CAPITALIZATION
AND INDEBTEDNESS
The
following tables set forth the consolidated cash and consolidated capitalization
of the Company as at December 31, 2007 prepared in accordance with Canadian
GAAP
and United States GAAP, respectively.
(Prepared
in accordance with Canadian GAAP)
|
|
As at December 31,
2007
$
|
|
Cash,
cash equivalents and restricted cash
|
|
|
2,907,028
|
|
Temporary
investments
|
|
|
3,965,384
|
|
Indebtness
|
|
|
|
|
current
liabilities
|
|
|
1,807,261
|
|
Obligations
under capital leases
|
|
|
99,788
|
|
Future
income taxes
|
|
|
650,413
|
|
Shareholders’
Equity
|
|
|
|
|
Capital
stock
|
|
|
96,556,485
|
|
Additional
paid-in capital
|
|
|
5,784,502
|
|
Cumulative
translation adjustment
|
|
|
561,137
|
|
Accumulated
deficit
|
|
|
(87,101,730
|
)
|
Total
shareholders’ equity
|
|
|
15,800,394
|
|
Total
capitalization
|
|
|
18,357,856
|
|
|
|
|
|
|
|
|
|
|
|
(Prepared
in accordance with US GAAP)
|
|
|
As at December 31,
2007
$
|
|
Cash and
cash equivalents
and restricted cash
|
|
|
2,907,028
|
|
Temporary
investments
|
|
|
3,965,384
|
|
Indebtness
|
|
|
|
|
current
liabilities
|
|
|
1,807,261
|
|
Obligations
under capital leases
|
|
|
99,788
|
|
Future
income taxes
|
|
|
650,413
|
|
Shareholders’
Equity
|
|
|
|
|
Capital
stock
|
|
|
113,326,055
|
|
Additional
paid-in capital
|
|
|
6,822,192
|
|
Cumulative
translation adjustment
|
|
|
561,137
|
|
Accumulated
deficit
|
|
|
(104,908,990
|
)
|
Total
shareholders’ equity
|
|
|
15,800,394
|
|
Total
capitalization
|
|
|
18,357,856
|
|
|
|
|
|
|
Reasons
for the Offer and Use of Proceeds
|
|
|
|
|
|
|
|
|
|
Not
Applicable.
|
|
|
|
|
RISK
FACTORS
Our
revenues depend to a high degree on our relationship with two customers, the
loss of which would adversely affect our business and results of
operations.
For
the
year ended December 31, 2007, approximately 20% and 14% respectively of our
revenues were derived from agreements with our two largest customers. Revenues
from these customers represented 22% and 11% of our revenues in 2006
and
16
% and
11% of our revenues in 2005. Although we monitor our accounts receivable for
credit risk deterioration and these customers have been paying their payables
to
Copernic Inc. in accordance with the terms of their agreements with the Company,
there can be no assurance that they will continue to do so or that they will
continue to do so at the volume of business they have done historically. Our
loss of these customers’ business would adversely affect our business and
results of operations.
Our
operating results may fluctuate, which makes our results difficult to predict
and could cause our results to fall short of expectations.
Our
operating results may fluctuate as a result of a number of factors, many of
which are outside of our control. For these reasons, comparing our operating
results on a period-to-period basis may not be meaningful, and you should not
rely on our past results as an indication of our future performance. Our
operating results may fluctuate as a result of many factors related to our
business, including the competitive conditions in the industry, loss of
significant customers, delays in the development of new services and usage
of
the Internet, as described in more detail below, and general factors such as
size and timing of orders and general economic conditions. Our quarterly and
annual expenses as a percentage of our revenues may be significantly different
from our historical or projected rates. Our operating results in future quarters
may fall below expectations. Any of these events could cause our stock price
to
fall. Each of the risk factors listed in this “Risk Factors” section, and the
following factors, may affect our operating results:
|
·
|
Our
ability to continue to attract users to our Web sites.
|
|
·
|
Our
ability to monetize (or generate revenue from) traffic on our Web
sites
and our network of advertisers’ Web sites.
|
|
·
|
Our
ability to attract advertisers.
|
|
·
|
The
amount and timing of operating costs and capital expenditures related
to
the maintenance and expansion of our businesses, operations and
infrastructure.
|
|
·
|
Our
focus on long term goals over short term results.
|
|
·
|
The
results of any investments in risky projects.
|
|
·
|
Payments
that may be made in connection with the resolution of litigation
matters.
|
|
·
|
General
economic conditions and those economic conditions specific to the
Internet
and Internet advertising.
|
|
·
|
Our
ability to keep our Web sites operational at a reasonable cost and
without
service interruptions.
|
|
·
|
Geopolitical
events such as war, threat of war or terrorist actions.
|
|
·
|
Our
ability to generate Copernic Desktop Search (“CDS”) revenues through
licensing and revenue share.
|
Because
our business is changing and evolving, our historical operating results may
not
be useful to you in predicting our future operating results. In addition,
advertising spending has historically been cyclical in nature, reflecting
overall economic conditions as well as budgeting and buying patterns. Also,
user
traffic tends to be seasonal.
We
rely on our Web site partners for a significant portion of our net revenues,
and
otherwise benefit from our association with them. The loss of these Web site
partners could prevent us from receiving the benefits we receive from our
association with them, which could adversely affect our
business.
We
provide advertising, Web search and other services to members of our partner
Web
sites. We expect the percentage of our revenues generated from this network
to
increase in the future. We consider this network to be critical in the future
growth of our revenues. However, some of the participants in this network may
compete with us in one or more areas. Therefore, they may decide in the future
to terminate their agreements with us. If our Web site partners decide to use
a
competitor’s or their own Web search or advertising services, our revenues would
decline.
We
face significant competition from Microsoft, Yahoo, Google and Ask.com.
We
face
formidable competition in every aspect of our business, and particularly from
other companies that seek to connect people with information on the Web and
provide them with relevant advertising. Currently, we consider our primary
competitors to be Microsoft, Yahoo, Google and Ask.com. Microsoft, Yahoo, Google
and Ask.com have a variety of Internet products, services and content that
directly competes with our products, services, content and advertising
solutions. We expect that Microsoft will increasingly use its financial and
engineering resources to compete with us.
Microsoft,
Yahoo, Google and Ask.com have more employees and cash resources than we do.
These companies also have longer histories operating search engines and more
established relationships with customers. They can use their experience and
resources against us in a variety of competitive ways, including by making
acquisitions, investing more aggressively in research and development and
competing more aggressively for advertisers and Web sites. Microsoft and Yahoo
also may have a greater ability to attract and retain users than we do because
they operate Internet portals with a broad range of products and services.
If
Microsoft, Yahoo, Google or Ask.com are successful in providing similar or
better Web search results compared to ours or leverage their platforms to make
their Web search services easier to access than ours, we could experience a
significant decline in user traffic. Any such decline in user traffic could
negatively affect our net revenues.
We
face competition from other Internet companies, including Web search providers,
Internet advertising companies and destination Web sites that may also bundle
their services with Internet access.
In
addition to Microsoft, Yahoo, Google and Ask.com, we face competition from
other
Web search providers, including companies that are not yet known to us. We
compete with Internet advertising companies, particularly in the areas of
pay-for-performance and keyword-targeted Internet advertising. Also, we may
compete with companies that sell products and services online because these
companies, like us, are trying to attract users to their Web sites to search
for
information about products and services. Barriers to entry in our business
are
generally low and products, once developed, can be distributed quickly and
to a
wide range of customers at a reasonably low cost.
We
also
compete with destination Web sites that seek to increase their search-related
traffic. These destination Web sites may include those operated by Internet
access providers, such as cable and DSL service providers. Because our users
need to access our services through Internet access providers, they have direct
relationships with these providers. If an access provider or a computer or
computing device manufacturer offers online services that compete with ours,
the
user may find it more convenient to use the services of the access provider
or
manufacturer. In addition, the access provider or manufacturer may make it
hard
to access our services by not listing them in the access provider’s or
manufacturer’s own menu of offerings. Also, because the access provider gathers
information from the user in connection with the establishment of a billing
relationship, the access provider may be more effective than we are in tailoring
services and advertisements to the specific tastes of the user.
There
has
been a trend toward industry consolidation among our competitors, and so smaller
competitors today may become larger competitors in the future. If our
competitors are more successful than we are at generating traffic and
advertising, our revenues may decline.
We
face competition from traditional media companies, and we may not be included
in
the advertising budgets of large advertisers, which could harm our operating
results.
In
addition to Internet companies, we face competition from companies that offer
traditional media advertising opportunities. Most large advertisers have set
advertising budgets, a very small portion of which is allocated to Internet
advertising. We expect that large advertisers will continue to focus most of
their advertising efforts on traditional media. If we fail to convince these
companies to spend a portion of their advertising budgets with us, or if our
existing advertisers reduce the amount they spend on our programs, our operating
results would be harmed.
Our
revenues declined in 2007 and we are experiencing downward pressure on our
operating margin, which we expect will intensify in the
future.
We
believe our operating margin may decline as a result of increasing competition
and increased expenditures for all aspects of our business as a percentage
of
our revenues, including product development and sales and marketing expenses.
Also, our operating margin has declined as a result of increases in the
proportion of our revenues generated from our partner Web sites. The margin
on
revenues we generate from our partner Web sites is generally significantly
less
than the margin on revenues we generate from advertising on our Web sites.
Additionally, the
margin
we
earn on revenues generated from our partner Web sites could decrease in the
future if our partners require a greater portion of the advertising fees.
If
we
do not continue to innovate and provide products and services that are useful
to
users, we may not remain competitive, and our revenues and operating results
could suffer.
Our
success depends on providing products and services that people use for a high
quality Internet experience. Our competitors are constantly developing
innovations in Web search, online advertising and providing information to
people. As a result, we must continue to invest significant resources in
research and development in order to enhance our Web search technology and our
existing products and services and introduce new high-quality products and
services that people will use. If we are unable to predict user preferences
or
industry changes, or if we are unable to modify our products and services on
a
timely basis, we may lose users, advertisers and Web site partners. Our
operating results would also suffer if our innovations were not responsive
to
the needs of our users, advertisers and Web site partners are not appropriately
timed with market opportunity, effectively brought to market or well received
in
the market place. As search technology continues to develop, our competitors
may
be able to offer search results that are, or that are perceived to be,
substantially similar or better than those generated by our search services.
This may force us to compete on bases in addition to quality of search results
and to expend significant resources in order to remain competitive.
Our
business depends on a strong brand, and if we are not able to maintain and
enhance our brands, our ability to expand our base of users and advertisers
will
be impaired and our business and operating results will be harmed.
We
believe that the brand identity that we have developed has significantly
contributed to the success of our business. We also believe that maintaining
and
enhancing the Company’s brands are critical to expanding our base of users and
advertisers. Maintaining and enhancing our brands may require us to make
substantial investments and these investments may not be successful. If we
fail
to promote and maintain the Mamma® and Copernic® brands, or if we incur
excessive expenses in this effort, our business, operating results and financial
condition will be materially and adversely affected. We anticipate that, as
our
market becomes increasingly competitive, maintaining and enhancing our brands
may become increasingly difficult and expensive. Maintaining and enhancing
our
brands will depend largely on our ability to continue to provide high quality
products and services, which we may not do successfully.
We
generated a significant portion of our revenues in 2007 from our advertisers.
Our advertisers can generally terminate their contracts with us at any time.
Advertisers will not continue to do business with us if their investment in
advertising with us does not generate sales leads, and ultimately customers,
or
if we do not deliver their advertisements in an appropriate and effective
manner.
New
technologies could block our ads, which would harm our
business.
Technologies
are being developed that can block the display of our ads. Most of our revenues
are derived from fees paid to us by advertisers in connection with the display
of ads on Web pages. As a result, ad-blocking technology could, in the future,
adversely affect our operating results.
We
generate all of our revenue from advertising and software licensing, and the
reduction of spending by or loss of customers could seriously harm our
business.
If
we are
unable to remain competitive and provide value to our advertisers, they may
stop
placing ads with us, which could negatively affect our net revenues and
business. Copernic has on-going efforts to maintain a high quality network
of
publishers in order to offer advertisers high quality users that will provide
for a satisfactory ROI. Therefore, from time to time we cease sending
advertisements to what we determine are low quality publishers. This can reduce
our revenues in the short term in order to create advertiser retention in the
long term.
We
make investments in new products and services that may not be
profitable.
We
have
made and will continue to make investments in research, development and
marketing for new products, services and technologies. Our success in this
area
depends on many factors including our innovativeness, development support,
marketing and distribution. We may not achieve significant revenue from a new
product for a number of years, if at all. For the years 2006 and 2007, we did
not generate significant revenues from licensing Copernic® software and we
cannot assure you that we will generate significant revenue from licensing
of
Copernic® software going forward. In addition, our competitors are constantly
improving their competing software, and if we fail to innovate and remain
competitive our revenues from software licensing will decline.
Volatility
of stock price and trading volume could adversely affect the market price and
liquidity of the market for our Common Shares.
Our
Common Shares are subject to significant price and volume fluctuations, some
of
which result from various factors including (a) changes in our business,
operations, and future prospects, (b) general market and economic conditions,
and (c) other factors affecting the perceived value of our Common Shares.
Significant price and volume fluctuations have particularly impacted the market
prices of equity securities of many technology companies including without
limitation those providing communications software or Internet-related products
and services. Some of these fluctuations appear to be unrelated or
disproportionate to the operating performance of such companies. The market
price and trading volume of our Common Shares have been, and may likely continue
to be, volatile, experiencing wide fluctuations. In addition, the stock market
in general, and market prices for Internet-related companies in particular,
have
experienced volatility that often has been unrelated to the operating
performance of such companies. These broad market and industry fluctuations
may
adversely affect the price of our stock, regardless of our operating
performance.
Furthermore,
should the market price of our Common Shares drop below the $1.00 per share
minimum bid price requirement, our Common Shares risk being delisted from The
NASDAQ Stock Market®, which would have an adverse effect on our business and
liquidity of our Common Shares. Through the month of December 2007 our stock
price had steadily declined and as of December 31, 2007 our stock price was
$1.41 per share. Brokerage firms may not provide a market for low-priced stock,
may not recommend low-priced stock to their clients and may charge a greater
percentage commission on low-priced stock than that which they would charge
on a
transaction of a similar dollar amount but fewer shares. These circumstances
may
adversely impact trading in our Common Shares and may also adversely affect
our
ability to access capital.
Infringement
and liability claims could damage our business.
Companies
in the Internet, technology and media industries own large numbers of patents,
copyrights, trademarks and trade secrets and frequently enter into litigation
based on allegations of infringement or other violations of intellectual
property rights. As we face increasing competition and become increasingly
high
profile, the possibility of intellectual property rights claims against us
grows. Our technologies may not be able to withstand any third-party claims
or
rights against their use. Any intellectual property claims, with or without
merit, could be time-consuming, expensive to litigate or settle and could divert
resources and attention. In addition, many of our agreements with our
advertisers require us to indemnify certain third-party intellectual property
infringement claims, which would increase our costs as a result of defending
such claims and may require that we pay damages if there were an adverse ruling
in any such claims. An adverse determination also could prevent us from offering
our services to others and may require that we procure substitute services
for
these members.
With
respect to any intellectual property rights claim, to resolve these claims,
we
may enter into royalty and licensing agreements on less favorable terms, pay
damages or stop using technology or content found to be in violation of a third
party’s rights. We may have to seek a license for the technology or content,
which may not be available on reasonable terms and may significantly increase
our operating expenses. The technology or content also may not be available
for
license to us at all. As a result, we may also be required to develop
alternative non-infringing technology, which could require significant effort
and expense, or stop using the content. If we cannot license or develop
technology or content for the infringing aspects of our business, we may be
forced to limit our product and service offerings and may be unable to compete
effectively. Any of these results could harm our brand and operating results.
In
addition, we may be liable to third-parties for content in the advertising
we
deliver if the artwork, text or other content involved violates copyright,
trademark, or other intellectual property rights of third-parties or if the
content is defamatory. Any claims or counterclaims could be time-consuming,
could result in costly litigation and could divert management’s
attention.
