ |
(12,952
|
)
|
|
|
State
tax effects, net of Federal taxes
|
(110,460
|
)
|
(4,069
|
)
|
|||
|
Nondeductible
expenses
|
14,814
|
236,009
|
|||||
|
Taxable
temporary differences
|
187,051
|
(73,533
|
)
|
||||
|
Deductible
temporary differences
|
(11,157
|
)
|
356,278
|
||||
|
Net
operating loss
|
505,575
|
---
|
|||||
|
Deferred
tax asset valuation allowance
|
(14,725
|
)
|
(1,517,592
|
)
|
|||
|
Income
tax expense (benefit)
|
$
|
50,709
|
$ |
(1,015,859
|
)
|
||
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, 2005 and 2004 are as follows:
|
For
the year ended December 31, 2005
|
Federal
|
State
|
Total
|
|||||||
|
Current
Deferred Income Taxes
|
||||||||||
|
Reserve
for sales returns
|
$
|
42,667
|
$
|
1,054
|
$
|
43,721
|
||||
|
Reserve
for technical support costs
|
13,022
|
322
|
13,344
|
|||||||
|
Accrued
compensation costs
|
50,622
|
1,251
|
51,873
|
|||||||
|
Deferred
revenue
|
8,806
|
218
|
9,024
|
|||||||
|
Reserve
for bad debts
|
26,520
|
655
|
27,175
|
|||||||
|
Operating
loss carryforwards
|
85,091
|
531
|
85,622
|
|||||||
|
226,728
|
4,031
|
230,759
|
||||||||
|
Less:
Valuation allowance
|
141,705
|
3,662
|
145,367
|
|||||||
|
Deferred
income tax asset, net
|
$
|
85,023
|
$
|
369
|
$
|
85,392
|
||||
|
Non-current
Deferred Income Taxes
|
||||||||||
|
State
deferred tax liabilities
|
$
|
7,185
|
$
|
---
|
$
|
7,185
|
||||
|
Operating
loss carryforwards
|
2,794,956
|
25,101
|
2,820,057
|
|||||||
|
2,802,141
|
25,101
|
2,827,242
|
||||||||
|
Less:
Valuation allowance
|
1,751,338
|
22,804
|
1,774,142
|
|||||||
|
Deferred
income tax asset, net
|
1,050,803
|
2,297
|
$
|
1,053,100
|
||||||
|
Software
development costs
|
(240,403
|
)
|
(5,939
|
)
|
($246,342
|
)
|
||||
|
Website
costs
|
(18,990
|
)
|
(469
|
)
|
(19,459
|
)
|
||||
|
Inventory
|
(10,915
|
)
|
(270
|
)
|
(11,185
|
)
|
||||
|
Property
and equipment
|
(188
|
)
|
(5
|
)
|
(193
|
)
|
||||
|
Software
license fees
|
(595,774
|
)
|
(14,719
|
)
|
(610,493
|
)
|
||||
|
State
deferred tax assets
|
(1,338
|
)
|
---
|
(1,338
|
)
|
|||||
|
Deferred
income tax liability
|
(867,608
|
)
|
(21,402
|
)
|
$
|
(889,010
|
)
|
|||
|
Deferred
income tax asset, net
|
$
|
183,195
|
||||||||
|
Deferred
income tax liability, net
|
$
|
(19,105
|
)
|
|||||||
|
For
the year ended December 31, 2004
|
Federal
|
State
|
Total
|
|||||||
|
Current
Deferred Income Taxes
|
||||||||||
|
Reserve
for sales returns
|
$
|
34,061
|
$
|
8,014
|
$
|
42,075
|
||||
|
Reserve
for technical support costs
|
13,362
|
3,144
|
16,506
|
|||||||
|
Accrued
compensation costs
|
50,734
|
11,937
|
62,671
|
|||||||
|
Deferred
revenue
|
14,807
|
3,484
|
18,291
|
|||||||
|
Reserve
for bad debts
|
6,120
|
1,440
|
7,560
|
|||||||
|
Operating
loss carryforwards
|
285,600
|
1,054
|
286,654
|
|||||||
|
404,684
|
29,073
|
433,757
|
||||||||
|
Less:
Valuation allowance
|
129,005
|
4,561
|
133,566
|
|||||||
|
Deferred
income tax asset, net
|
$
|
275,679
|
$
|
24,512
|
$
|
300,191
|
||||
|
Non-current
Deferred Income Taxes
|
||||||||||
|
Property
and equipment, net
|
$
|
2,312
|
$
|
544
|
$
|
2,856
|
||||
|
Reorganization
costs
|
1,700
|
400
|
2,100
|
|||||||
|
State
deferred tax liabilities
|
53,665
|
---
|
53,665
|
|||||||
|
Operating
loss carryforwards
|
2,555,351
|
3,957
|
2,559,308
|
|||||||
|
2,613,028
|
4,901
|
2,617,929
|
||||||||
|
Less:
Valuation allowance
|
1,774,631
|
4,901
|
1,779,532
|
|||||||
|
Deferred
income tax asset, net
|
$
|
838,397
|
---
|
$
|
838,397
|
|||||
|
Software
development costs
|
$
|
(238,438
|
)
|
$
|
(56,103
|
)
|
$
|
(294,541
|
)
|
|
|
Website
costs
|
(23,020
|
)
|
(5,416
|
)
|
(28,436
|
)
|
||||
|
Software
license fees
|
(409,360
|
)
|
(96,321
|
)
|
(505,681
|
)
|
||||
|
State
deferred tax assets
|
(9,739
|
)
|
---
|
(9,739
|
)
|
|||||
|
Deferred
income tax liability
|
$
|
(680,557
|
)
|
$
|
(157,840
|
)
|
$
|
(838,397
|
)
|
|
|
Deferred
income tax asset, net
|
$
|
157,840
|
||||||||
|
Deferred
income tax liability, net
|
$
|
(157,840
|
)
|
|||||||
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. At December 31,
2001, in accordance with SFAS No. 109, Accounting
for Income Taxes,
management established the valuation allowance equal to the total deferred
tax
assets due to the uncertainty about our ability to continue as a going concern.
At December 31, 2004, management adjusted the amount of valuation allowance
based on the assessment that we will continue as a going concern and will
produce sufficient income in the future to realize our net deferred tax asset.
The valuation allowance for deferred tax assets was increased by $6,411 and
decreased by $1,602,090 during the years ended December 31, 2005 and 2004,
respectively.
At
December 31, 2005, we had available net operating loss carryforwards of
approximately $8,470,000 for federal income tax purposes that expire in
2022.
The federal carryforwards resulted from losses generated in 1996 through
2002
and 2005. We also had net operating loss carryforwards available from various
state jurisdictions ranging from approximately $39,000 to approximately
$841,000
that expire in 2022.
NOTE
10 - STOCKHOLDERS’ EQUITY
COMMON
STOCK
In
April
2004, we issued a total of 1,519,349 restricted shares of common stock to
the
executive management team as payment of the 2003 accrued performance bonus.
These shares were valued at $0.022 per share.
In
April
2004, we resolved to issue 637,500 restricted shares of common stock to the
non-executive employees as additional compensation pursuant to an incentive
and
retention bonus program. In July, 2004, we removed 2,500 restricted shares
of
common stock from the resolution due to voluntary separation from service
by a
part-time employee. These shares were valued at $0.022 per share.
In
June
2004, we issued 324,074 restricted shares of common stock to the outside
board
of directors in lieu of cash and meeting fees for the period from July 2003
through August 2004. These shares were valued at $0.081 per share.
In
July
2004, the holders of 11,400 shares of Series A Preferred Stock and the holders
of 40,000 shares of Series B Preferred Stock elected to convert such shares
into
218,000 shares of common stock and 266,667 shares of common stock, respectively.
In addition, the holders converted $4,125 unpaid accumulated Series A Preferred
Stock dividends into 56,353 shares of common stock.
In
July
2004, we issued 295,692 non-restricted shares of common stock in settlement
of
an agreement with an institutional private equity investor. These shares
were
valued at $0.10 per share. A warrant dated March 26, 2001 to purchase up
to
510,000 shares of common stock exercisable at $0.23 per share was cancelled
in
the settlement. See Note 11.