Additionally,
we may be subject to legal actions alleging patent infringement, unfair
competition or similar claims. Others may apply for or be awarded patents or
have other intellectual property rights covering aspects of our technology
or
business. For example we understand that Overture Services, Inc. (acquired
by
Yahoo) purports to be the owner of U.S. Patent No. 6,269,361, which was issued
on July 31, 2001 and is entitled “System and method for influencing a position
on a search result list generated by a computer network search engine.” Overture
has aggressively pursued its alleged patent rights by filing lawsuits against
other pay-per-click search engine companies such as MIVA (formerly known as
FindWhat.com) and Google. MIVA and Google have asserted counter-claims against
Overture including, but not limited to, invalidity, unenforceability and
non-infringement. While it is our understanding that the lawsuits against MIVA
and Google have been settled, there is no guarantee Overture will not pursue
its
alleged patent rights against other companies.
An
inability to protect our intellectual property rights could damage our business.
We
rely
upon a combination of trade secret, copyright, trademark, patents and other
laws
to protect our intellectual property assets. We have entered into
confidentiality agreements with our management and key employees with respect
to
such assets and limit access to, and distribution of, these and other
proprietary information. However, the steps we take to protect our intellectual
property assets may not be adequate to deter or prevent misappropriation. We
may
be unable to detect unauthorized uses of and take appropriate steps to enforce
and protect our intellectual property rights. Additionally, the absence of
harmonized patent laws between the United States and Canada makes it more
difficult to ensure consistent respect for patent rights. Although senior
management believes that our services and products do not infringe on the
intellectual property rights of others, we nevertheless are subject to the
risk
that such a claim may be asserted in the future. Any such claims could damage
our business.
Historical
net results include net losses for the years ended December 31, 1999 to December
31, 2003 and for the years ended December 31, 2005 to December 31, 2007. Working
capital may be inadequate.
For
the
years ended December 31, 1999 through the year ended December 31, 2003 and
for
the years ended December 31, 2005 to December 31, 2007, we have reported net
losses and net losses per share. We have been financing operations mainly from
funds obtained in several private placements, and from exercised warrants and
options. Management considers that liquidities as at December 31, 2007 will
be
sufficient to meet normal operating requirements throughout 2008. In the long
term, we may require additional liquidity to fund growth, which could include
additional equity offerings or debt finance. No assurance can be given that
we
will be successful in getting required financing in the future.
Goodwill
may be written-down in the future.
Goodwill
is evaluated for impairment annually, or when events or changed circumstances
indicate impairment may have occurred. Management monitors goodwill for
impairment by considering estimates including discount rate, future growth
rates, amounts and timing of estimated future cash flows, general economic,
industry conditions and competition. Future adverse changes in these factors
could result in losses or inability to recover the carrying value of the
goodwill. Consequently, our goodwill, which amounts to approximately $7.4M
as at
December 31, 2007, may be written-down in the future which could adversely
effect our financial position.
Long-lived
assets may be written-down in the future.
The
Company assesses the carrying value of its long-lived assets, which include
property and equipment and intangible assets, for future recoverability when
events or changed circumstances indicate that the carrying value may not be
recoverable. Management monitors long-lived assets for impairment by considering
estimates including discount rate, future growth rates, general economic,
industry conditions and competition. Future adverse changes in these factors
could result in losses or inability to recover the carrying value of the
long-lived assets. Consequently, our long-lived assets, which amounts to
approximately $2.8M as at December 31, 2007, may be written-down in the
future.
Reduced
Internet use may adversely affect our results.
Our
business is based on Internet driven products and services including direct
online Internet marketing. The emerging nature of the commercial uses of the
Internet makes predictions concerning a significant portion of our future
revenues difficult. As the industry is subject to rapid changes, we believe
that
period-to-period comparisons of its results of operations will not necessarily
be meaningful and should not be relied upon as indicative of our future
performance. It is also possible that in some fiscal quarters, our operating
results will be below the expectations of securities analysts and investors.
In
such circumstances, the price of our Common Shares may decline. The success
of a
significant portion of our operations depends greatly on increased use of the
Internet by businesses and individuals as well as increased use of the Internet
for sales, advertising and marketing. It is not clear how effective Internet
related advertising is or will be, or how successful Internet-based sales will
be. Our results will suffer if commercial use of the Internet, including the
areas of sales, advertising and marketing, fails to grow in the
future.
Our
business depends on the continued growth and maintenance of the Internet
infrastructure.
The
success and availability of our internet based products and services depend
on
the continued growth, maintenance and use of the Internet. Spam, viruses, worms,
spyware, denial of service attacks, phishing and other acts of malice may affect
not only the Internet’s speed and reliability but also its desirability for use
by customers. If the Internet is unable to meet these threats placed upon it,
our business, advertiser relationships, and revenues could be adversely
affected.
Our
long-term success may be materially adversely affected if the market for
E-commerce does not grow or grows slower than expected.
Because
many of our customers’ advertisements encourage online purchasing and/or
Internet use, our long-term success may depend in part on the growth and market
acceptance of e-commerce. Our business will be adversely affected if the market
for e-commerce does not continue to grow or grows slower than expected. A number
of factors outside of our control could hinder the future growth of e-commerce,
including the following:
|
·
|
the
network infrastructure necessary for substantial growth in Internet
usage
may not develop adequately or our performance and reliability may
decline;
|
|
·
|
insufficient
availability of telecommunication services or changes in telecommunication
services could result in inconsistent quality of service or slower
response times on the Internet;
|
|
·
|
negative
publicity and consumer concern surrounding the security of e-commerce
could impede our growth; and
|
|
·
|
financial
instability of e-commerce customers.
|
Security
breaches and privacy concerns may negatively impact our
business.
Consumer
concerns about the security of transmissions of confidential information over
public telecommunications facilities is a significant barrier to increased
electronic commerce and communications on the Internet that are necessary for
growth of the Company’s business. Many factors may cause compromises or breaches
of the security systems we use or other Internet sites use to protect
proprietary information, including advances in computer and software
functionality or new discoveries in the fields of cryptography and processor
design. A compromise of security on the Internet would have a negative effect
on
the use of the Internet for commerce and communications and negatively impact
our business. Security breaches of their activities or the activities of their
customers and sponsors involving the storage and transmission of proprietary
information, such as credit card numbers, may expose our operating business
to a
risk of loss or litigation and possible liability. We cannot assure you that
the
measures in place are adequate to prevent security breaches.
If
we
fail to detect click fraud
or
other malicious applications or activity of others
,
we
could lose the confidence of our advertisers
as
well as face potential litigation, government regulation or
legislation
,
thereby causing our business to suffer.
We
are
exposed to the risk of fraudulent clicks on our ads and other clicks that
advertisers may perceive as undesirable. Click fraud occurs when a person clicks
on an ad displayed on a Web site for a reason other than to view the underlying
content. These types of fraudulent activities could hurt our brands. If
fraudulent clicks are not detected, the affected advertisers may experience
a
reduced return on their investment in our advertising programs because the
fraudulent clicks will not lead to potential revenue for the advertisers.
Advertiser dissatisfaction with click fraud and other traffic quality related
claims has lead to litigation and possible governmental regulation of
advertising. Any increase in costs due to any such litigation, government
regulation, or refund could negatively impact our profitability.
Index
spammers could harm the integrity of our Web search results, which could damage
our reputation and cause our users to be dissatisfied with our products and
services.
There
is
an ongoing and increasing effort by “index spammers” to develop ways to
manipulate our Web search results. Although they cannot manipulate our results
directly, “index spammers” can manipulate our suppliers like Ask.com,
Gigablast.com or Wisenut.com, which can result in our search engine pages
producing poor results. We take this problem very seriously because providing
relevant information to users is critical to our success. If our efforts to
combat these and other types of manipulation are unsuccessful, our reputation
for delivering relevant information could be diminished. This could result
in a
decline in user traffic, which would damage our business.
Our
business is subject to a variety of U.S. and foreign laws that could subject
us
to claims or other remedies based on the nature and content of the information
searched or displayed by our products and services, and could limit our ability
to provide information regarding regulated industries and products.
The
laws
relating to the liability of providers of online services for activities of
their users are currently unsettled both within the U.S. and abroad. Claims
have
been threatened and filed under both U.S. and foreign law for defamation, libel,
invasion of privacy and other data protection claims, tort, unlawful activity,
copyright or trademark infringement, or other theories based on the nature
and
content of the materials searched and the ads posted or the content generated
by
our users. Increased attention focused on these issues and legislative proposals
could harm our reputation or otherwise affect the growth of our business.
The
application to us of existing laws regulating or requiring licenses for certain
businesses of our advertisers, including, for example, distribution of
pharmaceuticals, adult content, financial services, alcohol or firearms and
online gambling, can be unclear. Existing or new legislation could expose us
to
substantial liability, restrict our ability to deliver services to our users,
limit our ability to grow and cause us to incur significant expenses in order
to
comply with such laws and regulations.
Several
other federal laws could have an impact on our business. Compliance with these
laws and regulations is complex and may impose significant additional costs
on
us. For example, the Digital Millennium Copyright Act has provisions that limit,
but do not eliminate, our liability for listing or linking to third-party Web
sites that include materials that infringe copyrights or other rights, so long
as we comply with the statutory requirements of this act. The Children’s Online
Protection Act and the Children’s Online Privacy Protection Act restrict the
distribution of materials considered harmful to children and impose additional
restrictions on the ability of online services to collect information from
minors. In addition, the Protection of Children from Sexual Predators Act of
1998 requires online service providers to report evidence of violations of
federal child pornography laws under certain circumstances. Any failure on
our
part to comply with these regulations may subject us to additional liabilities.
If
the technology that we currently use to target the delivery of online
advertisements and to prevent fraud on our networks is restricted or becomes
subject to regulation, our expenses could increase and we could lose customers
or advertising inventory.
Web
sites
typically place small files of non-personalized (or “anonymous”) information,
commonly known as cookies, on an Internet user’s hard drive, generally without
the user’s knowledge or consent. Cookies generally collect information about
users on a non-personalized basis to enable Web sites to provide users with
a
more customized experience. Cookie information is passed to the Web site through
an Internet user’s browser software. We currently use cookies to track an
Internet user’s movement through the advertiser’s Web site and to monitor and
prevent potentially fraudulent activity on our network. Most currently available
Internet browsers allow Internet users to modify their browser settings to
prevent cookies from being stored on their hard drive, and some users currently
do so. Internet users can also delete cookies from their hard drives at any
time. Some Internet commentators and privacy advocates have suggested limiting
or eliminating the use of cookies, and legislation (including, but not limited
to, Spyware legislation such as U.S. House of Representatives Bill HR 29 the
“Spy Act”) has been introduced in some jurisdictions to regulate the use of
cookie technology. The effectiveness of our technology could be limited by
any
reduction or limitation in the use of cookies. If the use or effectiveness
of
cookies were limited, we would have to switch to other technologies to gather
demographic and behavioural information. While such technologies currently
exist, they are substantially less effective than cookies. We would also have
to
develop or acquire other technology to prevent fraud. Replacement of cookies
could require significant reengineering time and resources, might not be
completed in time to avoid losing customers or advertising inventory, and might
not be commercially feasible. Our use of cookie technology or any other
technologies designed to collect Internet usage information may subject us
to
litigation or investigations in the future. Any litigation or government action
against us could be costly and time-consuming, could require us to change our
business practices and could divert management’s attention.
Increased
regulation of the Internet may adversely affect our business.
If
the
Internet becomes more strongly regulated, a significant portion of our operating
business may be adversely affected. For example, there is increased pressure
to
adopt and where adopted, strengthen laws and regulations relating to Internet
unsolicited advertisements, privacy, pricing, taxation and content. The
enactment of any additional laws or regulations in Canada, Europe, Asia or
the
United States, or any state or province of the United States or Canada may
impede the growth of the Internet and our Internet-related business, and could
place additional financial burdens on us and our Internet-related
business.
Changes
in key personnel, labour availability and employee relations could disrupt
our
business.
Our
success is dependent upon the experience and abilities of our senior management
and our ability to attract, train, retain and motivate other high-quality
personnel, in particular for our technical and sales teams. There is significant
competition in our industries for qualified personnel. Labour market conditions
generally and additional companies entering industries which require similar
labour pools could significantly affect the availability and cost of qualified
personnel required to meet our business objectives and plans. There can be
no
assurance that we will be able to retain our existing personnel or that we
will
be able to recruit new personnel to support our business objectives and plans.
We believe our employee relations are good. Currently, none of our employees
are
unionized. There can be no assurance, however, that a collective bargaining
unit
will not be organized and certified in the future. If certified in the future,
a
work stoppage by a collective bargaining unit could be disruptive and have
a
material adverse effect on us until normal operations resume.
Possible
future exercise of warrants and options could dilute existing and future
shareholders.
As
at
March 19, 2008, we had 646,392 warrants at a weighted average exercise price
of
$15.60 and 860,801 stock options at a weighted average exercise price of $2.69
outstanding. As at March 19, 2008, the exercise prices of all outstanding
warrants and options were higher than the market price of our Common Shares.
When the market value of the Common Shares is above the respective exercise
prices of all options and warrants, their exercise could result in the issuance
of up to an additional 1,507,193 Common Shares. To the extent such shares are
issued, the percentage of our Common Shares held by our existing stockholders
will be reduced. Under certain circumstances the conversion or exercise of
any
or all of the warrants or stock options might result in dilution of the net
tangible book value of the shares held by existing Company stockholders. For
the
life of the warrants and stock options, the holders are given, at prices that
may be less than fair market value, the opportunity to profit from a rise in
the
market price of the shares of Common Shares, if any. The holders of the warrants
and stock options may be expected to exercise them at a time when the Company
may be able to obtain needed capital on more favourable terms. In addition,
we
reserve the right to issue additional shares of Common Shares or securities
convertible into or exercisable for shares of Common Shares, at prices, or
subject to conversion and exercise terms, resulting in reduction of the
percentage of outstanding Common Shares held by existing stockholders and,
under
certain circumstances, a reduction in the net tangible book value of existing
stockholders’ Common Shares.
Strategic
acquisitions and market expansion present special risks.
A
future
decision to expand our business through acquisitions of other businesses and
technologies presents special risks. Acquisitions entail a number of particular
problems, including (i) difficulty integrating acquired technologies,
operations, and personnel with the existing businesses, (ii) diversion of
management’s attention in connection with both negotiating the acquisitions and
integrating the assets as well as the strain on managerial and operational
resources as management tries to oversee larger operations, (iii) exposure
to
unforeseen liabilities relating to acquired assets, and (iv) potential issuance
of debt instruments or securities in connection with an acquisition possessing
rights that are superior to the rights of holders of the our currently
outstanding securities, any one of which would reduce the benefits expected
from
such acquisition and/or might negatively affect our results of operations.
We
may not be able to successfully address these problems.
We
also
face competition from other acquirers, which may prevent us from realizing
certain desirable strategic opportunities.
We
do
not plan to pay dividends on the Common Shares.
The
Company has never declared or paid dividends on its shares of Common Shares.
The
Company currently intends to retain any earnings to support its working capital
requirements and growth strategy and does not anticipate paying dividends in
the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of the Company’s Board of Directors after taking into account various
factors, including the Company’s financial condition, operating results, current
and anticipated cash needs and plans for expansion.
Rapidly
evolving marketplace and competition may adversely impact our
business.
The
markets for our products and services are characterized by (i) rapidly changing
technology, (ii) evolving industry standards, (iii) frequent new product and
service introductions, (iv) shifting distribution channels, and (v) changing
customer demands. The success of the Company will depend on its ability to
adapt
to its rapidly evolving marketplaces. There can be no assurance that the
introduction of new products and services by others will not render our products
and services less competitive or obsolete. We expect to continue spending funds
in an effort to enhance already technologically complex products and services
and develop or acquire new products and services. Failure to develop and
introduce new or enhanced products and services on a timely basis might have
an
adverse impact on our results of operations, financial condition and cash flows.
Unexpected costs and delays are often associated with the process of designing,
developing and marketing enhanced versions of existing products and services
and
new products and services. The market for our products and services is highly
competitive, particularly the market for Internet products and services which
lacks significant barriers to entry, enabling new businesses to enter this
market relatively easily. Competition in our markets may intensify in the
future. Numerous well-established companies and smaller entrepreneurial
companies are focusing significant resources on developing and marketing
products and services that will compete with the Company’s products and
services. Many of our current and potential competitors have greater financial,
technical, operational and marketing resources. We may not be able to compete
successfully against these competitors. Competitive pressures may also force
prices for products and services down and such price reductions may reduce
our
revenues.
To
the extent that some of our revenues and expenses are paid in foreign
currencies, and currency exchange rates become unfavourable, we may lose some
of
the economic value in U.S. dollar terms.
Although
we currently transact a majority of our business in U.S. dollars, as we expand
our operations more of our customers may pay us in foreign currencies.
Conducting business in currencies other than U.S. dollars subjects us to
fluctuations in currency exchange rates. This could have a negative impact
on
our reported operating results. We do not currently engage in hedging
strategies, such as forward contracts, options and foreign exchange swaps
related to transaction exposures to mitigate this risk. If we determine to
initiate such hedging activities in the future, there is no assurance these
activities will effectively mitigate or eliminate our exposure to foreign
exchange fluctuations. Additionally, such hedging programs would expose us
to
risks that could adversely affect our operating results, because we have limited
experience in implementing or operating hedging programs. Hedging programs
are
inherently risky and we could lose money as a result of poor trades. In 2007,
revenues were increased by approximately $128,000 and total expenses were also
increased by $348,000 resulting in a net loss $220,000 due to the fluctuation
of
foreign currencies.
Higher
inflation could adversely affect our results of operations and financial
condition.
We
do not
believe that the relatively moderate rates of inflation experienced in the
United States and Canada in recent years have had a significant effect on our
revenues or profitability. Although higher rates of inflation have been
experienced in a number of foreign countries in which we might transact
business, we do not believe that such rates have had a material effect on our
results of operations, financial condition and cash flows. Nevertheless, in
the
future, high inflation could have a material, adverse effect on the Company’s
results of operations, financial condition and cash flows.
Our
future growth significantly depends to a high degree on our ability to
successfully commercialize the Copernic Desktop Search
®
product, and any failure or delays in that commercialization would adversely
affect our business and results of operations.
On
December 22, 2005, we completed our acquisition of Copernic, which we believe
positioned the Company as a leader in search technologies and applications
and
as a multi-channel online marketing services provider. Although we have high
expectations for the Copernic Desktop Search® (CDS) award-winning product, to
date our program to commercialize that product through licensing to large ISP’s
and Internet Portals has not generated significant revenue and we cannot
guarantee we will obtain such significant licensing revenue in the future.
Any
failure or continued significant delay in successfully commercializing the
CDS
product could adversely affect our business and results of
operations.
ITEM
4. INFORMATION ON THE COMPANY
GENERAL
INFORMATION
The
legal
name of the Company is Copernic Inc. and the Company operates under the
commercial names Mamma.com and Copernic. The Company was incorporated on July
5,
1985, pursuant to the
Business
Corporations Act
(Ontario),
promulgated under the laws of the Province of Ontario, Canada. The Company’s
principal executive officers are located at 388 St. Jacques Street West, 9th
Floor, Montreal, Quebec, Canada H2Y 1S1.
The
Company maintains its registered office c/o Fasken Martineau DuMoulin LLP,
Toronto Dominion Bank Tower, P.O. Box 20, Suite 4200, 66 Wellington Street
West,
Toronto-Dominion Centre, Toronto, Ontario, M5K 1N6, Canada.
RECENT
EVENTS
Resignation
and departure of two officers
On
February 11, 2008 the Company announced the departure of Patrick Hopf, Executive
Vice President of Business Development. 117,134 options held by Mr. Hopf were
cancelled, resulting in a reversal of employee stock-based compensation expense
of $48,542 which will be recorded in Q1 2008.
On
February 8, 2008 the Company announced that its President and Chief Executive
Officer, Martin Bouchard, tendered his resignation, effective March 3, 2008,
citing personal reasons. Mr. Bouchard will continue as a member of the board
of
directors and has agreed to be available to the Company on a consulting basis.
155,000 options held by Mr. Bouchard were cancelled, resulting in a reversal
of
employee stock-based compensation expense of $49,320 which will be recorded
in
Q1 2008. Mr. Marc Ferland, a director of the Company, is appointed President
and
CEO commencing on March 3, 2008.
Write-down
of intangible assets and goodwill
In
Q4
2007, the Company concluded that its software unit was facing delays in
execution and changes of market conditions of its commercial deployment
solutions. Based on the Company’s assessment of the fair value of its assets
related to the software unit, the Company concluded that these assets had
suffered a loss in value and the fair values of intangible assets and goodwill
were significantly less than their carrying value. Therefore, write-downs of
$1,333,415 for trade names, $652,055 for customer relationships and goodwill
of
$7,214,531 were recorded in 2007.
Also
in
Q4 2007, the Company reported decreased revenues due to industry pressures
on
advertising rates, slow down in sponsored clicks, pop-up campaigns and general
demand for all graphic ads. Based on the Company assessment of the fair value
of
its assets related to search / media unit, the Company concluded that the
goodwill related to this unit had suffered a loss in value and the fair value
of
the related goodwill was significantly less then its carrying value. Therefore,
a write-down of goodwill of $846,310 for search / media unit was recorded in
2007 to bring it to nil.
Write-down
of investment
In
Q4
2007, based on its assessment of the fair value of the Company’s investment in
LTRIM, the Company concluded that its investment had suffered a loss in value
other than a temporary decline due to LTRIM’s significant corporate
restructuring and therefore recorded a write-down of $150,000 to bring it to
nil.
Closure
of SEC investigation
On
September 19, 2007, the United States Securities and Exchange Commission (“SEC”)
informed the Company by letter that it had closed its investigation of the
Company, commenced in 2004, concerning certain trading in the shares of the
Company and other matters, and that the SEC did not intend to recommend
enforcement action against the Company.
Settlement
of class action lawsuit
On
July
16, 2007, the Company announced that the United States District Court, Southern
District of New York (the “Court”) had approved the settlement of the class
action following a hearing on July 9, 2007, at which time the Court heard from
all parties before concluding that the settlement was fair and all
procedural requisites were met. As a result, all claims asserted in the class
actions against the Company and the individual officer defendants have been
resolved, with the exception of three shareholders who have indicated they
will
exclude themselves from the settlement so as to preserve rights to maintain
separate actions should they elect to do so. The amount paid into escrow,
along with any interest earned, was distributed as provided under the settlement
to pay class members, plaintiffs' attorney fee, and the costs of claims
administration. Subsequently, one of the three shareholders has declined its
right to the class action lawsuit.
Name
change of Mamma.com Inc. to Copernic Inc.
On
June
8, 2007, the Company’s shareholders approved changing the Company’s name from
Mamma.com Inc. to Copernic Inc. at its Annual General and Special Meeting of
the
Shareholders. On June 14, 2007, articles of amendment were filed at the Ministry
of Consumer and Business Services of Ontario effecting the name change. On
June
21, 2007, the Company’s stock ticker symbol was changed to “CNIC”.
Agreement
for financial advisory services
On
June
7, 2007, the Company retained ThomasLloyd Capital LLC (“ThomasLloyd Capital”) as
its financial and investment banking advisor. In consideration for these
services, the Company has committed to pay ThomasLloyd Capital a monthly fee
of
$5,000 for seven months beginning June 1, 2007, plus a success fee of the
greater of $1,000,000 (but in no event shall such amount exceed 3% of the
transaction value) or 2% of the transaction value but in no event to exceed
$2,000,000 (less any amounts previously paid as monthly fees) plus an additional
fee of $200,000, credited against the above fees payable upon delivery of a
fairness opinion.
Resignation
of two officers
In
January 2007, two officers resigned from their positions. In connection with
their resignations, the Company paid and recorded termination costs of
CDN$510,000 in Q1 2007, changed the duration of their option agreements and
allowed accelerated vesting options for one of the officers. These changes
represented an additional non-cash item expense of $253,236 which was recorded
in Q1 2007.
Granting,
exercising and cancellation of stock options
On
January 23, 2007, the Company granted to officers and employees 70,500 and
21,803 stock options, respectively, at an exercise price of $5.15 expiring
in
five years.
On
February 26, 2007, 10,000 stock options were granted to a new employee, at
an
exercise price of $4.99 expiring in five years.
On
March
29, 2007, the Company granted 2,632 stock options to an employee at an exercise
price of $4.75 expiring in five years.
On
April
30, 2007, the Company granted 40,000 stock options to a new employee at an
exercise price of $4.90 expiring in five years.
On
June
8, 2007, the Company granted 60,000 stock options to directors at an exercise
price of $4.24 expiring in five years.
On
September 18, 2007, the Company granted 652,000 stock options to officers and
employees at an exercise price of $1.74 expiring in five years.
On
September 21, 2007, the Company granted 50,000 stock options to two new board
members at an exercise price of $1.67 expiring in five years.
As
at
September 30, 2007, 296,667 stock options were exercised with exercising prices
ranging between $1.53 to $2.57 and 59,037 stock options were
cancelled.
As
at
November 8, 2007, the Company granted 4,000 stock options to an employee at
an
exercise price of $2.23 expiring in five years.
As
at
December 31, 2007, 296,667 stock options were exercised with exercising prices
ranging between $1.53 to $2.57 and 83,065 were cancelled or had
expired.
RECENT
FINANCINGS
On
June
30, 2004, the Company sold under a securities purchase agreement an aggregate
of
1,515,980 common shares and 606,392 warrants to certain accredited investors
for
an aggregate price of $16,599,981. Net proceeds from the offering amounted
to
$15,541,162, net of issue cost of $1,058,819, $996,000 of which was paid to
Merriman Curhan Ford & Co. (“MCF”). For this specific transaction, MCF
waived their entitlement to a warrant component of the financing completion
fee.
Each warrant entitles the accredited investors to purchase one additional common
share at an exercise price equal to $15.82 per share. The warrants will be
exercisable beginning six months after the closing date, and will have a term
of
five years from the closing date.
On
December 12, 2002, the Company entered into subscription agreements to sell
1,893,939 Units, for a purchase price of $1.32 per Unit or total proceeds of
$2.5 million. Each Unit consisted of one share of Common Shares plus one
nontransferable “A Warrant” that entitled the holder to purchase one additional
Common Share at a price of $1.40 on or before November 30, 2004. Only in the
event and upon the exercise of each respective A Warrant, the holder thereof
was
entitled to be issued one “B Warrant” that would entitle such holder to purchase
one additional Common Share at a price of $1.50 on or before November 30, 2006.
A placement fee of 142,045 Units was paid to a placement agent for arranging
this financing and the A and B warrants attached were exercised in September
2004 and November 2004, respectively. A sum of $5,904,354 accrued to the
treasury of the Company and a further 4,071,968 common shares of the Company
were issued.
RECENT
AGREEMENT
ThomasLloyd
Capital LLC
On
June
7, 2007, the Company retained ThomasLloyd Capital LLC (“ThomasLloyd Capital”) as
its financial and investment banking advisor. In consideration for these
services, the Company committed to pay ThomasLloyd Capital a monthly fee of
$5,000 for seven months beginning June 1, 2007, plus a success fee of the
greater of $1,000,000 (but in no event shall such amount exceed 3% of the
transaction value) or 2% of the transaction value but in no event to exceed
$2,000,000 (less any amounts previously paid as monthly fees) plus an additional
fee of $200,000, credited against the above fees payable upon delivery of a
fairness opinion.
OTHER
AGREEMENTS
Merriman
Curhan Ford & Co.
On
March
16, 2004, the Company retained Merriman Curhan Ford & Co. (“MCF”) as a
financial advisor and as an investment banking advisor. The Company then signed
two separate agreements. In consideration for financial services, the Company
had committed to pay MCF a monthly fee of $5,000 for a minimum obligation of
$30,000 and 10,000 warrants per month with a minimum issuance of 60,000
warrants, each warrant gives the rights to purchase one common share of the
Company. Warrants are issuable at an exercise price equal to the average closing
bid for the last five trading days at the end of the month of issue, for the
duration of the agreement upon the same terms and conditions. The warrants
have
a life of five years from the issuance date. For the investment banking
services, the Company had committed to pay a cash financing completion fee
equal
to 6% of the total amount of capital received by the Company from the sale
of
its equity securities and warrants to purchase common shares of the Company
in
an amount equal to 6% of the number of common shares purchased by investors
in
capital raising transactions. The warrants are immediately exercisable at the
higher of the price per share at which the investor can acquire common shares
or
the closing price of the Company’s common shares at the date of the capital
raising transaction. For mergers and acquisitions, the Company had committed
to
pay a success fee upon closing equal to the sum of 4% of up to $10,000,000
transaction value, 3% of $10,000,000 to $15,000,000 transaction value and 2%
of
greater than $15,000,000 transaction value, provided that MCF either introduces
and/or performs specific services for the transaction. The minimum success
fee
for a transaction is $200,000. For a sale transaction, the Company had committed
to pay a success fee with the same parameters of an acquisition except for
the
minimum fee which is $500,000.
For
the
period ended December 31, 2004, 40,000 warrants were issued to MCF at an average
price of $12.31, the fair value of which was $260,301 estimated as of grant
date
using the Black-Sholes pricing model, and charged to expense with a
corresponding credit to additional paid-in capital. The following weighted
average assumptions were used:
Expected
option life
|
3.5
years
|
Volatility
|
86%
|
Risk-free
interest rate
|
3.99%
|
Dividend
yield
|
nil
|
On
July
16, 2004, the agreement for financial services, dated March 16, 2004 was
amended. The Company committed to pay MCF a monthly fee of $5,000 for eight
months from July 16, 2004. The agreement for investment banking services was
amended on July 16, 2004, on September 8, 2004 and subsequently on October
12,
2005. The Company then is committed to pay a success fee upon closing equal
to
the sum of 3% of up to $20,000,000 transaction value, 1.5% of the excess of
$20,000,000. If an acquisition transaction is less than 50% interest in the
Company or the Target, a fee shall be payable in cash for 7% of the transaction
value. If transaction is not consummated and the Company is entitled to receive
break-up fee and other form of compensation, the Company then will pay to MCF
30% of Company’s entire entitlement. In the event that the Board deems it
necessary or appropriate for a fairness opinion to be rendered in connection
with an acquisition transaction, MCF will receive a Fairness Opinion Fee of
$200,000 for rendering its opinion, payable upon delivery of the Fairness
Opinion and will be credited against the M&A Completion Fee due to MCF.
At
the
completion of the Copernic Technologies Inc. acquisition, total fees paid to
MCF
were $618,468 including the fairness opinion fee of $200,000.
Maxim
Group, LLC
On
January 29, 2003, the Company retained Maxim Group LLC (“Maxim”), on a
non-exclusive basis, as its investment banker, strategic advisor and financial
advisor. In consideration for these services, the Company paid a retainer of
$25,000 for the first month and a monthly fee of $5,000 for the duration of the
agreement. Upon execution of the agreement, the Company issued a warrant to
purchase 25,000 of the Company’s Common Shares at an exercise price of $2.15
expiring on June 30, 2006. Under the agreement, on a monthly basis, commencing
30 days after execution of the agreement, the Company was obligated to issue
additional warrants, each to purchase 8,000 Common Shares, at an exercise price
equal to the market price, for the duration of the agreement upon the same
terms
and conditions. For any Transaction completed by the Company with Maxim Group
LLC, the Company agreed to pay a success fee upon closing equal to the sum
of
2½% of the aggregate transaction value, provided that Maxim either introduced
and/or performed specific services for the Transaction. The minimum success
fee
for any transaction was $200,000. On May 5, 2003, an amendment was made to
the
agreement to increase the success fee for a specific Transaction from 2½% to
3½%.
The
term
of this agreement was indefinite. However, the Company or Maxim could terminate
it upon 30 days written notice. If such a notice was sent by the Company, the
monetary consideration was payable by the Company for the ensuing five months;
however, the warrant consideration would cease after the 30 days written notice.
If Maxim sent such a notice, both the
monetary
and warrant consideration will cease immediately. The preceding statements
notwithstanding, the agreement could also be terminated upon 30 days written
notice by either party any time after the 6
th
month
anniversary of the agreement. On October 30, 2003 the Company advised Maxim
of
termination of this agreement effective November 30, 2003. In 2003, the Company
granted a total of 105,000 warrants at an average price of $2.50 to Maxim Group
LLC for financial advisory fees.
Maxim
Group was paid a $200,000 success fee related to the acquisition of Digital
Arrow in June 2004.
As
at
March 30, 2005, Maxim Group, LLC had exercised all its warrants.
ACQUISITIONS,
DIVESTITURES AND DISCONTINUED OPERATIONS
Acquisition
of Copernic Technologies Inc.
On
December 22, 2005, the Company acquired 100% of the issued and outstanding
securities of Copernic Technologies Inc. including an amount to settle Copernic
Technologies Inc.’s outstanding stock appreciation right
obligations.
The
consideration for the acquisition, including costs directly related to the
acquisition, consisted of $15,851,922 in cash including $3,297,007 paid to
settle Copernic Technologies Inc.’s stock appreciation right and severance
obligations net of cash acquired. The Company also issued 2,380,000 common
shares as part of the consideration paid. The fair value of the Company’s common
shares issued to owners of Copernic Technologies Inc. has been determined to
be
$2.958 per share. This value has been determined using the average closing
price
of the Company’s common shares for the two days before and after August 17,
2005, the date the significant terms and conditions of the transaction were
agreed to and publicly announced.