In
July
2004, we issued 21,875,000 restricted shares of common stock for proceeds
of
$1,750,000 through a private placement with a New York based private investment
partnership. In connection with this issuance, we incurred $51,047 in legal
and
other direct costs. These costs have been recorded as a reduction to additional
paid-in capital.
In
July
2004, we removed 48,387 previously resolved but un-issued shares of common
stock
associated with an unexecuted 2001 stock subscription agreement.
In
October 2004, we increased the number of our authorized shares of common
stock
from 50,000,000 to 120,000,000.
In
November 2004, we issued 2,000,000 restricted shares of common stock to holders
of convertible promissory notes who exercised their options to convert. See
Note
6.
COMMON
STOCK OPTIONS
In
July
2004, we cancelled 190,200 vested stock options with an exercise price of
$1.00
per share and 525,000 vested stock options with an exercise price of $1.03
per
share. In addition, 100,000 vested stock options with an exercise price of
$0.11
were voluntarily forfeited by management and 1,333 vested stock options with
an
exercise price of $1.00 and 38,750 vested stock options with an exercise
price
of $0.11 expired after termination. We apply APB Opinion No. 25 and related
interpretations in accounting for our stock options. Accordingly, no
compensation cost has been recognized for these stock options and therefore,
there was no effect on the financial statements resulting from these
cancellations. See Note 14. We did not grant any options or other stock-based
awards to any of the individuals for which the options were canceled, during
the
six months prior to and after the option cancellation.
During
2005, 55,000 vested stock options related to terminated employees expired
unexercised. We did not grant any options or other stock-based awards to
any of
the individuals for which the options expired, during the six months prior
to
and after the option expirations.
COMMON
STOCK WARRANTS
In
April
2004, we issued a warrant for 150,000 shares of common stock with an exercise
price of $0.022 per share to our corporate counsel as payment for $3,300
of
accrued legal services.
In
May
2004, we issued a warrant for 600,000 shares of common stock with an exercise
price of $0.15 per share to a consultant for corporate business planning,
financing, and merger and acquisition assistance. This warrant was valued
at
$59,915 using the Black-Scholes method and recorded as an expense.
In
July
2004, we cancelled a warrant for 510,000 shares of common stock with an
exercise
price of $0.23 per share with an institutional private equity investor
in
connection with a settlement in which 295,692 non-restricted shares of
common
stock were issued. See Note 11.
In
November 2004, we issued two warrants to purchase 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 entitles the holder to purchase up to 10,937,500
shares
of our common stock at a price of $0.18 per share, and the second warrant
entitles the holder to purchase up to 10,937,500 additional shares of our
common
stock at a price of $0.60 per share. Each warrant is subject to standard
adjustment provisions.
SERIES
A CONVERTIBLE PREFERRED STOCK
The
rights, preferences and privileges of our Series A Preferred Stock, none
of
which currently remain outstanding, were as follows:
Dividends
Holders
of Series A Preferred Stock were entitled to receive common stock dividends
of
$0.50 per share per annum, in preference to any payment of cash dividends
declared or paid on shares of common stock. Dividends on Series A Preferred
Stock were fully cumulative and were payable as determined by our board of
directors. As of December 31, 2005 and 2004, no dividends had been declared.
Series A Preferred Stock dividends, however, were paid to a
stockholder as a conversion incentive during 2004.
Liquidation
Holders
of Series A Preferred Stock were entitled to liquidation preferences over
common
stockholders to the extent of $10.00 per Series A Preferred share, plus all
declared but unpaid dividends. If funds were sufficient to make a complete
distribution to the preferred stockholders, such stockholders would have
shared
in the distribution of our assets on a pro rata basis in proportion to the
aggregate preferential amounts owed each stockholder. After payment would
have
been made to the preferred stockholders, any remaining assets and funds would
have been distributed equally among the holders of our common stock based
upon
the number of shares of common stock held by each.
Conversion
Each
share of Series A Preferred Stock would have been convertible into shares
of
common stock at the rate of 10 shares of common stock for each share of Series
A
Preferred Stock, subject to adjustment.
During
the year ended December 31, 2004, all shares of Series A Preferred Stock
were
converted into shares of common stock.
Redemption
At
the
election of our board of directors, we were able to redeem all or part of
the
shares of the Series A Preferred Stock at any time (pro rata based upon the
total number of shares of the Preferred Stock held by each holder) by paying
in
cash a sum per share equal to $10.00 plus accrued and unpaid dividends per
annum.
Voting
Rights
The
holder of each share of Series A Preferred Stock was not entitled to vote
except
as required by law.
SERIES
B CONVERTIBLE PREFERRED STOCK
The
rights, preferences and privileges of our Series B Preferred Stock, none
of
which currently remain outstanding, were as follows:
Dividends
The
holders of Series B Preferred Stock were entitled to receive cumulative cash
dividends at the rate of $1.60 per annum per share. As of December 31, 2005
and
2004, no dividends had been declared.
Liquidation
The
Series B Preferred stockholders were entitled to a liquidation preference
in an
amount equal to the dividends accrued and unpaid, whether or not declared,
without interest, and a sum equal to $20.00 per share before any payment
was to
be made or any assets distributed to the holders of our common stock or any
other class or series of our capital stock ranking junior as to liquidation
rights to the Series B Preferred Stock.
Conversion
Each
share of Series B Preferred Stock had been convertible into shares of common
stock at the rate of 1 share of common stock for each share of Series B
Preferred Stock, subject to adjustment.
During
the year ended December 31, 2004, all shares of Series B Preferred Stock
were
converted into shares of common stock.
Redemption
Subject
to restrictions, shares of the Series B Preferred Stock were redeemable at
our
option at any time at the redemption price of $20.00 per share plus, in each
case, an amount equal to the dividends accrued and unpaid thereon to the
redemption date. We did not have the right to redeem any shares of Series
B
Preferred Stock unless the current market value of our common stock immediately
prior to the redemption date was not less than $18.00 per share.
Voting
Rights
The
holder of each share of Series B Preferred Stock was not entitled to vote,
except as required by law and as a class. Voting as a class, the holders
were
entitled to elect one director to fill one directorship.
NOTE
11 - OTHER INCOME AND ADJUSTMENTS
During
the year ended December 31, 2004, we settled with various vendors and content
providers for lump-sum payments ranging from approximately 17% to approximately
60% of balances owed. The difference between the balance owed and the settlement
amount, totaling $1,002,090, has been treated as gain from extinguishment
of
debt and included in other income.
During
the year ended December 31, 2004, we settled an agreement with an institutional
private equity investor, for early termination of the agreement. We issued
295,692 shares of common stock valued at $0.10 per share and paid a cash
lump
sum of $125,000. A total of $154,569 has been treated as expenses incurred
in a
withdrawn public offering. See Note 10. This has been included in other
adjustments.
As
part
of the July 19, 2004 financing transaction, see Note 10, we also entered
into a
Registration Rights Agreement pursuant to which we became committed to
registering all of the shares issued as part of such transaction, including
those issuable under each of two warrants. On November 22, 2004 we filed a
registration statement on Form SB-2 covering the shares issued, as well as
the
shares underlying the warrants. In accordance with the terms of the Registration
Rights Agreement, as amended, we had another 150 days, until April 22, 2005,
to
cause such registration statement to be declared effective by the SEC, with
any
delays in meeting this obligation resulting in our being liable to the New
York
based private investment firm in an amount equal to $630,000 per year, pro-rated
for the duration of any such delay, which amounts to $1,726 per day.
As
of
December 31, 2005, we have accrued a total of $436,686 (253 days at $1,726
per
day) in penalties under the terms of the Registration Rights Agreement. This
has
been included in other adjustments.
NOTE
12 - REBATE RESERVE ADJUSTMENT
During
the year ended December 31, 2004, we recorded an adjustment to our rebates
reserve in the amount of $142,039. Our reserve balance properly reflects
open
rebate programs and the estimated balance of each that management expects
to
pay. These adjustments are the result of, among other things, an internal
review
of the amount owed and of our ability to reach intended rebate recipients,
as
properly reflected by historical response rates. These adjustments to our
rebate
reserves have been recognized as an adjustment to revenue in accordance with
EITF Issue No. 01-09.
NOTE
13 - EARNINGS PER COMMON SHARE
Earnings
per common share are computed by dividing net income by the weighted average
number of shares of common stock and common stock equivalents outstanding
during
the year. Common stock equivalents are the net additional number of shares
that
would be issuable upon the exercise of the outstanding common stock options
(see
Note 14), assuming that we reinvested the proceeds to purchase additional
shares
at market value.