This
acquisition has been accounted for using the purchase method and the results
of
operations have been included in the Company’s statement of operations from the
date of acquisition. The purchase price allocation was finalized upon receipt
of
a valuation report.
On
May
31, 2006, Copernic Technologies Inc. was wound up into the Company. The wind-up
allows the Company to use carry forward tax losses where needed.
In
2006,
the purchase price allocation was adjusted to reflect additional assets and
liabilities assumed by the Company. These adjustments resulted by
increasing accounts receivable by $480,091, liabilities by $22,286 and
consequently decreasing original goodwill by $457,805. The increase in accounts
receivable, which was not accounted for in the audited closing balance sheet
of
Copernic Technologies Inc. at the date of acquisition, was due to revenue
recognition adjustment related to a specific contract that existed prior to
the
date of the transaction.
In
2006,
$379,382 was received by the Company from the sellers of Copernic Technologies
Inc. to compensate for a reduction of research and development tax credits
prior
to the acquisition date, the purchase price and goodwill were then reduced
accordingly.
Discontinued
Digital Arrow LLC and High Performance Broadcasting Inc. (“Digital Arrow”)
Operations
In
September 2005, following the poor performance of Digital Arrow LLC and High
Performance Broadcasting, Inc. (“Digital Arrow”) located in Florida, management
decided to discontinue its subsidiary’s operations. The Company has therefore
not renewed the lease in Florida and recorded closing costs.
Consequently,
the results of the operations of Digital Arrow were recorded as discontinued
operations and the results of the Company for the years ended December 31,
2005
and 2004 were reclassified to account for the closure of the subsidiary’s
operations.
Digital
Arrow, which the Company acquired on June 10, 2004, was a privately held
marketing company that was engaged in the distribution of online, opt-in e-mail
marketing solutions via the Internet. In that acquisition, the Company’s
wholly-owned subsidiary, Mamma.com USA, Inc., entered into a Securities Purchase
Agreement with Digital Arrow and their equity holders, pursuant to which
Mamma.com USA, Inc. acquired all equity interests in Digital Arrow. The
consideration for the acquisition, including costs directly related to the
acquisition, consisted of $1,264,210 in cash, net of cash acquired, and 90,000
of the Company’s common shares. The fair value of the Company shares issued to
owners of Digital Arrow was determined to be $8.23 per share. The operations
of
the business have been included in the Company’s consolidated financial
statements since June 1, 2004.
This
acquisition has been accounted for using the purchase method. The fair value
of
the net assets acquired was $1,535,744, which with goodwill of $556,196,
resulted in a total purchase price of $2,091,940. From this purchase price,
$740,782 was paid by issuance of the Company’s common shares, $86,948 for cash
acquired at the transaction for a cash paid net of cash acquired of $1,264,210.
INCUBATOR
ACTIVITIES
Prior
to
February 2001, when the Company announced a moratorium on new incubator
activities, the Company had engaged in incubator management services and held
positions in companies in the analog circuit, new media and telecommunications
sectors. These companies included LTRIM Technologies Inc., (“LTRIM”), interWAVE
communications International, Ltd. Tri-Link Technologies Inc., TEC Technology
Evaluation.com Corporation, uPath.com Inc. and ESP Media Inc. The Company had
written down completely or disposed of its interest in all of these companies,
except for LTRIM.
LTRIM
is
engaged in the design and development of high-performance analog integrated
circuit products. LTRIM’s proprietary core technology consists of a laser-based
fine-tuning system designed to set the electrical characteristics of
high-performance analog integrated circuits by precisely adjusting the
resistance of silicon-embedded resistive elements that are fabricated through
standard semiconductor manufacturing processes. It is expected that this
technology will have advantages over conventional circuit fine-tuning
techniques, in terms of manufacturing cost, integration, and time-to-market,
when applied to the production of high-performance analog semiconductor
products.
On
May 4,
2000, the Company initiated a series of transactions pursuant to which it
subscribed to a CA$850,000 secured debenture convertible into 12.75% of the
equity of LTRIM. On February 23, 2001, the Company started acquiring preferred
shares by step purchase and by May 2001, a total of 207,323 preferred shares
were subscribed to and entirely paid. These shares were subsequently split
10
for 1, resulting in 2,073,230 shares.
On
December 13, 2002, LTRIM closed the first round of an intended two-round
financing transaction with new investors. As part of the transaction, the
Company converted all preference shares and the secured debenture into 4,891,686
Class A Common Shares. Accrued interest on the debenture in the amount of
CA$137,014 (US$80,038) was converted into 359,281 Class A preference shares.
On
February 11, 2004, LTRIM closed the second round of financing.
In
2006,
based on its assessment of the fair value of the Company’s investment in LTRIM,
the Company concluded that its investment had suffered a loss in value other
than a temporary decline and therefore recorded a write-down of $570,000.
As
at
December 31, 2006, the investment in LTRIM was carried at a value of $150,000
for approximately 4% of LTRIM.
In
2007,
based on its assessment of the fair value of the Company’s investment in LTRIM,
the Company concluded that its investment had suffered a loss in value other
than a temporary decline due to significant corporate restructuring and
therefore recorded a write-down of $150,000 to bring its investment value to
nil.
BUSINESS
OVERVIEW
Copernic
Inc. is a leading provider of award winning search technology for both the
web
and desktop space delivered through its online properties, including
www.mamma.com and www.copernic.com.
Through
its award winning Copernic Desktop Search® software search engine product, the
Company develops cutting edge search solutions bringing the power of a
sophisticated, yet easy-to-use search engine to the user’s PC. It allows for
instant searching of files, e-mails and e-mail attachments stored anywhere
on a
PC hard drive. The desktop search application won the CNET Editors' Choice
Award, as well as the PC World World Class award in 2005. In 2007, PC Pro,
the UK’s most respected IT magazine for professionals, and Micro Hebdo, one of
France’s most read IT magazines, each selected Copernic Desktop Search® 2.0
software search engine as the top desktop search tool.
Through
its well established media placement channels, Copernic Inc. provides both
online advertising as well as pure content to its partnerships worldwide.
Copernic handles over 1 billion search requests per month and has media
placement partnerships established not only in North America, but in Europe
and
Australia as well.
The
revenue models of the Company are based on:
Pay-Per-Click
search listing placement - advertisers bid or pay a fixed price for position
on
search listing advertisements on www.mamma.com and within the Copernic Media
Solutions™ Publisher Network.
Graphic
Ad Units - priced on a CPM (Cost-Per-Thousand) basis and are distributed through
the Copernic Media Solutions™ Publisher Network.
Copernic
Media Solutions™ Publisher Network has over 221 active publishers (combined
search and graphic ad publishers).
Copernic
Agent® and Copernic Desktop Search® users generate Web searches and clicks from
pay-per-click advertising listings.
Copernic
Desktop Search® licensing to ISPs, portals and e-commerce site generates
license, maintenance and customization revenues.
Copernic
Agent® Personal Pro, Copernic Summarizer® and Copernic Tracker® software are
sold from our e-commerce store.
Copernic
Desktop Search Corporate Edition® software is sold from our e-commerce store or
direct from corporate sales on a per license basis to businesses, academic
institutions, non-profit organizations and government environments.
PRINCIPAL
MARKETS
Although
we operate in the global on-line market, and now engage in the development
and
sale of information management and search solution products, the majority of
our
users and customers are concentrated in the U.S., Europe and Canada. Our total
revenues in 2007 can be divided into several categories: search advertising,
graphic advertising, software licensing, customized development and maintenance
support revenues. The following table gives a breakdown of the total revenues
by
category for the last five financial years. The operations of Copernic
Technologies Inc. have been included since December 23, 2005.
|
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|
|
|
|
|
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|
|
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ADVERTISING
|
|
|
|
|
|
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US$
|
|
US$
|
|
US$
|
|
US$
|
2007
|
|
7,246,838
|
|
107,871
|
|
415,263
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|
346,436
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|
|
|
|
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2006
|
|
7,197,868
|
|
827,104
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|
957,488
|
|
613,942
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|
|
|
|
|
|
|
|
|
2005
|
|
4,970,373
|
|
4,456,399
|
|
6,671
|
|
10,532
|
|
|
|
|
|
|
|
|
|
2004
|
|
9,659,024
|
|
4,965,198
|
|
-
|
|
12,096
|
|
|
|
|
|
|
|
|
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2003
|
|
5,787,980
|
|
3,150,883
|
|
-
|
|
-
|
SEASONALITY
AND FLUCTUATION IN REVENUES
The
Company is subject to seasonal fluctuations affecting its operations and
results. Historically, the first and third quarters have shown significant
decreases in search and graphic revenues, which the Company believes are
respectively attributable to decreased advertising and Internet use during
the
post-Christmas lull and the Summer holiday season.
Although
not seasonal, our software licensing revenues fluctuate from quarter to quarter
based upon the quarters in which we obtain new agreements or existing agreements
terminate.
MARKETING
CHANNELS AND SALES METHODS
The
Company maintains its own sales and marketing staff and has its own experienced
direct sales force to address the new and evolving requirements of its target
markets. Although the Company itself does not expend significant resources
on
public relations, the Company markets itself through on-line advertising, press
releases, internally sponsored events and trade shows.
The
Company solicits revenues by direct sales force, e-mail directly to the end
client, or through specialized search engines through advertising agencies
or
network distribution business associates who mainly specialize in the online
advertising market. Search listings are solicited either directly or through
on-line marketing campaigns from the end client.
DEPENDENCE
ON INTELLECTUAL PROPERTY AND OTHER MATTERS MATERIAL TO
PROFITABILITY
We
rely
upon a combination of trade secret, copyright, trademark, patent and other
laws
to protect our intellectual property assets. We have entered into
confidentiality agreements with our management and key employees with respect
to
such assets and limit access to, and distribution of, these assets and other
proprietary information. However, the steps we take to protect our intellectual
property assets may not be adequate to deter or prevent misappropriation. We
may
be unable to detect unauthorized uses of and take appropriate steps to enforce
and protect our intellectual property rights. Although senior management
believes that our services and products do not infringe on the intellectual
property rights of others, we nevertheless are subject to the risk that such
a
claim may be asserted in the future. Any such claims could damage our
business.
GOVERNMENT
REGULATION
The
laws
relating to the liability of providers of online services for activities of
their users are currently unsettled both within the U.S. and abroad. Claims
have
been threatened and filed under both U.S. and foreign law for defamation, libel,
invasion of privacy and other data protection claims, tort, unlawful activity,
copyright or trademark infringement, or other theories based on the nature
and
content of the materials searched and the ads posted or the content generated
by
users of other services similar to ours. Increased attention focused on these
issues and legislative proposals could harm our reputation or otherwise affect
the growth of our business.
The
application to us of existing laws regulating or requiring licenses for certain
businesses of our advertisers, including, for example, distribution of
pharmaceuticals, adult content, financial services, online gambling, alcohol
or
firearms, can be unclear. Existing or new legislation could expose us to
substantial liability, restrict our ability to deliver services to our users,
limit our ability to grow and cause us to incur significant expenses in order
to
comply with such laws and regulations.
Several
other federal laws could have an impact on our business. Compliance with these
laws and regulations is complex and may impose significant additional costs
on
us. For example, the Digital Millennium Copyright Act has provisions that limit,
but do not eliminate, our liability for listing or linking to third-party web
sites that include materials that infringe copyrights or other rights, so long
as we comply with the statutory requirements of this act. The Children’s Online
Protection Act and the Children’s Online Privacy Protection Act restrict the
distribution of materials considered harmful to children and impose additional
restrictions on the ability of online services to collect information from
minors. In addition, the Protection of Children from Sexual Predators Act of
1998 requires online service providers to report evidence of violations of
federal child pornography laws under certain circumstances. Any failure on
our
part to comply with these and similar regulations in other jurisdictions may
subject us to additional liabilities.
COMPETITION
The
Company primarily competes in the areas of on-line advertising and software
licensing which includes sales of licenses, customization and maintenance
support.
The
market for these services are in a constant state of flux and competition is
intense.
The
Company faces intense competition expects this competition will continue to
intensify. The Company’s markets are subject to rapid changes in technology and
marketing strategies and the Company is significantly affected by new product
introductions and other market activities of its existing and potential
competitors. The Company believes the principal competitive factors in this
market are name recognition, product performance and functionality, ease of
use,
size of the Web index, user traffic, the speed with which search results return
and the relevance of results, pricing and quality of customer support. Many
of
the Company’s current and potential competitors in on-line advertising and
software licensing, includes Google, Ask.com, Miva, Looksmart, Findwhat,
Microsoft, Yahoo!, Value Click, FastClick, Burst Media, Tribal Fusion and X1
have significant operating histories, larger customer bases, greater brand
name
recognition, greater access to proprietary content and significantly greater
financial, marketing and other resources which give them a competitive
advantage.
The
markets for our products and services are characterized by (i) rapidly changing
technology, (ii) evolving industry standards, (iii) frequent new product and
service introductions, (iv) shifting distribution channels, and (v) changing
customer demands. The success of the Company will depend on its ability to
adapt
to its rapidly evolving marketplaces. There can be no assurance that the
introduction of new products and services by others will not render our products
and services less competitive or obsolete. We expect to continue spending funds
in an effort to enhance already technologically complex products and services
and develop or acquire new products and services. Failure to develop and
introduce new or enhanced products and services on a timely basis might have
an
adverse impact on our results of operations, financial condition and cash flows.
Unexpected costs and delays are often associated with the process of designing,
developing and marketing enhanced versions of existing products and services
and
new products and services. The market for our products and services is highly
competitive, particularly the market for Internet products and services which
lacks significant barriers to entry, enabling new businesses to enter this
market relatively easily. Competition in our markets may intensify in the
future. Numerous well-established companies and smaller entrepreneurial
companies are focusing significant resources on developing and marketing
products and services that will compete with the Company’s products and
services. Many of our current and potential competitors have greater financial,
technical, operational and marketing resources. We may not be able to compete
successfully against these competitors. Competitive pressures may also force
prices for products and services down and such price reductions may reduce
our
revenues.
ORGANIZATIONAL
STRUCTURE
On
May
31, 2004, the wholly owned subsidiary, Mamma.com Enterprises Inc. was wound
up
into the Company. The transaction has allowed the Company to use carry forward
tax losses. On May 31, 2006, the wholly owned subsidiary, Copernic Technologies
Inc. which was acquired on December 22, 2005, was wound up into the Company.
During 2007 and 2008, a few non-active companies were wound up into the Company.
As at March 27, 2008 the Company had an active wholly-owned subsidiary,
Mamma.com USA, Inc. and non-operating, wholly-owned subsidiaries which are
dormant corporations that the Company will be winding up.
The
Company leases two office locations. They are in Quebec City, Canada with 13,000
square feet and Montreal, Canada with 3,400 square feet.
ITEM
5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion and analysis of the consolidated financial condition and
results of operations of Copernic Inc. for the three years ended December 31,
2007, 2006 and 2005 should be read in conjunction with its consolidated
financial statements and the related notes. All statements in the following
discussion, which are not reports of historical information or descriptions
of
current accounting policy, are forward-looking statements. Please consider
our
forward-looking statements in light of the risks referred to in this
Management’s Discussion and Analysis of Financial Condition and Results of
Operations cautionary note. The Company’s consolidated financial statements are
reported in US dollars and have been prepared in accordance with generally
accepted accounting principles as applied in Canada (“Canadian GAAP”). As a
registrant with the Securities and Exchange Commission in the United States,
the
Company is required to reconcile its financial results for significant
measurement differences between Canadian GAAP and generally accepted accounting
principles as applied in the United States (“U.S. GAAP”) as they specifically
relate to the Company as described in note 27 to its consolidated financial
statements. This Management’s Discussion and Analysis of Financial Condition and
Results of Operations is dated March 27, 2008.
Business
overview
Copernic
Inc. is a leading provider of award winning search technology for both the
web
and desktop space delivered through its online properties, including
www.mamma.com and www.copernic.com.
Through
its award winning Copernic Desktop Search® software search engine product, the
Company develops cutting edge search solutions bringing the power of a
sophisticated, yet easy-to-use search engine to the user’s PC. It allows for
instant searching of files, e-mails and e-mail attachments stored anywhere
on a
PC hard drive. The desktop search application won the CNET Editors' Choice
Award, as well as the PC World World Class award in 2005. In 2007, PC Pro,
the UK’s most respected IT magazine for professionals, and Micro Hebdo, one of
France’s most read IT magazines, each selected Copernic Desktop Search® 2.0
software search engine as the top desktop search tool.
Through
its well established media placement channels, Copernic Inc. provides both
online advertising as well as pure content to its partnerships worldwide.
Copernic handles over 1 billion search requests per month and has media
placement partnerships established not only in North America, but in Europe
and
Australia as well.
The
revenue models of the Company are based on:
Pay-Per-Click
search listing placement – advertisers bid or pay a fixed price for
position on search listing advertisements on
www.mamma.com
and within the Copernic Media Solutions™ Publisher Network.
Graphic
Ad Units – priced on a CPM (Cost-Per-Thousand) basis and are distributed
through the Copernic Media Solutions™ Publisher Network.
Copernic
Media Solutions™ Publisher Network has over 221 active publishers (combined
search and graphic ad publishers).
Copernic
Agent
®
and
Copernic Desktop Search
®
users
generate Web searches and clicks from pay-per-click advertising listings.
Copernic
Desktop Search
®
licensing to ISPs, portals and e-commerce site generates license, maintenance
and customization revenues.
Copernic
Agent
®
Personal
/ Pro, Copernic Summarizer
®
and
Copernic Tracker
®
software
are sold from our e-commerce store.
Copernic
Desktop Search Corporate Edition® software is sold from our e-commerce store or
direct from corporate sales on a per license basis to businesses, academic
institutions, non-profit organizations and government
environments.
Search
advertising
Approximately
89% of our revenues come from our search based business. The revenue model
in
this sector is simply a pay-per-click fee that is charged to the advertiser
when
a user clicks on a sponsored link. The business model consists of advertisers
buying keywords. When these keywords are searched by a user, the advertiser’s
Web site will be listed in a premium position in the search results, identified
as a sponsored result. The Company aggregates advertisers from other
search-based businesses and from its own direct sales efforts (through
direct sales and automated online marketing initiatives). The Company then
distributes these search advertisements onto its search publisher network which
consists of its own search properties (Mamma.com "The Mother of All Search
Engines" and Copernic Agent®) and third party search properties of approximately
117 partners. Advertising revenues generated through third party search
properties have associated payout costs; these payout costs represent a
percentage of the revenues generated from the distribution of search
advertisements onto third party search property. Higher margins are obtained
through our own properties as there are no payout costs associated with these
revenues.
Graphic
advertising
Approximately
1% of our revenues were generated from our ad network business. The revenue
model in this sector is CPM based (cost per one thousand impressions
published). The business model is based on advertisers buying impressions for
ad
campaigns (these are creative based campaigns: different size banners, pop-ups,
rich media advertising) and targeting them through our network of publishers.
Campaigns can be targeted in several ways: geo-targeting (by region), or by
site
category (ex: travel, entertainment, finance). The publisher network consists
of
about 104 active small to medium sized Web sites that subscribe to our service
through an online or direct representation contract and give us access to their
advertising inventory. The Company recruits publishers through a direct sales
force and through online initiatives. Publishers receive payouts of a percentage
of revenues generated from campaigns published on their Web sites.
Software
licensing
Approximately
5% of our revenues came from software licensing. The business model is based
on
selling licenses of Copernic Desktop Search to ISPs and portals as well as
Copernic Agent Personal/Pro, Copernic Summarizer and Copernic Tracker through
our e-commerce store.
Customized
development and maintenance support
Approximately
5% of our revenues were as a result of customized development and maintenance
support. The business model is based on billing our technical team for software
customization and maintenance support.
Industry
Trends and Facts released in publications:
1.
According to eMarketer, online advertising is expected to grow by 28.5% in
2008
up from 26.8% in 2007. Additionally, spending on paid search advertising
is expected to grow by 27.5% in 2008 up from 26.8% in 2007. (January
7
th
,
2008)
Source:
http://www.brandcurve.com/online-advertising-to-grow-285-in-2008/
2.
By
2011,
75% of the US workforce will be mobile. Pressure on companies to provide
work/life balance programs for employees combined with advances in mobile
technologies is increasing the number of mobile workers in the U.S. and around
the world. By year-end 2011, IDC expects nearly 75% of the US workforce will
be
mobile (February 10, 2008)
Source:
http://www.itfacts.biz/category/wireless-data
3.
The
time spent looking for and not finding information costs an organization $6
million a year. Including the cost of reworking information because it hasn’t
been found costs that organization an additional $12 million a year.
Source:
IDC and KMWorld
4.
More
than 100 million handsets with touch screens will be
shipped
in 2008.
Source:
ABI Research, October 2007
5.
Business mobile data application to generate $100 billion by 2012.
Source:
ABI Research, September 2007
Recent
events
Resignation
and departure of two officers
On
February 11, 2008 the Company announced the departure of Patrick Hopf, Executive
Vice President of Business Development. 117,134 options held by Mr. Hopf were
cancelled, resulting in a reversal of employee stock-based compensation expense
of $48,542 which will be recorded in Q1 2008.
On
February 8, 2008 the Company announced that its President and Chief Executive
Officer, Martin Bouchard, tendered his resignation, effective March 3, 2008,
citing personal reasons. Mr. Bouchard will continue as a member of the board
of
directors and has agreed to be available to the Company on a consulting basis.
155,000 options held by Mr. Bouchard were cancelled, resulting in a reversal
of
employee stock-based compensation expense of $49,320 which will be recorded
in
Q1 2008. Mr. Marc Ferland, a director of the Company, is appointed President
and
CEO commencing on March 3, 2008.
Write-down
of intangible assets and goodwill
In
Q4
2007, the Company concluded that its software unit was facing delays in
execution and changes of market conditions of its commercial deployment
solutions. Based on the Company’s assessment of the fair value of its assets
related to the software unit, the Company concluded that these assets had
suffered a loss in value and the fair values of intangible assets and goodwill
were significantly less than their carrying value. Therefore, write-downs of
$1,333,415 for trade names, $652,055 for customer relationships and goodwill
of
$7,214,531 were recorded in 2007.
Also
in
Q4 2007, the Company reported decreased revenues due to industry pressures
on
advertising rates, slow down in sponsored clicks, pop-up campaigns and general
demand for all graphic ads. Based on the Company assessment of the fair value
of
its assets related to search / media unit, the Company concluded that the
goodwill related to this unit had suffered a loss in value and the fair value
of
the related goodwill was significantly less then its carrying value. Therefore,
a write-down of goodwill of $846,310 for search / media unit was recorded in
2007 to bring it to nil.
Write-down
of investment
In
Q4
2007, based on its assessment of the fair value of the Company’s investment in
LTRIM, the Company concluded that its investment had suffered a loss in value
other than a temporary decline due to LTRIM’s significant corporate
restructuring and therefore recorded a write-down of $150,000 to bring it to
nil.
Closure
of SEC investigation
On
September 19, 2007, the United States Securities and Exchange Commission (“SEC”)
informed the Company by letter that it had closed its investigation of the
Company, commenced in 2004, concerning certain trading in the shares of the
Company and other matters, and that the SEC did not intend to recommend
enforcement action against the Company.
Settlement
of class action lawsuit
On
July
16, 2007, the Company announced that the United States District Court, Southern
District of New York (the “Court”) had approved the settlement of the class
action following a hearing on July 9, 2007, at which time the Court heard from
all parties before concluding that the settlement was fair and all
procedural requisites were met. As a result, all claims asserted in the class
actions against the Company and the individual officer defendants have been
resolved, with the exception of three shareholders who have indicated they
will
exclude themselves from the settlement so as to preserve rights to maintain
separate actions should they elect to do so. The amount paid into escrow,
along with any interest earned, was distributed as provided under the settlement
to pay class members, plaintiffs' attorney fee, and the costs of claims
administration. Subsequently, one of the three shareholders has declined its
right to the class action lawsuit.
Name
change of Mamma.com inc. to Copernic Inc.
On
June
8, 2007, the Company’s shareholders approved changing the Company’s name from
Mamma.com Inc. to Copernic Inc. at its Annual General and Special Meeting of
the
Shareholders. On June 14, 2007, articles of amendment were filed at the Ministry
of Consumer and Business Services of Ontario effecting the name change. On
June
21, 2007, the Company’s stock ticker symbol was changed to “CNIC”.
Agreement
for financial advisory services
On
June
7, 2007, the Company retained ThomasLloyd Capital LLC (“ThomasLloyd Capital”) as
its financial and investment banking advisor. In consideration for these
services, the Company has committed to pay ThomasLloyd Capital a monthly fee
of
$5,000 for seven months beginning June 1, 2007, plus a success fee of the
greater of $1,000,000 (but in no event shall such amount exceed 3% of the
transaction value) or 2% of the transaction value but in no event to exceed
$2,000,000 (less any amounts previously paid as monthly fees) plus an additional
fee of $200,000, credited against the above fees payable upon delivery of a
fairness opinion.
Resignation
of two officers
In
January 2007, two officers resigned from their positions. In connection with
their resignations, the Company paid and recorded termination costs of
CDN$510,000 in Q1 2007, changed the duration of their option agreements and
allowed accelerated vesting options for one of the officers. These changes
represented an additional non-cash item expense of $253,236 which was recorded
in Q1 2007.
Granting,
exercising and cancellation of stock options
On
January 23, 2007, the Company granted to officers and employees 70,500 and
21,803 stock options, respectively, at an exercise price of $5.15 expiring
in
five years.
On
February 26, 2007, 10,000 stock options were granted to a new employee, at
an
exercise price of $4.99 expiring in five years.
On
March
29, 2007, the Company granted 2,632 stock options to an employee at an exercise
price of $4.75 expiring in five years.
On
April
30, 2007, the Company granted 40,000 stock options to a new employee at an
exercise price of $4.90 expiring in five years.
On
June
8, 2007, the Company granted 60,000 stock options to directors at an exercise
price of $4.24 expiring in five years.
On
September 18, 2007, the Company granted 652,000 stock options to officers and
employees at an exercise price of $1.74 expiring in five years.
On
September 21, 2007, the Company granted 50,000 stock options to two new board
members at an exercise price of $1.67 expiring in five years.
As
at
September 30, 2007, 296,667 stock options were exercised with exercising prices
ranging between $1.53 to $2.57 and 59,037 stock options were
cancelled.
As
at
November 8, 2007, the Company granted 4,000 stock options to an employee at
an
exercise price of $2.23 expiring in five years.
As
at
December 31, 2007, 296,667 stock options were exercised with exercising prices
ranging between $1.53 to $2.57 and 83,065 were cancelled or had
expired.
Critical
Accounting Policies and Estimates
The
Company prepares its consolidated financial statements in accordance with
accounting principles generally accepted in Canada. In doing so, management
has
to make estimates and assumptions that affect reported amounts of assets,
liabilities, revenues and expenses, as well as related disclosure of contingent
assets and liabilities. In many cases, management reasonably has used different
accounting policies and estimates. In some cases, changes in the accounting
estimates are reasonably likely to occur from period to period. Accordingly,
actual results could differ materially from our estimates. To the extent that
there are material differences between these estimates and actual results,
our
financial condition or results of operations will be affected. Management bases
its estimates on past experience and other assumptions that it believes are
reasonable under the circumstances, and it evaluates these estimates on an
ongoing basis. Management refers to accounting estimates of this type as
critical accounting policies and estimates, which are discussed further below.
Management has reviewed its critical accounting policies and estimates with
its
Board of Directors.
Use
of
estimates
Significant
estimates in these financial statements include the allowance for doubtful
accounts, recovery of future income taxes, goodwill and annual goodwill
impairment test, useful lives and impairment of long-lived assets, stock-based
compensation costs, valuation of investments and determination of the fair
value
of the intangible assets on recent acquisitions. Each of these critical
accounting policies is described in more detail below.
Allowance
for doubtful accounts
We
make
judgments as to our ability to collect outstanding receivables and provide
allowances for the portion of receivables when collection becomes doubtful.
Provisions are made based upon a specific review of all significant outstanding
invoices. The allowance provided for doubtful accounts does not reflect the
future ability to collect outstanding receivables, additional provisions for
doubtful accounts may be needed and our future results of operations could
be
adversely impacted.
We
also
record a provision for revenue adjustments in the same period as the related
revenues are recorded. These estimates are based on historical analysis of
credit memo data and other factors. If the historical data we use to calculate
these estimates does not properly reflect future uncollectible revenues, then
a
change in the allowances would be made in the period in which such a
determination is made and revenues in that period could be impacted.
For
this
item, actual results could differ from those estimates.
Recovery
of future income taxes
We
use
significant judgment in determining our consolidated recovery of future income
taxes. Uncertainties may arise with respect to the tax treatment of certain
transactions. Although we believe our estimates are reasonable, we cannot be
certain that the final tax outcome of these matters will not be different than
that which is reflected in our financial statements. Such differences could
have
a material effect on our future income taxes in the period in which such
determination is made.
For
this
item, actual results could differ from those estimates.
Goodwill
and annual goodwill impairment test
Goodwill
is evaluated for impairment annually in the fourth quarter of the year, or
when
events or changed circumstances indicate impairment may have occurred. In
connection with the goodwill impairment test, if the carrying value of the
Company's reporting unit to which goodwill relates exceeds its estimated fair
value, the goodwill related to that reporting unit is tested for impairment.
If
the carrying value of such goodwill is determined to be in excess of its fair
value, an impairment loss is recognized in the amount of the excess of the
carrying value over the fair value. Management assesses goodwill for impairment
using estimates including discount rate, future growth rates, amounts and timing
of estimated future cash flows, general economic, industry conditions and
competition. Future adverse changes in these factors could result in losses
or
inability to recover the carrying value of the goodwill, thereby possibly
requiring an impairment charge in the future.
For
this
item, actual results could differ from those estimates.
Useful
lives and impairment of long-lived assets
The
Company assesses the carrying value of its long-lived assets which include
property and equipment and intangible assets, for future recoverability when
events or changed circumstances indicate that the carrying value may not be
recoverable. Useful lives of long-lived assets are regularly reviewed for their
appropriateness. An impairment loss is recognized if the carrying value of
a
long-lived asset exceeds the sum of its estimated undiscounted future cash
flows
expected from its use. The amount of impairment loss, if any, is determined
as
the excess of the carrying value of the assets over their fair value. Management
assesses long-lived assets for impairment using estimates including discount
rate, future growth rates, general economic, industry conditions and
competition. Future adverse changes in these factors could result in losses
or
inability to recover the carrying value of the long-lived assets, thereby
possibly requiring an impairment charge in the future.
For
this
item, actual results could differ from those estimates.
Stock-based
compensation costs
In
determining the fair value of stock options and warrants issued to employees
and
service providers, using the Black-Scholes option pricing model, the Company
must make estimates of the forfeiture rate, the period in which the holders
of
the options and warrants will exercise the options and warrants and the
volatility of the Company’s stock over that same period. Different estimates
would result in different amounts of compensation being recorded in the
financial statements.
Valuation
of investments
The
Company holds interests in various companies. Management records an investment
impairment charge when it believes an investment has experienced a decline
in
value that is judged to be other than temporary. Management monitors its
investments for impairment by considering current factors including economic
environment, market conditions and operational performance and other specific
factors relating to the business underlying the investment, and records
reductions in carrying values when necessary. The fair value for privately
held
securities is estimated using the best available information as of the valuation
date, including the quoted market prices of comparable public companies, recent
financing rounds of the investee and other investee specific information.
For
this
item, actual results could differ from those estimates.
Determination
of the fair value of the intangible assets on Copernic
acquisition
The
acquisition of Copernic made on December 22, 2005 resulted in the recognition
of
intangible assets totalling $7,900,000 and goodwill of $15,408,721. In 2006,
as
described in note 11, two items reduced the goodwill to $14,571,534. The
determination of the fair value of the acquired intangible assets and goodwill
requires management to estimate the discount rate to be used in the
calculations, the amounts and timing of estimated future net cash flows, royalty
rate, tax rate, weighted average cost of capital, residual growth rate, general
economic and industry conditions. If different estimates had been used, the
purchase price allocation might have been materially different and could cause
the amortization expense for the current and future years to be significantly
different.
Revenue
recognition
Search
advertising, graphic advertising, software licensing, customized development
and
maintenance support revenues are recognized when services are rendered, provided
there is persuasive evidence of an arrangement, the fee is fixed or
determinable, collection is considered probable, and fees are not subject to
forfeiture, refund or other concessions.