F-21
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
|
2005
|
2004
|
|||||
|
Net
Income (loss)
|
$ |
(1,581,266
|
)
|
$
|
964,053
|
||
|
Common
stock dividend on Preferred Series A
|
---
|
(4,125
|
)
|
||||
|
Net
income (loss) available to common shareholders
|
$ |
(1,581,266
|
)
|
$
|
959,928
|
||
|
Basic
weighted average shares outstanding
|
48,619,855
|
34,520,754
|
|||||
|
Dilutive
effect of:
|
|||||||
|
Stock
options
|
---
|
429,824
|
|||||
|
Warrants
|
---
|
245,262
|
|||||
|
Diluted
weighted average shares outstanding
|
48,619,855
|
35,195,840
|
|||||
A
total
of 25,530,000 and 24,315,000 dilutive potential securities for the years
ended
December
31, 2005
and
2004,
respectively, have been excluded from the computation of diluted earnings
per
common share, as their inclusion would be anti-dilutive.
NOTE
14 - 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 2005 or 2004.
In
addition, we issue various forms of stock-based awards including nonqualified
stock options and restricted stock awards to directors, officers, other key
employees and third-party consultants, outside of the plan. Awards granted
outside of the plan have been granted pursuant to equity compensation
arrangements that have not been approved by our stockholders. These awards
are granted at an exercise price as determined by our board at the time of
grant and are not less than the par value of such shares of common stock.
None
of the options granted outside of the plan have been granted with an exercise
price less than fair value of the common stock on the date of grant. Stock
options granted outside of the plan vest as determined by our board at the
time of grant and have a term of up to ten years. Non-employee directors,
though
treated as employees for financial reporting purposes under FASB Interpretation
No. 44, are excluded from the income tax advantages afforded employees by
the
Internal Revenue Code. We did not grant any options outside of the plan during
2005 or 2004.
We
apply
APB Opinion No. 25 and related interpretations in accounting for our stock
options. Accordingly, no compensation cost has been recognized for outstanding
stock options. Had compensation cost for our outstanding stock options been
determined based on the fair value at the grant date (calculated using the
Black-Scholes Option-Pricing Model) for those options consistent with SFAS
No.
123, our net income (loss) and primary and diluted earnings per share would
not
have differed from those as reported.
Activity
under our stock option plans is summarized as follows:
|
|
Outstanding
Options
|
||||||
|
|
Number
of Shares
|
|
Weighted-Average
Exercise Price
|
||||
|
Balance
at December 31, 2003
|
3,290,283
|
$
|
0.29
|
||||
|
Granted
|
---
|
---
|
|||||
|
Exercised
|
---
|
---
|
|||||
|
Expired
or forfeited
|
(140,083
|
)
|
$
|
0.12
|
|||
|
Canceled
|
(715,200
|
)
|
$
|
1.02
|
|||
|
Balance
at December 31, 2004
|
2,435,000
|
$
|
0.09
|
||||
|
Granted
|
---
|
---
|
|||||
|
Exercised
|
---
|
---
|
|||||
|
Expired
or forfeited
|
(55,000
|
)
|
$
|
0.11
|
|||
|
Canceled
|
---
|
---
|
|||||
|
Balance
at December 31, 2005
|
2,380,000
|
$
|
0.08
|
||||
No
stock
options, or any other form of stock-based awards, were granted to the
individuals for whom the options were cancelled, during the six months prior
to
and after the cancellation.
The
following table summarizes information about stock options outstanding at
December 31, 2005:
|
Outstanding
Options
|
Exercisable
Options
|
|||||||||||||||
|
Range
of Exercise Prices
|
Outstanding
at December 31, 2005
|
Weighted-Average
Remaining Contractual Life (Years)
|
|
Weighted-Average
Exercise Price
|
Exercisable
at December 31, 2005
|
Weighted-Average
Exercise Price
|
||||||||||
|
$0.00
to $0.11
|
2,380,000
|
6.15
|
$
|
0.0848
|
2,380,000
|
$
|
0.0848
|
|||||||||
A
summary
of warrants to purchase shares of our common stock as of December 31, 2005
and
2004, and changes during the years then ended is as follows:
|
|
Outstanding
Warrants
|
||||||
|
|
Number
of Shares
|
Weighted-Average
Exercise Price
|
|||||
|
Balance
at December 31, 2003
|
525,000
|
$
|
0.09
|
||||
|
Granted
|
22,625,000
|
$
|
0.38
|
||||
|
Exercised
|
---
|
---
|
|||||
|
Expired
or forfeited
|
---
|
---
|
|||||
|
Canceled
|
---
|
---
|
|||||
|
Balance
at December 31, 2004
|
23,150,000
|
$
|
0.37
|
||||
|
Granted
|
---
|
---
|
|||||
|
Exercised
|
---
|
---
|
|||||
|
Expired
or forfeited
|
---
|
---
|
|||||
|
Canceled
|
---
|
---
|
|||||
|
Balance
at December 31, 2005
|
23,150,000
|
$
|
0.37
|
||||
No
other
equity instruments were issued during 2005 to acquire goods and services
(see
Note 10).
NOTE
15 - RENTAL AND LEASE INFORMATION
OPERATING
LEASES
We
lease
office space/warehouse facilities in Omaha, Nebraska under an operating lease
with a third-party with terms extending through 2007. We are responsible
for all
taxes, insurance and utility expenses associated with this lease. There is
no
lease renewal option contained in the lease.
We
lease
office space in Naperville, Illinois under an operating lease with a third-party
with terms extending through March 2006. We are responsible for all insurance
expenses associated with this lease. See Note 21.
Rental
expense for the years ended December 31, 2005 and 2004 amounted to $82,172
and
$75,555, respectively. Rental expenses are included in capitalized software
development costs. See Note 1.
At
December 31, 2005, the future minimum rental payments required under these
leases are as follows:
|
2006
|
$
|
81,331
|
||
|
2007
|
31,248
|
|||
|
Total
future minimum rental payments
|
$
|
112,579
|
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 2005 and 2004.
The
following table summarizes property held under capital leases at December
31,
2005:
|
Office
equipment
|
$
|
51,788
|
||
|
Less:
Accumulated depreciation
|
12,084
|
|||
|
Net
property and equipment under capital lease
|
$
|
39,704
|
Future
minimum lease payments under capital leases as of December 31, 2005 for each
of
the next five years and in the aggregate are:
|
2006
|
$
|
13,726
|
||
|
2007
|
13,726
|
|||
|
2008
|
13,726
|
|||
|
2009
|
12,582
|
|||
|
2010
|
---
|
|||
|
Total
minimum lease payments
|
53,760
|
|||
|
Less:
Amount representing interest
|
10,788
|
|||
|
Total
obligations under capital lease
|
42,972
|
|||
|
Less:
Current installments of obligations under capital lease
|
9,186
|
|||
|
Long-term
obligation under capital lease
|
$
|
33,786
|
NOTE
16 - SUPPLEMENTAL CASH FLOW INFORMATION
We
incurred the following non-cash investing and financing activities during
the
years ended December 31, 2005 and 2004, respectively:
|
2005
|
2004
|
||||||
|
Property
and equipment acquired under capital lease
|
$
|
---
|
$
|
51,788
|
|||
|
Conversion
of notes payable into common stock. See Note 6.
|
$
|
---
|
$
|
263,334
|
|||
|
Common
stock dividend on Preferred Series A
|
$
|
---
|
$
|
4,125
|
|||
|
Preferred
stock converted into common stock
|
$
|
---
|
$
|
470
|
|||
|
Common
stock and warrants issued for services
|
$
|
---
|
$
|
178,929
|
|||
NOTE
17 - COMMITMENTS AND CONTINGENCIES
We
are
subject to legal proceedings and claims that arise in the ordinary course
of our
business. In the opinion of management, the amount of ultimate liability
with
respect to these actions will not materially affect our financial statements
taken as a whole.