With
respect to search advertising and graphic advertising revenues, insertion orders
or signed contracts are generally used as evidence of an arrangement. Revenues
are recognized in accordance with EIC-123,
Reporting
Revenue Gross as a Principal Versus Net as an Agent.
Software
licensing agreements are recognized upon delivery of software if persuasive
evidence of an arrangement exists, collection is probable, the fee is fixed
or
determinable and vendor-specific evidence of an arrangement exists to allocate
the total fee to the different elements of an arrangement. Vendor-specific
objective evidence is typically based on the price charged when an element
is
sold separately, or, in the case of an element not yet sold separately, the
price established by management, if it is probable that the price, once
established, will not change before market introduction.
Revenues
from maintenance support for licenses previously sold and implemented are
recognized ratably over the term of the contract.
Revenues
from customized development, not considered as part of the implementation of
software licenses, are recognized as the services are provided.
Amounts
received in advance of the delivery of products or performance of services
are
classified as deferred revenue.
Estimates
of collection likelihood are based on a number of factors, including past
transaction history with the customer and the credit-worthiness of the customer.
If it is determined that collection of a fee is not probable, management defers
the fee and recognizes revenues at the time collection becomes probable, which
is generally upon receipt of cash.
Recent
accounting changes
a)
For changes affecting 2005
Consolidation
of variable interest entities
The
Canadian Institute of Chartered Accountants (“CICA”) Accounting Guideline 15,
“Consolidation of Variable Interest Entities”, provides clarification on the
consolidation of those entities defined as “variable interest entities”, when
equity investors are not considered to have a controlling financial interest
or
they have not invested enough equity to allow the entity to finance its
activities without additional subordinated financial support from other parties.
Variable interest entities are commonly referred to as special purpose entities.
The guideline came into effect for interim periods beginning on or after
November 1, 2004. The adoption of this section did not have a significant impact
on the financial statements.
b)
For changes affecting 2007
Initial
application of primary source of GAAP
On
January 1, 2007, in accordance with the applicable transitional provisions,
the
Company applied the recommendations of new Section 1506, “Accounting Changes”,
of the CICA’s Handbook. This new section, effective for the years beginning on
or after January 1, 2007, prescribes the criteria for changing accounting
policies, together with the accounting treatment and disclosure of changes
in
accounting policies, changes in accounting estimates and corrections of errors.
Furthermore, the new standard requires the communication of the new primary
sources of GAAP that are issued but not yet effective or not yet adopted by
the
Company. The new standard had a negligible effect on the Company’s financial
statements.
Effective
in January 2007, the Company adopted three new accounting standards issued
by
the CICA: Section 1530, Comprehensive Income; Section 3855, Financial
Instruments - Recognition and Measurement; and Section 3865, Hedges. These
new
accounting standards establish standards for recognizing and measuring financial
instruments, namely financial assets, financial liabilities and derivatives.
Certain changes in the value of these financial instruments are presented under
Comprehensive Income in the Consolidated Statements of Shareholders’ Equity. The
application of these new standards had a negligible effect on the Company’s
financial statements and financial position.
Accounting
policy choice for transaction costs (“EIC-166”)
Issued
in
June 2007, EIC-166 addresses whether the entity must make one accounting policy
choice that applies to all financial assets and financial liabilities classified
other than held for trading. This Abstract mentions that the same accounting
policy choice should be made for all similar financial instruments classified
as
other than held for trading but that a different accounting policy choice might
be made for financial instruments that are not similar. This accounting
treatment should be applied retrospectively to transaction costs accounted
for
in accordance with Section 3855 in financial statements issued for interim
and
annual periods ending on or after September 30, 2007. The adoption of this
Abstract had no impact of the Company’s financial statements.
c)
Recently published accounting changes
Convertible
and other debt instruments with embedded derivatives (“EIC-164”)
EIC-164
addresses the situation where a company issues a debt instrument that is
convertible at any time at the holder’s option into a fixed number of common
shares. Upon conversion, the issuer is either required or has the option to
satisfy all or part of the obligation in cash. The instrument may also permit
the issuer to redeem the instrument prior to maturity, and/or permit the holder
to force the issuer to redeem the instrument prior to maturity. This Abstract
provides guidance on various issues related to such debt
instruments.
The
accounting treatment in this Abstract should be applied retrospectively to
financial instruments accounted for in accordance with Section 3855 in financial
statements issued for interim and annual periods ending on or after June 30,
2007. The adoption of this Abstract had no impact on the financial
statements.
Accounting
by an investor upon a loss of significant influence (“EIC-165”)
Issued
in
April 2007, EIC-165 addresses the situation of how an investor that loses
significant influence in an investee should account for the amount the investor
has in its accumulated other comprehensive income (OCI) for its proportionate
share of the investee’s equity adjustment for OCI. The amount recorded by the
investor in accumulated OCI for the investor’s proportionate share of an
investee’s equity adjustments for OCI should be deducted from or added to the
carrying value of the investment at the time significant influence is lost.
To
the extent that the adjustment results in a carrying value of the investment
that is less than zero, an investor should reduce the carrying value of the
investment to zero and record the remaining balance in net income.
The
accounting treatment in this Abstract should be applied retrospectively, with
restatement of prior periods, to all financial statements for interim and annual
reporting periods ending June 30, 2007. The adoption of this Abstract had no
impact of the Company’s financial statements.
d)
Future accounting changes
CICA
Section 1535 - Capital Disclosures
In
December 2006, the CICA issued Handbook Section 1535 - Capital Disclosures.
The
new accounting standard requires disclosure of information about an entity’s
objectives, policies, and processes for managing capital, as well as
quantitative data about capital and whether the entity has complied with any
capital requirements. This Handbook Section is effective for interim and annual
periods beginning on or after October 1, 2007. The Company is currently
evaluating the impact of adopting this new Section.
CICA
Section 3862 – Financial Instruments – Disclosures
CICA
Section 3863 – Financial Instruments – Presentation
In
December 2006, the CICA issued Handbook Section 3862 and 3863 that provide
additional guidance regarding disclosure of the risks associated with both
recognized and unrecognized financial instruments and how those risks are
managed. These Handbook Sections are also effective for interim and annual
periods beginning on or after October 1, 2007. The Company is currently
evaluating the impact of adopting these new Sections.
EIC-169,
Determining Whether a Contract is Routinely Denominated in a Single
Currency
Issued
January 8th, 2008, EIC-169 provides guidance on how to define or apply the
term
“routinely denominated in commercial transactions around the world” as discussed
in Section 3855 when assessing contracts for embedded foreign currency
derivatives. It also determines the factors that can be used to determine
whether a contract for the purchase or sale of a non-financial item such as
a
commodity is routinely denominated in a particular currency in commercial
transactions around the world. The accounting treatment of this Abstract should
be applied retrospectively to embedded foreign currency derivatives in host
contracts that are not financial instruments accounted for in accordance with
Section 3855 in financial statements issued for interim and annual periods
ending on or after March 15, 2008. The adoption of this Abstract will not have
any impact on the Company’s financial statements.
Goodwill
and Intangible Assets - Section 3064
In
January 2008, the CICA issued Section 3064, Goodwill and Intangible Assets,
which replaces Section 3062, Goodwill and Other Intangible Assets. The
objectives of Section 3064 are to reinforce the principle-based approach to
the
recognition of assets only in accordance with the definition of an asset and
the
criteria for asset recognition; and clarify the application of the concept
of
matching revenues and expenses such that the current practice of recognizing
asset items that do not meet the definition and recognition criteria is
eliminated. This standard also provides guidance for the recognition of
internally developed intangible assets (including research and development
activities), ensuring consistent treatment of all intangible assets, whether
separately acquired or internally developed. This Section applies to interim
and
annual periods beginning on or after October 1, 2008, with early adoption
encouraged. The Company is currently evaluating the impact of adopting this
new
Section.
Transition
to International Financial Reporting Standards (“IFRS”)
The
CICA
has announced the final date for the required conversion of publicly accountable
enterprises from Canadian GAAP to IFRS. The official changeover date is for
interim and annual financial statements relating to fiscal years beginning
on or
after January 1, 2011.
Results
of Operations
Revenues
2007
as compared to 2006
In
2007,
the Company generated revenues of $8,116,408 compared to $9,596,402 for the
previous year, a decrease of 15%.
During
2007, search advertising revenues increased to $7,246,838 from $7,197,868 in
2006, an increase of $48,970 or 0.7%. In the first half of 2007, revenues were
higher than the same period in 2006 but were lower during the second half of
2007.
In
2007,
graphic advertising totalled $107,871 compared to $827,104 for the same period
last year, a decrease of $719,233 or 87%. The decrease is due to the decline
in
pop-up campaigns and a decrease in demand for all other graphic ad units.
Software
licensing stood at $415,263 in 2007 compared to $957,488 in 2006, a decrease
of
$542,225 or 57%. The decrease is explained by the sale of one major CDS license
in 2006 compared to two smaller CDS licenses in 2007.
Customized
development and maintenance support revenues generated $346,436 in 2007 compared
to $613,942 for the same period last year, a decrease of $267,506 or 44%. The
decrease is explained by maintenance support contracts that were not renewed
in
2007.
2006
as compared to 2005
Revenues
for 2006 were $9,596,402 compared to $9,443,975 in 2005, an increase of
2%.
In
2006
search advertising revenues increased by $2,227,495 or 45% to $7,197,868 from
$4,970,373 in 2005. The increased is explained mainly by an expanded
distribution network and new clients and additional revenues generated by the
acquisition of Copernic Technologies Inc. at the end of 2005.
Graphic
advertising revenues totalled $827,104 in 2006 compared to $4,456,399 for the
same period in 2005, a decrease of $3,629,295 or 81%. The variance is explained
by the decline of pop-up campaigns, a decrease in demand for all other graphic
ad units and significant delays in re-orientating our sales team’s focus on
quality top-tier agencies as opposed to low-tier broker business.
Software
licensing went from $6,671 in 2005 to $957,488 in 2006 an increase of $950,817.
The 2005 results represents only 7 days of operations of Copernic Technologies
Inc. as compared to a full year in 2006 and by a sale of one major CDS license
during 2006.
In
2006,
customized development and maintenance support amounted $613,942 compared to
$10,532 in 2005 an increase of $603,410. The 2005 results represents only 7
days
of operations of Copernic Technologies Inc. as compared to a full year of
operation in 2006.
Expenses
Cost
of revenues
Cost
of
revenues is comprised of partners’ payouts and bandwidth costs to deliver our
services.
2007
as compared to 2006
In
2007,
cost of revenues represented $2,636,410 or 36% over search and graphic
advertising revenues, compared to $2,704,101 or 34% over search and graphic
advertising revenues for the same period in 2006.
Search
payouts totalled $2,244,715 in 2007 compared to $2,022,516 for the same period
last year and represented respectively 31% and 28% over search revenues. The
increase in percentage in 2007 is explained by higher payouts to partners which
deliver better quality traffic.
In
2007,
graphic payouts amounted to $17,641 compared to $286,919 for the same period
in
2006 and represented respectively 16% and 35% over graphic advertising revenues.
The decrease in percentage is explained by reversal of old graphic payable
payouts that totalled respectively $42,037 in 2007 compared to $144,671 in
2006.
Excluding the cumulative reversals of both years, the percentage of payouts
over
graphic revenues would both have been respectively 55% and 52%. The increase
in
percentage in 2007 is also explained by higher payouts to partners which deliver
better quality traffic.
In
2007,
bandwidth costs decreased by $20,612 or 5% to $374,054 from $394,666 for the
same period last year. These reductions were due to lower traffic.
2006
as compared to 2005
For
the
fiscal year ended December 31, 2006, cost of revenues represented $2,704,101
or
34% over search and graphic advertising revenues, compared to $4,183,445 or
44%
over search and graphic revenues for the same period in 2005.
In
2006,
search payouts totalled $2,022,516 compared to $1,638,780 for the same period
last year and represented respectively 28% and 33% over search revenues. The
decrease in percentage in 2006 is explained by new search revenues through
Copernic Agent® and Copernic Desktop Search® that have no payout associated to
them.
For
the
twelve-month period ended December 31, 2006, graphic payouts stood at $286,919
or 35% over graphic revenue compared to $2,264,700 or 51% over related revenue
for the same period in 2005. The decrease in percentage over revenue in 2006
is
explained by the reversal of old accruals amounting to $144,671. If we exclude
this adjustment, the payouts for 2006 would have stood at $431,590, representing
52% over graphic revenues compared to 51% for the same period last
year.
The
bandwidth costs were $394,666 for the twelve-month period ended December 31,
2006, compared to $279,965 for the same period in 2005.
Marketing,
sales and services
Marketing,
sales and services consist primarily of salaries, commissions and related
personnel expenses for our sales force, advertising and promotional expenses,
as
well as the provision for doubtful accounts.
2007
as compared to 2006
For
the
fiscal year ended December 31, 2007, marketing, sales and services increased
by
$47,646 or 3% from $1,850,176 in 2006 to $1,897,822. The variance for the
twelve-month period reflected an increase in salaries due to reorganization
of
the department, professional services due to new sales consultants for CDS
and
stock-based compensation of respectively $127,000, $93,000 and $67,000. The
increases were offset by a decrease in purchase of algorithmic contents and
publicity and promotion of respectively of $137,000 and $117,000 due to reduced
revenue.
2006
as compared to 2005
For
the
year ended December 31, 2006, marketing, sales and services expenses stood
at
$1,850,176 compared to $2,023,925 in 2005, representing a decrease of $173,749
or 9%.
The
variance for the year is explained by the decrease of charges paid for
algorithmic content of $162,000, decrease of publicity, bad debt expense and
salaries and related costs of respectively $69,000, $62,000 and $38,000. The
decrease was offset by an increase in recruiting fees and professional services
of respectively $97,000 and $65,000.
General
and administration
General
and administrative expenses include in the salaries and associated costs of
employment of executive management and finance personnel, including stock-based
compensation. These costs also include facility charges, investor relations,
as
well as legal, tax and accounting, consulting and professional service fees
associated with operating our business and corporate compliance
requirements.
2007
as compared to 2006
For
the
year ended December 31, 2007, general and administrative expenses increased
by
$695,245 to $4,691,572 from $3,996,327 in 2006. The increase is mainly explained
by the termination costs of approximately $695,000, which included a non-cash
item for accelerated vesting options of $253,236, related to the departure
of
the former President and CEO of the Company in January 2007.
2006
as compared to 2005
In
2006,
general and administrative expenses amounted to $3,996,327 compared to
$5,692,092 in 2005, a decrease of $1,695,765.
The
decrease is mainly explained by the reduction of $2,278,000 of professional
fees, which included a reimbursement of $460,000 by our insurance company in
relation with the SEC investigation. This reduction was mainly offset by two
items: an increase of $306,000 in stock-based compensation explained by a
combination of a reversal of expenses due to cancellation of options in 2005
and
new options granted and an increase of $245,000 of salaries and related costs
mainly related to the acquisition of Copernic Technologies Inc.
Product
development and technical support
Product
development and technical support costs include the salaries and associated
costs of employment of our team software developers and maintenance of our
metasearch engine and other IT systems. These charges also include the costs
of
technical support and license maintenance. Research and development (R&D)
tax credits are also recorded against product development and technical support
expenses.
2007
as compared to 2006
For
the
fiscal year ended December 31, 2007, product development and technical support
decreased to $2,416,410 from $2,538,867 in 2006, representing a decrease of
$122,457. The decrease is explained by a reduction in salaries due to a
reorganization of our R&D team.
2006
as compared to 2005
In
2006,
product development and technical support expenses amounted to $2,538,867
compared to $1,286,345 in 2005, an increase of $1,252,522 and mainly explained
by additional expenses of $1,460,970 related to the acquisition of Copernic
Technologies Inc. in December 2005 and offset by a reduction in salaries
expenses of $207,000 due to the reorganization of the R&D department in
Montreal.
Amortization
of property and equipment
2007
as compared to 2006
Amortization
of property and equipment totalled $302,509 for the year ended December 31,
2007, compared to $178,192 for the same period last year. The increase is
explained by acquisitions of equipment during the year of approximately $150,000
and the change in the amortization rates, from 30% in 2006 to 50% in 2007 and
from 20% to 33% for computer equipment and for furniture
respectively.
2006
as compared to 2005
In
2006,
amortization of property and equipment stood at $178,192 compared to $106,788
in
2005. The increase was related to acquisition of Copernic Technologies Inc.
at
the end of December 2005 and acquisitions of equipment during 2006 for
approximately $76,000.