We
entered into a license agreement in June 1999 with Parsons Technology, Inc.,
a
copy of which has since been assigned to Riverdeep, Inc., the latest
licensor-assignee in a succession of assignments that have occurred since
the
original agreement. The license, as we acquired it in 1999, provided us with
the
right, for a term of ten years, to publish, use, distribute, sublicense and
sell, exclusively worldwide in non-secular channels and non-exclusively in
secular channels, a collection of top-selling Christian-related software
titles
and content owned by Parsons Technology, including certain intellectual
properties owned by The Zondervan Corporation.
In
October 2001, due to a shortage in working capital, we fell in arrears with
certain royalty payments due under the Parsons Agreements. Thereafter we
became
party with, among others, Zondervan, Parsons and Riverdeep, to a court
supervised mediation arising out of a content royalty claim. A multi-party
settlement was reached on October 20, 2003, providing for our payment to
Zondervan of $500,000 plus 5% simple interest in installments over a period
of
nine months from November 2003 to July 2004, as well as for the destruction
of
all inventory containing Zondervan-owned content. We have fully complied
with
the terms of the agreement and, upon satisfaction, received a covenant in
perpetuity with respect to our rights under the Parsons Agreement, effectively
extending the agreement indefinitely.
We
were
in arrears with the Internal Revenue Service for back payroll taxes and had
been
paying the payroll taxes in monthly installments previously approved by the
Internal Revenue Service. In July of 2004, we paid all back payroll taxes
that
were due to the Internal Revenue Service and remain current with all payroll
tax
deposits and filings.
Our
employment agreements with our management team each contain a provision for
an
annual bonus equal to 1% of our net income (3% total). We accrue this bonus
on a
quarterly basis. Our management team consists of our Chief Executive Officer
(with a base annual salary of $150,000), our Chief Financial Officer (with
a
base annual salary of $110,000), and our Chief Technical Officer (with a
base
annual salary of $150,000). In addition to the bonus provisions and annual
base
salary, each employment agreement provides for payment of all accrued base
salaries ($17,191 included in Accrued payroll at December 31, 2005), bonuses
($44,384 from fiscal 2004 and $-0- from fiscal 2005 included in Other current
liabilities at December 31, 2005), and any vested deferred compensation ($36,631
included in Other current liabilities at December 31, 2005) for termination
by
reason of disability. The agreements also provide for severance compensation
equal to the then base salary until the later of (i) the expiration of the
term
of the agreement as set forth therein or (ii) one year, when the termination
is
other than for cause (including termination by reason of disability). There
is
no severance compensation in the event of voluntary termination or termination
for cause.
In
2004,
we reduced our reserve for rebates payable based, in part, on our ability
to
meet the financial obligation of claims carried forward from our last rebate
program in 2001. As such, we may have a legal obligation to pay rebates in
excess of the liability recorded.
On
July
19, 2004, we entered into a certain Stock Purchase Agreement pursuant to
which
we agreed to issue and sell 21,875,000 restricted shares of our common stock
to
a New York based institutional investor, at a price of $0.08 per share. Under
the terms of transaction, the investor received two of our common stock purchase
warrants. The first warrant entitles the holder, for a period of up to five
years, to purchase up to 10,937,500 common shares at a price of $0.18 per
share,
subject to standard adjustment provisions. The second warrant entitles the
holder, also for a period of up to five years, to purchase up to 10,937,500
additional common shares at a price of $0.60 per share, subject to standard
adjustment provisions.
As
part
of the financing transaction, we also entered into a certain Registration
Rights
Agreement with the investor pursuant to which we became committed to registering
all of the shares issued as part of such transaction, including those issuable
under the warrants. On November 22, 2004, we filed a registration statement
on
Form SB-2 covering the shares issued to the investor, as well as the shares
underlying the warrants issued to the investor. Under the terms of the
Registration Rights Agreement, as amended, we had until April 22, 2005 to
cause
such registration statement to be declared effective by the SEC. In accordance
with the terms of the Registration Rights Agreement, any delays in meeting
this
obligation subjected us to liability to the investor in an amount equal to
$1,726 per day for the duration of any such delay. As of December 31, 2005,
we
have accrued a total of $436,686 (253 days at $1,726 per day) in penalties
under
the terms of the Registration Rights Agreement. See Note 21.
NOTE
18 - RELATED PARTY TRANSACTIONS
Our
executive officers and employees, from time to time, make purchases of materials
and various expense items via their personal credit cards in lieu of a corporate
check for COD orders and/or prior to establishment of a line of credit with
a
vendor. We do not provide our employees or executive officers with corporate
credit cards and reimburse these purchases promptly. We had no other
transactions with related parties during the years ended December 31, 2005
and
2004.
NOTE
19 - 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
20 - 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,
2005, we had a net loss of $1,581,266. In addition, we had negative working
capital of $3,025,697 and $1,800,446, and had an accumulated deficit of
$7,752,097 and $6,170,831 as of December 31, 2005 and 2004, respectively.
Although these factors raise substantial doubt about our ability to continue
as
a going concern, we have taken several actions to mitigate the risk that
we will
be unable to continue as a going concern through December 31, 2006. These
actions include expanding our in-house telemarketing efforts to increase
our
direct-to-consumer revenue while at the same time reducing commissions
paid to
third-party telemarketing firms. In addition, we have focused on reducing
both
our sales and marketing and general and administrative expenses to those
providing the most return on investment. Finally, as indicated in Note
21, we
have stopped the accrual of penalties associated with our registration
statement
and have negotiated extended payment terms for the penalties
accrued.
NOTE
21 - SUBSEQUENT EVENTS
On
February 1, 2006, the registration statement filed on November 22, 2004 was
declared effective by the SEC. We accrued penalties at $1,726 per day from
January 1, 2006 through January 31, 2006 ($53,506).
On
March
10, 2006, we secured a twelve-month extension to our Naperville, Illinois
office
lease. The extension expires March 31, 2007 and continues at a base rent
of
$1,320 per month.
On
March
31, 2006, we committed to issue a total of 438,462 restricted shares of common
stock at the closing market trading price as of March 30, 2006 ($0.13) to
our
outside directors in lieu of cash as payment of amounts accrued for their
services from the period from September 1, 2004 through March 31,
2006.
On
March
31, 2006, we committed to issue a three year warrant for up to 300,000
restricted shares of common stock with an exercise price at the closing market
trading price as of March 30, 2006 ($.13) to our legal counsel in lieu of
cash
as payment for accrued legal fees.
On
April
3, 2006, we entered into a consulting agreement with a company for investor
relations services. The agreement carries a twelve-month term with either
party
having the option of terminating the agreement at the six-month anniversary.
The
agreement provides for a monthly cash payment of $7,500 and 500,000 restricted
shares of common stock to be delivered during the first thirty days of the
agreement term. In the event that the consultant does not complete the full
twelve-month term, a pro-rata portion of 360,000 restricted shares of common
stock will be returned to us.
On
April
7, 2006, we signed a two-year, $336,000, 8% promissory note with the New
York
based institutional investor for payment of the unpaid registration rights
penalties. The note agreement calls for monthly installments of $10,000,
beginning May 1, 2006, for the first twelve months and $20,000 per month
thereafter. Any overdue principal bears interest at 15% and is due on
demand.
There
were no previously unreported events under this Item 8 during the fiscal
year
ended December 31, 2005.
(a)
Formation of Disclosure Controls and Procedures Officer
Committee
Our
Disclosure Controls and Procedures Officer Committee (the “Disclosure Policy
Committee”) was formed in September 2002 and reports directly to our Chief
Executive Officer and Chief Financial Officer. The Disclosure Policy Committee
has implemented disclosure controls and procedures that meet the standards
established by Rule 13a-15 of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”).
Disclosure
Controls and Procedures
The
Disclosure Policy Committee is primarily responsible for establishing and
maintaining disclosure controls and procedures designed to ensure that the
information required to be disclosed in our reports filed or submitted under
the
Exchange Act, is recorded, processed, summarized and reported in a timely
manner
as specified in the rules and forms set forth by the SEC and that the
information required to be disclosed in our reports is accumulated and
communicated to our management, including our principal executive and principal
financial officers, or other persons performing similar functions, as
appropriate to allow timely decisions regarding required
disclosure.
(b)
Evaluation of Disclosure Controls and Procedures and Annual Report on Internal
Control over Financial Reporting
The
Disclosure Policy Committee meets quarterly within one week of the last day
of
the period in which a given report is due. Members provide information that
is
documented in the Quarterly Control and Procedures Report for the period
in
which a quarterly 10-QSB or annual 10-KSB report is due. This report contains
attestations and documentation in regard to the following:
|
▪
|
The
fact that disclosure controls and procedures have been reviewed
as of the
end of the period covered by a given report;
|
|
|
▪
|
Any
concerns regarding weaknesses in disclosure controls and
procedures;
|
|
|
▪
|
Any
concerns relating to events that may require
disclosure;
|
|
|
▪
|
Any
concerns relating to internal fraud/defalcation;
|
|
|
▪
|
Potential
material losses;
|
|
|
▪
|
New
off-balance sheet arrangements; and
|
|
|
▪
|
Material
amounts not reflected on the general
ledger.
|
The
Quarterly Control and Procedures Report is completed, signed and presented
to
the CEO and CFO prior to completion of the first draft of each 10-QSB and
10-KSB. Because material issues may occur between regularly scheduled quarterly
meetings, this report is to be generated by the disclosure policy appropriate
officers at anytime warranted. The CEO and CFO will consult with our Disclosure
Policy Committee to determine any action that is necessary.
Our
CEO
and CFO have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Exchange Act) as of the end of the fiscal quarter covered by this annual
report
on Form 10-KSB. Based on this evaluation, our CEO and CFO have concluded
that
our disclosure controls and procedures are effective and designed to ensure
that
the information required to be disclosed in our reports filed or submitted
under
the Exchange Act, is recorded, processed, summarized and reported within
the
requisite time periods.
During
the course of their evaluation our CEO and CFO did not discover any fraud
involving management or any other personnel who play a significant role in
our
disclosure controls and procedures. Furthermore, because there were no
significant deficiencies and/or material weaknesses discovered no remedial
measures were necessary or taken during the period covered by this report
to
correct any such deficiencies.
(c)
Changes in Internal Control over Financial Reporting
No
changes in our disclosure controls and procedures, internal control over
financial reporting or other factors have occurred during the fiscal quarter
covered by this report that would materially affect or be reasonably likely
to
materially affect our disclosure controls and procedures or internal control
over financial reporting.
There
were no reportable events under this Item 8B during the fiscal quarter ended
December 31, 2005.
Our
directors and executive officers and their ages as of March 31, 2006 were
as
follows:
|
Name
|
Age
|
Position
|
||
|
Steven
Malone
|
39
|
Director,
Chairman of the Board and President
|
||
|
Henry
M. Washington, Ph.D.
|
62
|
Director
|
||
|
John
A. Kuehne, CA
|
48
|
Director
|
||
|
Kirk
R. Rowland, CPA
|
46
|
Director
and Chief Financial Officer
|
||
|
William
Terrill
|
49
|
Chief
Technology Officer
|
||
|
Brittian
Edwards
|
43
|
Vice
President, CBA Sales and Licensing
|
||
|
Chad
Grosse-Rhode
|
36
|
Vice
President, Sales and Marketing
|
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 eighteen
years
of experience in the computer industry, with the last twelve 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.
Henry
M. Washington, Ph.D. - Director
Dr.
Washington has served as one of our directors since December 2000. He is
also
presently President of Wren Enterprises Corporation, a position that he
has held
since January 2005. Wren Enterprises is a private manufacturing solutions
company working with automotive, non-automotive, agricultural markets,
utilities
and government agencies providing plastic, metal and fabrication. Prior
to his
position with Wren, Dr. Washington served as the interim President for
Jamestown
Plastic Molders Corporation from January 2001 to April 2004. During the
year of
2000, Dr. Washington served as Managing Director of Rilas & Rogers, LLC, an
international consulting firm located in Detroit. Dr. Washington has held
short-term assignments with the U.S. Department of Commerce, where he was
Executive Director from 1995 to 1998 of the Department’s Minority Business
Opportunity Committee. He currently serves on several national organizations
including the American Association of Christian Counselors, the Black Caucus
International Think Tank, and the International Trade and Development
Organization dealing with global security issues. Dr. Washington holds
a
Bachelor of Management and Metaphysics degree, a Masters of Metaphysics
and
Theology degree, and a Doctorate degree in Metaphysical Counseling, in
each case
from the University of Metaphysics, and in each case which are accredited
by the
International Metaphysical Ministry for use by its Ministry and for membership
in the American Metaphysical Doctors Association.
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
corporate finance and investor communications advisory 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
private Canadian forest products company, where he eventually became Chief
Financial Officer. As the CFO of Doman Industries, Mr. Kuehne gained practical
experience in corporate finance and mergers and acquisitions, completing
a $125
million senior note issue through Bear Stearns and the $140 million acquisition
of Pacific Forest Products. Mr. Kuehne holds a Bachelor of Commerce degree
from
the University of Alberta (1984) and a Masters of Management from the
J.L.Kellogg Graduate School of Management at Northwestern University (1990).
From June 2000 to May 2004 he served as a director of Prospector Consolidated
Resources Inc., a Canadian public company. From January 2003 to November
2004 he
served as a director of Beau Pre Explorations Ltd., also a Canadian public
company. Mr. Kuehne qualified as a Canadian Chartered Accountant in 1983
and as
an American Certified Public Accountant in 1985.
Kirk
R. Rowland, CPA - Chief Financial Officer
Mr.
Rowland has served as our Chief Financial Officer and as one of our directors
since April 2002. He served as our Vice President of Finance from March
2001 to
April 2002, and as our Director of Finance from December 1999 through March
2001. Mr. Rowland has over seventeen years of experience in public accounting
working in a multitude of industries, including insurance, manufacturing,
and
agriculture. Most recently, and from 1992 to 1999 he was a partner in Manning
& Associates, P.C. a local Nebraska accounting firm. From 1984 to 1988, Mr.
Rowland was a Senior Staff Accountant with KMG Main Hurdman (now KPMG),
an
international accounting firm, and from 1988 to 1992 he was an Audit Supervisor
with Sommer, Magnuson, & Dawson, P.C.
William
Terrill - Chief Technology Officer
Mr.
Terrill rejoined us in July 2002 as our Chief Technology Officer after
having
been involved with us from July 1999 to July 2000. He has over 26 years
of
experience managing software divisions and technology efforts for us, The
Learning Company, Mindscape, and The Software Toolworks. As Vice President
of
the Parsons Church Division for The Learning Company, from January 1999
to July
1999, Mr. Terrill managed a 30% annual revenue increase and shared
responsibilities in the transaction that resulted in our acquiring that
division. Mr. Terrill was the Senior Vice President Reference Products
Division
for Mindscape from 1989 to 1995 managing revenues exceeding $14 million.
He has
extensive experience managing international software development teams
in China,
Singapore, United Kingdom, India, and Russia. Mr. Terrill has experience
with
joint ventures, spin-offs, mergers, IPOs, and corporate acquisitions. In
addition, Mr. Terrill has lead software product marketing teams and
content/media acquisition efforts for over ten years. As a consultant from
1996
to 1998, Mr. Terrill has extensive experience leading large-scale product
development and information technology efforts for Navistar, Nalco Chemical,
American Express, Motorola, and IBM Global Services. From July 2000 to
July
2002, Mr. Terrill served as the IT Integration Program Manager for Blue
Diamond
Joint Venture between Ford Motor Company and International Truck and Engine
Corporation.
Brittian
Edwards - Vice President of CBA Sales and Licensing
Mr.
Edwards has served as our Vice President of CBA Sales and Licensing since
July
2004. Mr. Edwards served as our Vice President of Sales from April 2002
to July
2004 and director of Christian Booksellers Association Sales from July
1999 to
April 2002. Mr. Edwards has been in the Christian Booksellers Association
marketplace for more than 18 years. He began his career in 1988 with LifeWay
Christian Resources as LifeWay Christian Stores retail manager. He then
worked
successfully for Genesis Marketing Group from 1994 to 1995 as a Sales Manager
for Texas, Oklahoma, Louisiana and New Mexico. From there he served as
a Product
Manager for the largest Christian distributor, Spring Arbor, which is now
owned
by Ingram Book Group. He left Spring Arbor as National Sales Manager in
1988 to
become the National Sales Manager for Parsons Technology, then owned by
Broderbund.
Chad
Grosse-Rhode - Vice President of Sales and Marketing
Mr.