Amortization
of intangible assets
2007
as compared to 2006
For
the
fiscal year ended December 31, 2007, amortization of intangible assets decrease
to $1,991,286 from $2,067,009 in 2006. The decrease is explained by the
write-down of intangible assets recorded in Q3 2006 of $413,238.
2006
as compared to 2005
Amortization
of intangible assets stood at $2,067,009 in 2006 compared to $242,031 in 2005.
The increase is explained by the amortization of intangible assets resulting
from the acquisition of Copernic Technologies Inc. on December 22,
2005.
Write-downs
and settlement costs
2007
as compared to 2006
In
2007,
write-downs and settlement costs amounted to $10,146,311 compared to $1,683,238
for the same period last year.
In
Q4
2007, the Company recorded write-downs of goodwill and intangible assets related
to Copernic Technologies Inc. acquisition of respectively $7,214,531 and
$1,985,470. The Company’s software unit was facing delays in execution and
changes of market conditions of its commercial deployment solutions. Based
on
the assessment of the fair value of the Company’s assets related to the software
unit, the Company concluded that these assets had suffered a loss in value
and
the fair values of goodwill and intangible assets were significantly less than
the carrying value for these assets.
In
Q4
2007, the Company reported decreased revenues due to industry pressures on
advertising rates, slow down in sponsored clicks and general decrease for all
graphic ads. Based on the Company assessment of the fair value of its assets
related to search / media unit, the Company concluded that the goodwill had
suffered a loss in value and the fair value of the related goodwill was
significantly less then its carrying value. Therefore, a write-down of goodwill
of $846,310 for search / media unit was recorded in 2007 to bring it to
nil.
Also
in
Q4 2007, based on its assessment of the fair value of the Company’s investment
in LTRIM, the Company concluded that its investment had suffered a loss in
value
other than a temporary decline due to LTRIM’s significant corporate
restructuring and therefore recorded a write-down of $150,000 to bring it to
nil.
These
expenses were offset by the reversal of $50,000 of class action settlement
costs.
In
2006,
the Company recorded class action settlement and closure costs of $700,000,
write-downs of property and equipment and intangible assets related to graphic
advertising for a total of $413,238 and a write-down of LTRIM investment of
$570,000.
2006
as compared to 2005
In
2006,
the Company recorded class action settlement and closure costs of $700,000,
write-downs of property and equipment and intangible assets related to graphic
advertising for a total of $413,238 and a write-down of LTRIM investment of
$570,000, none in 2005.
Interest
and other income
2007
as compared to 2006
Interest
and other income stood at $401,183 in 2007 compared to $415,950 in
2006.
2006
as compared to 2005
Interest
income and other income decreased to $415,950 in 2006 from $768,738 in 2005.
The
decrease reflected lower liquidities following the acquisition of Copernic
Technologies Inc. at the end of 2005.
Loss
on foreign exchange
Loss
on
foreign exchange totalled $115,071 for the year ended December 31, 2007 compared
to $82,203 in 2006 and $47,080 in 2005.
The
increased loss is mainly due to the appraisal of the Canadian dollar in
2007.
Recovery
of income taxes
For
the
fiscal year 2007, the recovery for current and future income taxes amounted
to
$1,248,974 compared to $729,053 in 2006 and $26,010 in 2005.
In
2007,
the recovery of income taxes is explained by current income tax paid of $1,479
and the reversal of $1,250,453 of future income tax liability due to the
current
amortization and write-downs of Copernic Technologies Inc.’s intangible
assets.
In
2006,
the recovery of future income taxes is explained by a recovery of previous
year’s income tax for $4,876 and the reversal of $724,177 of future income tax
liability related to the amortization of Copernic Technologies Inc.’s intangible
assets.
In
2005,
the recovery of income taxes is explained by the reassessment of previous year’s
income tax returns for $12,046 and the reversal of future income tax liability
related to the amortization of Copernic Technologies Inc.’s intangible assets
for $13,964.
Loss
from continuing operations and loss per share from continuing
operations
The
Company reported a loss from continuing operations of $14,430,826 ($0.99 per
share) in 2007, compared to a loss of $4,358,708 ($0.31 per share) in 2006
and a
loss of $3,342,983 ($0.27 per share) in 2005.
Results
of discontinued operations and loss per share from discontinued
operations
Results
from discontinued operations for Digital Arrow are nil in 2007 compared to
contribution to earnings of $89,328 ($0.01 per share) in 2006 and a loss of
$2,315,335 ($0.19 per share) in 2005.
In
2006,
the contribution of Digital Arrow was due to a reversal of a reserve for salary
expenses after a settlement with two former employees and a reversal of the
provision for remaining restructuring costs.
In
2005,
the loss from discontinued operations of Digital Arrow amounting to $2,315,335
included a write-down of $1,625,898 for property and equipment, intangible
assets and goodwill.
Loss
for the year
The
loss
for the year totalled $14,430,826 ($0.99 per share) in 2007 compared to a loss
of $4,269,380 ($0.30 per share) in 2006 and a loss of $5,658,318 ($0.46 per
share in 2005). For 2007, 2006 and 2005, there is no difference between net
loss
under US GAAP as compared to Canadian GAAP.
Liquidity
and capital resources
As
at
December 31, 2007, the Company had liquidities of $6,872,412 which were composed
of $2,099,560 in cash and cash equivalents, restricted cash of $807,468 and
$3,965,384 in temporary investments compared to $7,971,459 in 2006 which
consisted of $2,379,617 in cash and cash equivalents and $5,591,842 in temporary
investments. For the year ended December 31, 2007, working capital was
$6,413,044 compared to $8,533,546 for the previous year.
Operating
activities
In
2007,
the cash used for operating activities of $1,527,890 is mainly due to the loss
from continuing operations net of non-cash items of $2,518,048 offset by net
change in non-cash working capital items of $990,158. The cash used for
discontinued operations in 2007 totalled $6,253.
In
2006,
the cash used is explained by the loss from continuing operations net of
non-cash items of $1,343,253 offset by net change in non-cash working capital
items of $515,619. The cash used for discontinued operations in 2006 stood
at
$83,948.
In
2005,
the cash used is mainly due to the loss from continuing operations net of
non-cash items of $2,871,195 offset by the net change in non-cash working
capital of $1,420,013. The cash used from discontinued operations amounted
to
$630,288 in 2005.
Investing
activities
In
2007,
investing activities provided cash of $1,408,367 mainly explained by the
decrease of temporary investments of $1,626,458 offset by the purchases of
property and equipment and intangible assets of $218,091.
In
2006,
investing activities used cash of $1,326,652 mainly explained by the purchase
of
temporary investments of $1,578,530 offset by a reimbursement related to
Copernic Technologies Inc. business acquisition of $379,382 and purchases of
intangible assets and property and equipment of $127,504.
In
2005,
investing activities used cash of $13,131,709 of which $15,851,922 was used
for
the acquisition of Copernic Technologies Inc., $140,630 used for purchases
of
property and equipment an intangible assets and the decrease in temporary
investments provided cash of $2,860,843.
Financing
activities
In
2007,
financing activities provided cash totalling $676,258 from issuance of capital
stock upon exercise of options offset by repayment of obligations under capital
leases of $23,071. In 2006, no cash was provided by, nor used in the financing
activities of the Company. In 2005, financing activities used cash of $1,046,731
mainly explained by the redemption of common shares of the Company.
Liquidity
and capital resources
The
Company considers that its liquidities will be sufficient to meet normal
operating requirements until the end of 2008. In the long term, the Company
may
require additional liquidity to fund growth, which could include additional
equity offerings or debt financing.
The
Company retained ThomasLloyd Capital LLC (“ThomasLloyd Capital”) as its
financial and investment banking advisor.
Concentration
of credit risk with customers
As
at
December 31, 2007, four customers represented 54% of our accounts receivable
compared to 54% from three customers for the previous year resulting in a
significant concentration of credit risk. Management monitors the evolution
of
these customers closely in order to rapidly identify any potential problems.
These customers, which represented more than 10% of the Company’s net accounts
receivable, have paid accounts receivable as per their commercial agreements.
The Company also monitors the other accounts receivable and there is no
indication of credit risk deterioration. Nevertheless we cannot assure that
we
can retain the business of these customers or that their business will not
decline generally in the future.
Q4
2007 Results
Revenues
Revenues
for the three-month period ended December 31, 2007 (“Q4”) totalled $1,654,352
compared to $3,566,421 for the same period in 2006, a decrease of $1,912,069
or
54%. In Q4 2007, each revenue type was lower than the same period in
2006.
Search
advertising revenues went from $2,503,771 in Q4 2006 to $1,431,583 in Q4 2007,
a
decrease of $1,072,188 or 43%. The decrease is explained by a change of our
client mix.
Graphic
advertising totalled $14,584 for the three-month period ended December 31,
2007
compared to $131,634 for the same period last year, a decrease of $117,050
or
89%. The decrease is due to the decline in pop-up campaigns and a general
decrease in demand for all other graphic ad units.
Software
licensing stood at $85,751 in Q4 2007 compared to $701,181 in Q4 2006, a
decrease of $615,430 or 88%. The decrease is explained by the sale of one
significant CDS license in Q4 2006 of approximately $570,000 compared to no
significant one in 2007.
Customized
development and maintenance support revenues generated $122,434 in Q4 2007
compared to $229,834 for the same period last year, a decrease of $107,400
or
47%. The decrease is explained by two contracts that were not renewed in 2007
for a total amount of $192,000 offset by various new small
contracts.
Expenses
Cost
of revenues
In
Q4
2007, cost of revenues represented $543,763 or 38% over search and graphic
advertising revenues, compared to $918,920 or 35% over search and graphic
advertising revenues for the same period in 2006.
In
Q4
2007, search payouts totalled $428,193 compared to $754,628 for the same period
last year, represented 35% and 34% over search revenues respectively.
In
Q4
2007, graphic payouts stood at $5,321 compared to $77,044 for the same period
in
2006, represented respectively 36% and 59% over graphic advertising revenue.
In
2007, the payouts were reduced by the reversal of old graphic payable of $3,019.
Excluding the adjustment, the percentage of payout over revenue would have
been
57%. The higher percentage in Q4 2006 is explained by a fixed payout of $10,000
for a specific partner who got cancelled.
The
bandwidth costs were $110,249 in Q4 2007 compared to $87,248 for the same period
in 2006. The bandwidth costs were higher in Q4 2007 due to the transition period
of shifting data centers.
Marketing,
sales and services
In
Q4
2007, marketing, sales and services expenses decreased to $480,531 from $502,415
in Q4 2006, a decrease of $21,884. The variance is mainly explained by the
decrease in training and recruiting fees of $96,000 for our US team incurred
in
Q4 2006 offset by the increase in stock based compensation costs and sales
consulting fees of respectively $46,000 and $29,000.
General
and administration
General
and administrative expenses in Q4 2007 totalled $1,020,709 as compared to
$1,029,243 for the same period last year, a decrease of $8,534 or 1%. The
variance is explained by a decrease of insurance expense and salaries offset
by
an increase in legal fees and stock-based compensation.
Product
development and technical support
Product
development and technical support expenses amounted to $651,830 in Q4 2007,
compared to $614,340 for the same period last year, an increase of $37,490
or
6%. The increase is explained by the increase in stock based compensation costs
of $43,000 offset by the increase of tax credit of $62,000 and the reversal
in
Q4 2006 of a provision for litigation of $27,000.
Amortization
of property and equipment
Amortization
of property and equipment totalled $119,220 in Q4 2007, compared to $48,968
for
the same period last year. The increase is explained by acquisitions of
equipment and the change in the amortization rates, from 30% in 2006 to 50%
in
2007 and from 20% to 33% for computer equipment and for furniture
respectively.
Amortization
of intangible assets
Amortization
of intangible assets increased to $511,384 in Q4 2007, compared to $487,914
for
the same period last year. The increase is explained by acquisitions of software
and the change in the amortization rates, from 30% in 2006 to 50% in 2007 for
software.
Write-downs,
settlement and other costs
In
Q4
2007, write-downs and settlement costs amounted to $10,146,311.
In
Q4
2007, the Company recorded write-downs of goodwill and intangible assets related
to Copernic Technologies Inc. acquisition of respectively $7,214,531 and
$1,985,470. The Company’s software unit was facing delays in execution and
changes of market conditions of its commercial deployment solutions. Based
on
the Company’s assessment of the fair value of the assets related to the software
unit, the Company concluded that its assets had suffered a loss in value and
the
fair value of intangible assets was significantly less than the carrying value
for these assets. A write-down of goodwill of $846,310 due to industry pressures
on advertising rates, slow down in sponsored clicks and general decrease for
all
graphic ads related to search / media and a write-down of LTRIM investment
of
$150,000 were also recorded. These expenses were offset by the reversal of
$50,000 for class action settlement costs.
Interest
and other income
Interest
income and other income decreased to $74,078 in Q4 2007 from $102,978 in Q4
2006. The decrease is explained by lower liquidities during Q4 2007 compared
to
the same period last year.
Loss
on foreign exchan
ge
Loss
on
foreign exchange totalled $41,164 for Q4 2007, compared to a gain of $51,392
for
the same period last year mainly due to the appraisal of the Canadian dollar
in
Q4 2007.
Income
taxes
The
recovery of future income taxes relates to the amortization of intangible assets
which does not have the same asset base for accounting and tax purposes.
Recovery of future income taxes totalled $796,401 in Q4 2007, compared to
$246,356 for the same period last year. The increase of recovery for income
taxes is explained by the reversal of future income taxes liability in relation
with the write-downs of intangible assets in Q4 2007.
Loss
(earnings) from continuing operations and loss (earnings) per share from
continuing operations
The
Company reported a loss from continuing operations of $10,990,081 ($0.75 per
share) in Q4 2007, compared to earnings of $365,347 ($0.03 per share) for the
same period last year.
Results
of discontinued operations and loss per share from discontinued
operations
Results
from discontinued operations for Digital Arrow in Q4 2007 are $nil compared
to
contribution to earnings of $54,828 ($0.00 per share) in Q4 2006.
Net
loss (earnings) and net loss (earnings) per share
Net
loss
for the three-month period ended December 31, 2007, totalled $10,990,081 ($0.75
per share), compared to net earnings of $420,175 ($0.03) per share for the
same
period last year.
Off-balance
sheet arrangements
As
at
December 31, 2007 and 2006, the Company has no off-balance sheet
arrangements.
Contractual
obligations, contingent liabilities and commitments
The
following table summarizes our contractual obligations as at December 31, 2007,
and the effect such obligations are expected to have on our liquidity and cash
flows in future periods:
|
|
Operating leases
|
|
Years:
|
|
$
|
|
2008
|
|
|
524,000
|
|
2009
|
|
|
174,000
|
|
2010
|
|
|
56,000
|
|
2011
|
|
|
33,000
|
|
2012
|
|
|
22,000
|
|
Thereafter
|
|
|
-
|
|
The
Company maintains director and officer insurance, which may cover certain
liabilities arising from its obligation to indemnify its directors, and officers
and former directors, officers and employees of acquired companies, in certain
circumstances. It is not possible to determine the maximum potential amount
under these indemnification agreements due to the limited history of prior
indemnification claims and the unique facts and circumstances involved in each
particular agreement. Such indemnification agreements may not be subject to
maximum loss clauses. Historically, the Company has not incurred material costs
as a result of obligations under these agreements and it has not accrued any
liabilities related to such indemnification obligations in its financial
statements.
On
June
7, 2007, the Company retained ThomasLloyd Capital LLC (“ThomasLloyd Capital”) as
its financial and investment banking advisor. In consideration for these
services, the Company has committed to pay ThomasLloyd Capital a monthly fee
of
$5,000 for seven months beginning June 1, 2007, plus a success fee of the
greater of $1,000,000 (but in no event shall such amount exceed 3% of the
transaction value) or 2% of the transaction value but in no event to exceed
$2,000,000 (less any amounts previously paid as monthly fees) plus an additional
fee of $200,000, credited against the above fees payable upon delivery of a
fairness opinion.
As
at
December 31, 2007, the Company has change of control agreements with certain
executive officers. If there is a change of control of the Company and their
employments are not required, the Company will have to pay lump sums up to
a
maximum of $1,018,000 for these specific officers.
Risks
and uncertainties
Copernic
Inc.’s Management considers that these following factors, among others, should
be considered in evaluating its future results of operations.
Our
revenues depend to a high degree on our relationship with two customers, the
loss of which would adversely affect our business and results of
operations.