Grosse-Rhode joined us in August 2004 as our Vice President of Sales and
Marketing. Mr. Grosse-Rhode was most recently with Summitsoft Corporation,
(www.summisoftcorp.com), from July 2003 to July 2004, where he served as
the
Vice President of Sales and Marketing. Summitsoft produces a full line
of small
business software products, which are available in both PC and
Macintosh®
platforms and are sold in most major secular retail outlets. Prior to
Summitsoft, Mr. Grosse-Rhode was General Manager of NewLeadsUSA from April
1995
to June 2003, which is a subsidiary of InfoUSA. In this role, Mr. Grosse-Rhode
managed the compilation, production, marketing and sales of multiple direct
marketing databases. Mr. Grosse-Rhode has over 11 years of senior management
experience in both sales and marketing.
Board
of Directors Committees
At
March
31, 2006, we had two standing committees each comprised of members of our
board
of directors; our audit committee and compensation committee.
Our
audit
committee was first formed in December 2000. At March 31, 2006, the members
of
our audit committee included John A. Kuehne and Dr. Henry M. Washington,
one
member, John A. Kuehne, a “financial expert” (as defined in Regulation
228.401(e)(1)(i)(A) of Regulation S-B). Mr. Kuehne and Dr. Washington both
qualified as “independent” directors under Item 7(d)(3)(iv) of Schedule 14A of
the Securities Exchange Act of 1934, as amended.
Our
compensation committee was first formed in July 2003. At March 31, 2006,
the
members of our compensation committee included Dr. Henry M. Washington
and John
A. Kuehne.
On
March
31, 2006, Dr. Washington resigned as a member of our board of directors
as a
result of other professional obligations, leaving us with only one independent
director and causing the entire board to temporarily function as the audit
and
compensation committee. As of the date of the filing of this annual report
on
Form 10-KSB for the fiscal year ended December 31, 2005, and despite our
efforts
to do so, we have not yet identified a suitable replacement.
Disclosure
Policy Committee
Since
September 2002, we have had a Disclosure Controls and Procedure Officer
Committee (the “Disclosure Policy Committee). The current members of the
Disclosure Policy Committee include Steven Malone, John A. Kuehne, and
Kirk R.
Rowland. The Disclosure Policy Committee has implemented disclosure controls
and
procedures that meet the standards established by Rule 13a-15 of the Securities
Exchange Act of 1934, as amended.
Code
of Ethics
We
have
adopted the Code of Ethics attached as Exhibit 14.1 to this Form 10-KSB
for our
senior financial officers and the principal executive officer.
Compliance
with Section 16(a)
Section
16(a) of the Exchange Act requires our directors and executive officers,
and
persons who own more than ten percent of a registered class of our equity
securities, to file with the SEC initial reports of ownership and reports
of
changes in ownership of our common stock and other equity securities of
ours.
Officers, directors and greater than ten percent stockholders are required
by
the SEC’s regulations to furnish us with copies of all Section 16(a) forms they
filed.
The
following table sets forth the compliance reporting under Section 16(a)
for the
fiscal year ended December 31, 2005.
|
|
Number
of Late
Reports
|
Number
of
Transactions
Not
Timely
Reported
|
Failure
to
File
|
|||||||
|
Steven
Malone
|
---
|
|
|
1
|
|
|
---
|
|||
|
Barron
Partners, LP
|
---
|
|
|
1
|
|
|
---
|
SUMMARY
COMPENSATION TABLE
The
following table sets forth the total compensation awarded to, earned by
or paid,
for each of the last three fiscal years to our Chief Executive Officer
and each
of our executive officers earning a total annual salary and bonus of $100,000
or
more during any such fiscal year. Steven Malone has served as our President
and
Chief Executive Officer since March 2001. William Terrill has served as
our
Chief Technology Officer since July 2002. Kirk R. Rowland has served as
our
Chief Financial Officer and director since April 2002. No other individuals
employed by us earned a total annual salary and bonus in excess of $100,000
during the fiscal year ended December 31, 2005.
|
|
Long
Term Compensation Awards
|
||||||||||||||||||||||||
|
|
Annual
Compensation
|
Awards
|
Payouts
|
||||||||||||||||||||||
|
Name
and Principal Position
|
Year
|
Salary
|
Bonus
|
Other
Annual Compensation
|
Restricted
Stock Awards
|
Securities
Underlying Options/SARs (#)
|
|
LTIP
Payouts
|
All
Other Compensation
|
||||||||||||||||
|
Steven
Malone
|
2005
|
$
|
150,000
|
$
|
---
|
$
|
---
|
$
|
---
|
---
|
$
|
---
|
$
|
---
|
|||||||||||
|
President
and Chief Executive Officer
|
2004
|
$
|
150,000
|
$
|
22,192
|
$
|
---
|
$
|
---
|
---
|
$
|
---
|
$
|
---
|
|||||||||||
|
2003
|
$
|
150,000
|
$
|
18,079
|
$
|
---
|
$
|
---
|
---
|
$
|
---
|
$
|
---
|
||||||||||||
|
William
Terrill
|
2005
|
$
|
150,000
|
$
|
---
|
$
|
---
|
$
|
---
|
---
|
$
|
---
|
$
|
---
|
|||||||||||
|
Chief
Technology Officer
|
2004
|
$
|
150,000
|
$
|
22,192
|
$
|
---
|
$
|
---
|
---
|
$
|
---
|
$
|
---
|
|||||||||||
|
2003
|
$
|
150,000
|
$
|
18,079
|
$
|
---
|
$
|
14,536
|
500,000
|
$
|
---
|
$
|
---
|
||||||||||||
|
Kirk
R. Rowland
|
2005
|
$
|
110,000
|
$
|
---
|
$
|
---
|
$
|
---
|
---
|
$
|
---
|
$
|
---
|
|||||||||||
|
Chief
Financial Officer
|
2004
|
$
|
108,846
|
$
|
22,192
|
$
|
---
|
$
|
---
|
---
|
$
|
---
|
$
|
---
|
|||||||||||
|
2003
|
$
|
82,306
|
$
|
18,079
|
$
|
---
|
$
|
---
|
---
|
$
|
---
|
$
|
---
|
||||||||||||
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 ($0.001).
We
did
not grant stock options/SARs, and no executive exercised any stock options/SARs
previously granted, during the fiscal year ended December 31, 2005.
Option/SAR
Grants in Last Fiscal Year
|
Name
|
Number
of Securities
Underlying
Options/SARs
Granted
(#)
|
|
Percent
of Total
Options/SARs
Granted to
Employees
in Fiscal Year
|
Exercise
or
Base
Price
($/Sh)
|
|
Expiration
Date
|
|||||||
|
Steven
Malone
|
---
|
---
|
---
|
N/A
|
|||||||||
|
William
Terrill
|
---
|
---
|
---
|
N/A
|
|||||||||
|
Kirk
R. Rowland
|
---
|
---
|
---
|
N/A
|
The
following table sets forth the number of stock options/SARs held by the
executive officers named in the Summary Compensation Table for the fiscal
year
ended December 31, 2005 and the value of unexercised “in-the-money” stock
options/SARs held which represents the positive difference between the
exercise
price and the market price at fiscal year end. No such executive exercised
any
stock options/SARs during the fiscal year 2005.
Aggregated
Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR
Values
|
Name
|
Shares
Acquired
on
Exercise
(#)
|
|
|
Value
Realized
($)
|
|
|
Number
of Unexercised
Options/SARs
at
Fiscal
Year End (#)
|
|
|
Value
of Unexercised
“In-the-Money”
Options/
SARs
at Fiscal Year End ($)
|
|
||
|
Steven
Malone
|
---
|
$
|
---
|
250,000
|
$
|
---
|
|||||||
|
William
Terrill
|
---
|
$
|
---
|
1,000,000
|
$
|
50,000
|
|||||||
|
Kirk
R. Rowland
|
---
|
$
|
---
|
150,000
|
$
|
---
|
DIRECTOR
COMPENSATION
Pursuant
to authority granted under Article III, Section 13 of our bylaws, non-officer
directors are entitled to such compensation as our board of directors shall
from
time to time determine. On July 25, 2003, we resolved to issue each of
our
outside directors 300,000 shares of common stock valued at $0.045 per share
in
lieu of cash and meeting fees, for the period April 1, 2002 through June
30,
2003. On June 4, 2004, we resolved to issue our outside directors a total
of
324,074 shares of common stock valued at $0.081 per share in lieu of cash
and
meeting fees, for the period July 1, 2003 through August 31, 2004. These
shares
were issued on September 9, 2004. We have accrued $48,000 in director’s fees for
our outside directors for the period of September 1, 2004 through December
31,
2005, of which on March 31, 2006, we resolved to issue our outside directors
a
total of 438,462 shares of common stock valued at $0.13 per share in lieu
of
cash and meeting fees, for the period September 1, 2004 through March 31,
2006.
EMPLOYMENT
AGREEMENTS
Mr.
Malone is employed by us pursuant to a two-year employment agreement extension,
which extension commenced on March 31, 2006, and which is a term extension
to
the previous employment agreement originally dated July 25, 2003. The original
agreement provided for a base annual salary equal to $150,000 and an annual
bonus equal to 1% of our net income. In the event Mr. Malone is terminated
by us
for reason other than cause, we are required to pay him his then base salary
until the later of (i) the expiration of the employment agreement or (ii)
one
year. Mr. Malone has agreed to refrain from competing with us for a period
of
one year following the termination of his employment.
Mr.
Terrill is employed by us pursuant to a two-year employment agreement extension,
which extension commenced on March 31, 2006, and which is a term extension
to
the previous employment agreement originally dated June 7, 2002. The original
agreement provided for a base annual salary equal to $150,000, an annual
bonus
equal to 1% of our net income, 500,000 stock options upon his start date
at an
exercise price of $0.05 per share, and an additional 500,000 stock options
upon
the one year anniversary of his start date based on performance criteria
outlined in a separate agreement. The agreement also included a signing
cash
bonus of $10,000, which was converted on July 25, 2003 into 250,000 common
shares at the market price of $0.04 per share, the quoted trading price
on the
date the agreement was reached. In the event Mr. Terrill is terminated
by us for
reason other than cause, we are required to pay him his then base salary
until
the later of (i) the expiration of the employment agreement or (ii) one
year.
Mr. Terrill has agreed to refrain from competing with us for a period of
one
year following the termination of his employment.
Mr.
Rowland is employed by us pursuant to a two-year employment agreement extension,
which extension commenced on March 31, 2006, and which is a term extension
to
the previous employment agreement originally dated July 25, 2003. The original
agreement provided for a base annual salary equal to $110,000 and an annual
bonus equal to 1% of our net income. 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.
The
tables below set forth information regarding the beneficial ownership of
our
common stock as of March 31, 2006. The information in these tables provides
the
ownership information for:
|
▪
|
each
person known by us to be the beneficial owner of more than 5% of
our
common stock;
|
|
|
▪
|
each
of our directors and executive officers; and
|
|
|
▪
|
all
of our directors and executive officers as a
group.
|
Beneficial
ownership has been determined in accordance with the rules and regulations
of
the SEC and includes voting or investment power with respect to our common
stock
and those rights to acquire additional shares within sixty days. Unless
otherwise indicated, the persons named in the table below have sole voting
and
investment power with respect to the number of shares of common stock indicated
as beneficially owned by them, except to the extent such power may be shared
with a spouse. Common stock beneficially owned and percentage ownership are
based on 49,058,317 shares of common stock currently outstanding (reflects
a
1-for-50 reverse stock-split of our common stock that occurred in 1997 and
a
1-for-20 reverse stock-split of our common stock that occurred on March 18,
1998) and 23,150,000 additional shares potentially acquired within sixty
days,
for a total of 72,208,317 shares. The address of each person listed is in
care
of Findex.com, Inc., 11204 Davenport Street, Suite 100, Omaha, Nebraska 68154.
|
Title
of Class
|
Name
of Beneficial Owner
|
Amount
and Nature of Beneficial Owner
|
Percent
of Class
|
|||||||
|
Common
Stock
|
Barron
Partners, LP (1)
|
|
43,750,000
|
60.6
|
%
|
(1)
Consists of warrants to acquire up to 21,875,000 shares of common stock,
all of
which are presently exercisable and 21,875,000 shares of common stock directly
owned.
|
Title
of Class
|
Name
of Beneficial Owner
|
Amount
and Nature of Beneficial Owner
|
Percent
of Class
|
|||||||
|
Common
Stock
|
Steven
Malone (1)
|
|
2,143,111
|
3.0
|
%
|
|||||
|
Common
Stock
|
Henry
M. Washington (2)
|
|
1,729,179
|
2.4
|
%
|
|||||
|
Common
Stock
|
John
A. Kuehne (3)
|
|
1,984,157
|
2.8
|
%
|
|||||
|
Common
Stock
|
Kirk
R. Rowland (4)
|
|
1,819,111
|
2.5
|
%
|
|||||
|
Common
Stock
|
William
Terrill (5)
|
|
1,751,127
|
2.4
|
%
|
|||||
|
Common
Stock
|
All
officers and directors as
a group (5 persons)
|
|
9,426,685
|
13.1
|
%
|
(1)
Consists of stock options to acquire up to 250,000 shares of common stock,
all
of which are presently exercisable, 1,719,111 shares of common stock directly
owned, and stock options to acquire up to 50,000 shares of common stock all
of
which are presently exercisable and 124,000 shares of common stock indirectly
owned through spouse.
(2)
Consists of stock options to acquire up to 175,000 shares of common stock,
all
of which are presently exercisable and 1,554,179 shares of common stock directly
owned.
(3)
Consists of stock options to acquire up to 175,000 shares of common stock,
all
of which are presently exercisable and 1,809,157 shares of common stock directly
owned.
(4)
Consists of stock options to acquire up to 150,000 shares of common stock,
all
of which are presently exercisable and 1,669,111 shares of common stock directly
owned.
(5)
Consists of stock options to acquire up to 1,000,000 shares of common stock,
all
of which are presently exercisable and 751,127 shares of common stock directly
owned.
As
part
of the July 19, 2004 financing transaction with Barron Partners, LP, we entered
into a certain Registration Rights Agreement pursuant to which we became
committed to registering all of the shares issued as part of such transaction,
including those issuable under each of two warrants. On November 22, 2004
we
filed a registration statement on Form SB-2 covering the shares issued to
Barron
Partners, as well as the shares underlying the warrants issued to Barron
Partners. In accordance with the terms of the Registration Rights Agreement,
as
amended, we had another 150 days, until April 22, 2005, to cause such
registration statement to be declared effective by the SEC, with any delays
in
meeting this obligation resulting in our being liable to Barron Partners
in an
amount equal to $630,000 per year, pro-rated for the duration of any such
delay,
which amounts to $1,726 per day.
As
of
December 31, 2005, we had accrued a total of approximately $437,000 (253
days at
$1,726 per day) in penalties under the terms of the Registration Agreement,
inclusive of an adjustment made pursuant to a tentative verbal agreement
reached
with Barron Partners in April 2005, wherein, in relation to the associated
accruing penalties, we agreed to pay Barron Partners an amount in cash equal
to
$100,000 to toll the accrual of further penalties until June 21, 2005. Although
this amount has been paid in full, in two equal installments of $50,000 on
each
of April 22, 2005 and July 8, 2005, penalties in the amount of $1,726 per
day
continued to accrue from June 21, 2005 until the registration statement was
declared effective on February 1, 2006 by the SEC. We had experienced continued
delays in effectiveness of the registration statement due principally to
ongoing
efforts made necessary by our determination to restate certain of our historical
financial information. The amount paid by us to date ($150,000 as of March
31,
2006) to satisfy this obligation, and the continued delays in our ability
to
cause the registration statement to be declared effective coupled with
additional amounts which we are required to pay, has had a material adverse
effect on our business, our financial condition, including liquidity and
profitability, and our results of operations, including a corresponding
reduction in our net income and the net loss for the year.
As
of
March 31, 2006, Barron Partners owns 45% 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.
|
No.
|
Description
of Exhibit
|
|
2.1
|
Share
Exchange Agreement between Findex.com, Inc. and the stockholders
of Reagan
Holdings, Inc. dated March 7, 2000, incorporated by reference
to Exhibit
2.1 on Form 8-K filed March 15, 2000.
|
|
3(i)(1)
|
Restated
Articles of Incorporation of Findex.com, Inc. dated June 1999
incorporated
by reference to Exhibit 3.1 on Form 8-K filed March 15, 2000.
|
|
3(i)(2)
|
Amendment
to Articles of Incorporation of Findex.com, Inc. dated November
10, 2004
incorporated by reference to Exhibit 3.1(ii) on Form 10-QSB
filed November
10, 2004.
|
|
3(ii)
|
Restated
By-Laws of Findex.com, Inc., incorporated by reference to Exhibit
3.3 on
Form 8-K filed March 15, 2000.
|
|
10.1
|
Stock
Incentive Plan of Findex.com, Inc. dated May 7, 1999, incorporated
by
reference to Exhibit 10.1 on Form 10-KSB/A filed May 13,
2004.
|
|
10.2
|
Share
Exchange Agreement between Findex.com, Inc. and the stockholders
of Reagan
Holdings Inc., dated March 7, 2000, incorporated by reference
to Exhibit
2.1 on Form 8-K filed March 15, 2000.
|
|
10.3
|
License
Agreement between Findex.com, Inc. and Parsons Technology,
Inc. dated June
30, 1999, incorporated by reference to Exhibit 10.3 on Form
10-KSB/A filed
May 13, 2004.
|
|
10.4
|
Employment
Agreement between Findex.com, Inc. and Steven Malone dated
July 25, 2003,
incorporated by reference to Exhibit 10.4 on Form 10-KSB/A
filed May 13,
2004.
|
|
10.5
|
Employment
Agreement between Findex.com, Inc. and Kirk Rowland dated July
25, 2003,
incorporated by reference to Exhibit 10.5 on Form 10-KSB/A
filed May 13,
2004.
|
|
10.6
|
Employment
Agreement between Findex.com, Inc. and William Terrill dated
June 7, 2002,
incorporated by reference to Exhibit 10.6 on Form 10-KSB/A
filed May 13,
2004.
|
|
|
|
|
10.7
|
Restricted
Stock Compensation Agreement between Findex.com, Inc. and John
A. Kuehne
dated July 25, 2003, incorporated by reference to Exhibit 10.7
on Form
10-KSB/A filed May 13, 2004.
|
|
10.8
|
Restricted
Stock Compensation Agreement between Findex.com, Inc. and Henry
M.
Washington dated July 25, 2003, incorporated by reference to
Exhibit 10.8
on Form 10-KSB/A filed May 13, 2004.
|
|
10.9
|
Restricted
Stock Compensation Agreement between Findex.com, Inc. and William
Terrill
dated July 25, 2003, incorporated by reference to Exhibit 10.9
on Form
10-KSB/A filed May 13, 2004.
|
|
|
|
|
10.10
|
Stock
Purchase Agreement, including the form of warrant agreement,
between
Findex.com, Inc. and Barron Partners, LP dated July 19, 2004,
incorporated
by reference to Exhibit 10.1 on Form 8-K filed July 28,
2004.
|
|
10.11
|
Amendment
No. 1 to Stock Purchase Agreement between Findex.com, Inc.
and Barron
Partners, LP dated September 30, 2004, incorporated by reference
to
Exhibit 10.3 on Form 8-K filed October 6, 2004.
|
|
10.12
|
Registration
Rights Agreement between Findex.com, Inc. and Barron Partners,
LP dated
July 26, 2004, incorporated by reference to Exhibit 10.2 on
Form 8-K filed
July 28, 2004.
|
|
10.13
|
Waiver
Certificate between Findex.com, Inc. and Barron Partners, LP
dated
September 16, 2004, incorporated by reference to Exhibit 10.4
on Form 8-K
filed October 6, 2004.
|
|
|
|
|
10.14
|
Settlement
Agreement between Findex.com, Inc., The Zondervan Corporation,
Mattel,
Inc., TLC Multimedia, Inc., and Riverdeep, Inc. dated October
20, 2003,
incorporated by reference to Exhibit 10.14 on Form 10-KSB/A
filed December
14, 2005.
|
|
10.15
|
Employment
Agreement Extension between Findex.com, Inc and Steven Malone
dated March
31, 2006, incorporated by reference to Exhibit 10.1 on Form
8-K filed
April 6, 2006.
|
|
10.16
|
Employment
Agreement Extension between Findex.com, Inc and William Terrill
dated
March 31, 2006, incorporated by reference to Exhibit 10.2 on
Form 8-K
filed April 6, 2006.
|
|
|
|
|
10.17
|
Employment
Agreement Extension between Findex.com, Inc and Kirk R. Rowland
dated
March 31, 2006, incorporated by reference to Exhibit 10.3 on
Form 8-K
filed April 6, 2006.
|
|
10.18
|
Promissory
Note to Barron Partners, LP dated April 7, 2006, incorporated
by reference
to Exhibit 10.1 on Form 8-K filed April 13, 2006.
|
|
|
|
|
10.19
|
Share
Exchange Agreement between Findex.com, Inc. and the stockholders
of Reagan
Holdings Inc., dated March 7, 2000, incorporated by reference
to Exhibit
2.1 on Form 8-K filed March 15, 2000.
|
|
14.1
|
Code
of Ethics, adopted by Board of Directors April 17, 2006. FILED
HEREWITH.
|
|
|
|
|
16.1
|
Letter
from Chisholm, Bierwolf, & Nilson, P.C., dated January 3, 2006
regarding change in certifying accountant, incorporated by
reference to
Exhibit 16.1 on Form 8-K/A filed on January 4, 2006.
|
|
21.1
|
Subsidiaries
of Findex.com, Inc. as of December 31, 2005. FILED
HEREWITH.
|
|
31.1
|
Certification
of Findex.com, Inc. Chief Executive Officer, Steven Malone,
required by
Rule 13a-14(a) or Rule 15d-14(a), and dated April 17, 2006.
FILED
HEREWITH.
|
|
31.2
|
Certification
of Findex.com, Inc. Chief Financial Officer, Kirk R. Rowland,
required by
Rule 13a-14(a) or Rule 15d-14(a), and dated April 17, 2006.
FILED
HEREWITH.
|
|
32.1
|
Certification
of Findex.com, Inc. Chief Executive Officer, Steven Malone,
required by
Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter
63 of Title
18 of the United States Code (18 U.S.C. 1350), and dated April
17, 2006.
FILED HEREWITH.
|
|
32.2
|
Certification
of Findex.com, Inc. Chief Financial Officer, Kirk R. Rowland,
required by
Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter
63 of Title
18 of the United States Code (18 U.S.C. 1350), and dated April
17, 2006.
FILED HEREWITH.
|
The
following table sets forth the aggregate amount of various professional fees
billed by our principal independent accountants for our last two fiscal years,
Chisholm, Bierwolf &Nilson, LLC. On December 22, 2005, upon recommendation
of our Audit Committee, our Board of Directors dismissed Chisholm, Bierwolf
&Nilson, LLC and engaged Brimmer, Burek & Keelan LLP, as our principal
independent accountants for the fiscal year ended December 31, 2005, we have
not
been billed by Brimmer, Burek & Keelan with respect to our last two fiscal
years.
|
2005
|
2004
|
||||||
|
Audit
fees
|
$
|
20,446
|
$
|
8,390
|
|||
|
Audit-related
fees
|
$
|
---
|
$
|
---
|
|||
|
Tax
fees
|
$
|
---
|
$
|
---
|
|||
|
All
other fees
|
$
|
---
|
$
|
---
|
|||
|
All
other fees, including tax consultation and preparation
|
$
|
---
|
$
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All
audit
fees are approved by our audit committee and board of directors. Neither
Chisholm, Bierwolf & Nilson, LLC nor Brimmer, Burek & Keelan LLP
provided any non-auditing services to us.
Signatures
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
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FINDEX.COM,
INC.
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By:
/s/ Steven Malone
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Steven
Malone
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President
and Chief Executive Officer
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Date:
April 17, 2006
Pursuant
to the requirements of the Securities and Exchange Act of 1934, this report
has
been signed below by the following persons on behalf of the registrant and
in
the capacities and on the dates indicated.
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Signature
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Title
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Date
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/s/
Steven Malone
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Chairman
of the Board, President and Chief
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April
17, 2006
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Steven
Malone
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Executive
Officer (principal executive officer)
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/s/
John A. Kuehne
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Director
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April
17, 2006
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John
A. Kuehne
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/s/
Kirk R. Rowland
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Director
and Chief Financial Officer
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April
17, 2006
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Kirk
R. Rowland
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(principal
financial and accounting officer)
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