For
the
year ended December 31, 2007, approximately 20% and 14% respectively of our
revenues were derived from agreements with our two largest customers. Revenues
from these customers represented
22%
and
11% of our revenues in
2006
and
16
% and
11% of our revenues in 2005. Although we monitor our accounts receivable for
credit risk deterioration and these customers have been paying their payables
to
Copernic Inc. in accordance with the terms of their agreements with the Company,
there can be no assurance that they will continue to do so or that they will
continue to do so at the volume of business they have done historically. Our
loss of these customers’ business would adversely affect our business and
results of operations.
Our
operating results may fluctuate, which makes our results difficult to predict
and could cause our results to fall short of expectations.
Our
operating results may fluctuate as a result of a number of factors, many of
which are outside of our control. For these reasons, comparing our operating
results on a period-to-period basis may not be meaningful, and you should not
rely on our past results as an indication of our future performance. Our
operating results may fluctuate as a result of many factors related to our
business, including the competitive conditions in the industry, loss of
significant customers, delays in the development of new services and usage
of
the Internet, as described in more detail below, and general factors such as
size and timing of orders and general economic conditions. Our quarterly and
annual expenses as a percentage of our revenues may be significantly different
from our historical or projected rates. Our operating results in future quarters
may fall below expectations. Any of these events could cause our stock price
to
fall. Each of the risk factors listed in this “Risk Factors” section, and the
following factors, may affect our operating results:
|
·
|
Our
ability to continue to attract users to our Web sites.
|
|
·
|
Our
ability to monetize (or generate revenue from) traffic on our Web
sites
and our network of advertisers’ Web sites.
|
|
·
|
Our
ability to attract advertisers.
|
|
·
|
The
amount and timing of operating costs and capital expenditures related
to
the maintenance and expansion of our businesses, operations and
infrastructure.
|
|
·
|
Our
focus on long term goals over short term results.
|
|
·
|
The
results of any investments in risky projects.
|
|
·
|
Payments
that may be made in connection with the resolution of litigation
matters.
|
|
·
|
General
economic conditions and those economic conditions specific to the
Internet
and Internet advertising.
|
|
·
|
Our
ability to keep our Web sites operational at a reasonable cost and
without
service interruptions.
|
|
·
|
Geopolitical
events such as war, threat of war or terrorist actions.
|
|
·
|
Our
ability to generate CDS revenues through licensing and revenue
share.
|
Because
our business is changing and evolving, our historical operating results may
not
be useful to you in predicting our future operating results. In addition,
advertising spending has historically been cyclical in nature, reflecting
overall economic conditions as well as budgeting and buying patterns. Also,
user
traffic tends to be seasonal.
We
rely on our Web site partners for a significant portion of our net revenues,
and
otherwise benefit from our association with them. The loss of these Web site
partners could prevent us from receiving the benefits we receive from our
association with them, which could adversely affect our
business.
We
provide advertising, Web search and other services to members of our partner
Web
sites. We expect the percentage of our revenues generated from this network
to
increase in the future. We consider this network to be critical in the future
growth of our revenues. However, some of the participants in this network may
compete with us in one or more areas. Therefore, they may decide in the future
to terminate their agreements with us. If our Web site partners decide to use
a
competitor’s or their own Web search or advertising services, our revenues would
decline.
We
face significant competition from Microsoft, Yahoo, Google and Ask.com.
We
face
formidable competition in every aspect of our business, and particularly from
other companies that seek to connect people with information on the Web and
provide them with relevant advertising. Currently, we consider our primary
competitors to be Microsoft, Yahoo, Google and Ask.com.
Microsoft,
Yahoo, Google and Ask.com have a variety of Internet products, services and
content that directly competes with our products, services, content and
advertising solutions.
We
expect
that Microsoft will increasingly use its financial and engineering resources
to
compete with us.
Microsoft,
Yahoo, Google and Ask.com have more employees and cash resources than we do.
These companies also have longer histories operating search engines and more
established relationships with customers. They can use their experience and
resources against us in a variety of competitive ways, including by making
acquisitions, investing more aggressively in research and development and
competing more aggressively for advertisers and Web sites. Microsoft and Yahoo
also may have a greater ability to attract and retain users than we do because
they operate Internet portals with a broad range of products and services.
If
Microsoft, Yahoo, Google or Ask.com are successful in providing similar or
better Web search results compared to ours or leverage their platforms to make
their Web search services easier to access than ours, we could experience a
significant decline in user traffic. Any such decline in user traffic could
negatively affect our net revenues.
We
face competition from other Internet companies, including Web search providers,
Internet advertising companies and destination Web sites that may also bundle
their services with Internet access.
In
addition to Microsoft, Yahoo, Google and Ask.com, we face competition from
other
Web search providers, including companies that are not yet known to us. We
compete with Internet advertising companies, particularly in the areas of
pay-for-performance and keyword-targeted Internet advertising. Also, we may
compete with companies that sell products and services online because these
companies, like us, are trying to attract users to their Web sites to search
for
information about products and services. Barriers to entry in our business
are
generally low and products, once developed, can be distributed quickly and
to a
wide range of customers at a reasonably low cost.
We
also
compete with destination Web sites that seek to increase their search-related
traffic. These destination Web sites may include those operated by Internet
access providers, such as cable and DSL service providers. Because our users
need to access our services through Internet access providers, they have direct
relationships with these providers. If an access provider or a computer or
computing device manufacturer offers online services that compete with ours,
the
user may find it more convenient to use the services of the access provider
or
manufacturer. In addition, the access provider or manufacturer may make it
hard
to access our services by not listing them in the access provider’s or
manufacturer’s own menu of offerings. Also, because the access provider gathers
information from the user in connection with the establishment of a billing
relationship, the access provider may be more effective than we are in tailoring
services and advertisements to the specific tastes of the user.
There
has
been a trend toward industry consolidation among our competitors, and so smaller
competitors today may become larger competitors in the future. If our
competitors are more successful than we are at generating traffic and
advertising, our revenues may decline.
We
face competition from traditional media companies, and we may not be included
in
the advertising budgets of large advertisers, which could harm our operating
results.
In
addition to Internet companies, we face competition from companies that offer
traditional media advertising opportunities. Most large advertisers have set
advertising budgets, a very small portion of which is allocated to Internet
advertising. We expect that large advertisers will continue to focus most of
their advertising efforts on traditional media. If we fail to convince these
companies to spend a portion of their advertising budgets with us, or if our
existing advertisers reduce the amount they spend on our programs, our operating
results would be harmed.
Our
revenues declined in 2007 and we are experiencing downward pressure on our
operating margin, which we expect will intensify in the
future.
We
believe our operating margin may decline as a result of increasing competition
and increased expenditures for all aspects of our business as a percentage
of
our revenues, including product development and sales and marketing expenses.
Also, our operating margin has declined as a result of increases in the
proportion of our revenues generated from our partner Web sites. The margin
on
revenues we generate from our partner Web sites is generally significantly
less
than the margin on revenues we generate from advertising on our Web sites.
Additionally, the
margin
we
earn on revenues generated from our partner Web sites could decrease in the
future if our partners require a greater portion of the advertising fees.
If
we
do not continue to innovate and provide products and services that are useful
to
users, we may not remain competitive, and our revenues and operating results
could suffer.
Our
success depends on providing products and services that people use for a high
quality Internet experience. Our competitors are constantly developing
innovations in Web search, online advertising and providing information to
people. As a result, we must continue to invest significant resources in
research and development in order to enhance our Web search technology and
our
existing products and services and introduce new high-quality products and
services that people will use. If we are unable to predict user preferences
or
industry changes, or if we are unable to modify our products and services on
a
timely basis, we may lose users, advertisers and Web site partners. Our
operating results would also suffer if our innovations were not responsive
to
the needs of our users, advertisers and Web site partners are not appropriately
timed with market opportunity, effectively brought to market or well received
in
the market place. As search technology continues to develop, our competitors
may
be able to offer search results that are, or that are perceived to be,
substantially similar or better than those generated by our search services.
This may force us to compete on bases in addition to quality of search results
and to expend significant resources in order to remain competitive.
Our
business depends on a strong brand, and if we are not able to maintain and
enhance our brands, our ability to expand our base of users and advertisers
will
be impaired and our business and operating results will be harmed.
We
believe that the brand identity that we have developed has significantly
contributed to the success of our business. We also believe that maintaining
and
enhancing the Company’s brands are critical to expanding our base of users and
advertisers. Maintaining and enhancing our brands may require us to make
substantial investments and these investments may not be successful. If we
fail
to promote and maintain the Mamma® and Copernic® brands, or if we incur
excessive expenses in this effort, our business, operating results and financial
condition will be materially and adversely affected. We anticipate that, as
our
market becomes increasingly competitive, maintaining and enhancing our brands
may become increasingly difficult and expensive. Maintaining and enhancing
our
brands will depend largely on our ability to continue to provide high quality
products and services, which we may not do successfully.
We
generated a significant portion of our revenues in
2007
from our
advertisers. Our advertisers can generally terminate their contracts with us
at
any time. Advertisers will not continue to do business with us if their
investment in advertising with us does not generate sales leads, and ultimately
customers, or if we do not deliver their advertisements in an appropriate and
effective manner.
New
technologies could block our ads, which would harm our
business.
Technologies
are being developed that can block the display of our ads. Most of our revenues
are derived from fees paid to us by advertisers in connection with the display
of ads on Web pages. As a result, ad-blocking technology could, in the future,
adversely affect our operating results.
We
generate all of our revenue from advertising and software licensing, and the
reduction of spending by or loss of customers could seriously harm our
business.
If
we are
unable to remain competitive and provide value to our advertisers, they may
stop
placing ads with us, which could negatively affect our net revenues and
business. Copernic has on-going efforts to maintain a high quality network
of
publishers in order to offer advertisers high quality users that will provide
for a satisfactory ROI. Therefore, from time to time we cease sending
advertisements to what we determine are low quality publishers. This can reduce
our revenues in the short term in order to create advertiser retention in the
long term.
We
make investments in new products and services that may not be
profitable.
We
have
made and will continue to make investments in research, development and
marketing for new products, services and technologies. Our success in this
area
depends on many factors including our innovativeness, development support,
marketing and distribution. We may not achieve significant revenue from a new
product for a number of years, if at all. For the years 2006 and 2007, we did
not generate significant
revenues
from licensing
Copernic® software and we cannot assure you that we will generate significant
revenue from licensing of Copernic ® software going forward. In addition,
our
competitors are constantly improving their competing software, and if we fail
to
innovate and remain competitive our revenues from software licensing will
decline.
Volatility
of stock price and trading volume could adversely affect the market price and
liquidity of the market for our Common Shares.
Our
Common Shares are subject to significant price and volume fluctuations, some
of
which result from various factors including (a) changes in our business,
operations, and future prospects, (b) general market and economic conditions,
and (c) other factors affecting the perceived value of our Common Shares.
Significant price and volume fluctuations have particularly impacted the market
prices of equity securities of many technology companies including without
limitation those providing communications software or Internet-related products
and services. Some of these fluctuations appear to be unrelated or
disproportionate to the operating performance of such companies. The market
price and trading volume of our Common Shares have been, and may likely continue
to be, volatile, experiencing wide fluctuations. In addition, the stock market
in general, and market prices for Internet-related companies in particular,
have
experienced volatility that often has been unrelated to the operating
performance of such companies. These broad market and industry
fluctuations
may
adversely affect the
price
of
our stock, regardless of our operating performance.
Furthermore,
should the market price of our Common Shares drop below the $1.00 per share
minimum bid price requirement, our Common Shares risk being delisted from The
NASDAQ Stock Market®, which would have an adverse effect on our business and
liquidity of our Common Shares.
Through
the month of December 2007 our stock price had steadily declined and as of
December 31, 2007 our stock price was $1.41 per share.
Brokerage
firms may not provide a market for low-priced stock, may not recommend
low-priced stock to their clients and may charge a greater percentage commission
on low-priced stock than that which they would charge on a transaction of a
similar dollar amount but fewer shares. These circumstances may adversely impact
trading in our Common Shares and may also adversely affect our ability to access
capital.
Infringement
and liability claims could damage our business.
Companies
in the Internet, technology and media industries own large numbers of patents,
copyrights, trademarks and trade secrets and frequently enter into litigation
based on allegations of infringement or other violations of intellectual
property rights. As we face increasing competition and become increasingly
high
profile, the possibility of intellectual property rights claims against us
grows. Our technologies may not be able to withstand any third-party claims
or
rights against their use. Any intellectual property claims, with or without
merit, could be time-consuming, expensive to litigate or settle and could divert
resources and attention. In addition, many of our agreements with our
advertisers require us to indemnify certain third-party intellectual property
infringement claims, which would increase our costs as a result of defending
such claims and may require that we pay damages if there were an adverse ruling
in any such claims. An adverse determination also could prevent us from offering
our services to others and may require that we procure substitute services
for
these members.
With
respect to any intellectual property rights claim,
to
resolve these claims, we may enter into royalty and licensing agreements on
less
favorable terms,
pay
damages or stop using technology or content found to be in violation of a third
party’s rights. We may have to seek a license for the technology or content,
which may not be available on reasonable terms and may significantly increase
our operating expenses. The technology or content also may not be available
for
license to us at all. As a result, we may also be required to develop
alternative non-infringing technology, which could require significant effort
and expense, or stop using the content. If we cannot license or develop
technology or content for the infringing aspects of our business, we may be
forced to limit our product and service offerings and may be unable to compete
effectively. Any of these results could harm our brand and operating results.
In
addition, we may be liable to third-parties for content in the advertising
we
deliver if the artwork, text or other content involved violates copyright,
trademark, or other intellectual property rights of third-parties or if the
content is defamatory. Any claims or counterclaims could be time-consuming,
could result in costly litigation and could divert management’s
attention.
Additionally,
we may be subject to legal actions alleging patent infringement, unfair
competition or similar claims. Others may apply for or be awarded patents or
have other intellectual property rights covering aspects of our technology
or
business. For example we understand that Overture Services, Inc. (acquired
by
Yahoo) purports to be the owner of U.S. Patent No. 6,269,361, which was issued
on July 31, 2001 and is entitled “System and method for influencing a position
on a search result list generated by a computer network search engine.” Overture
has aggressively pursued its alleged patent rights by filing lawsuits against
other pay-per-click search engine companies such as MIVA (formerly known as
FindWhat.com) and Google. MIVA and Google have asserted counter-claims against
Overture including, but not limited to, invalidity, unenforceability and
non-infringement. While it is our understanding that the lawsuits against MIVA
and Google have been settled, there is no guarantee Overture will not pursue
its
alleged patent rights against other companies.
An
inability to protect our intellectual property rights could damage our business.
We
rely
upon a combination of trade secret, copyright, trademark, patents and other
laws
to protect our intellectual property assets. We have entered into
confidentiality agreements with our management and key employees with respect
to
such assets and limit access to, and distribution of, these and other
proprietary information. However, the steps we take to protect our intellectual
property assets may not be adequate to deter or prevent misappropriation. We
may
be unable to detect unauthorized uses of and take appropriate steps to enforce
and protect our intellectual property rights.
Additionally, the absence of harmonized patent laws between the United States
and Canada makes it more difficult to ensure consistent respect for patent
rights.
Although
senior management believes that our services and products do not infringe on
the
intellectual property rights of others, we nevertheless are subject to the
risk
that such a claim may be asserted in the future. Any such claims could damage
our business.
Historical
net results include net losses for the years ended December 31, 1999 to December
31, 2003 and for the years ended December 31, 2005 to December 31, 2007. Working
capital may be inadequate.
For
the
years ended December 31, 1999 through the year ended December 31, 2003 and
for
the years ended December 31, 2005
to
December
31,
2007,
we have
reported net losses and net losses per share. We have been financing operations
mainly from funds obtained in several private placements, and from exercised
warrants and options. Management considers that liquidities as at December
31,
2007
will
be
sufficient to meet normal operating requirements throughout
2008.
In the
long term, we may require additional liquidity to fund growth, which could
include additional equity offerings or debt finance. No assurance can be given
that we will be successful in getting required financing in the
future.
Goodwill
may be written-down in the future.
Goodwill
is evaluated for impairment annually, or when events or changed circumstances
indicate impairment may have occurred. Management monitors goodwill for
impairment by considering estimates including discount rate, future growth
rates, amounts and timing of estimated future cash flows, general economic,
industry conditions and competition. Future adverse changes in these factors
could result in losses or inability to recover the carrying value of the
goodwill. Consequently, our goodwill, which amounts to approximately $7.4M
as at
December 31, 2007, may be written-down in the future which could adversely
effect our financial position.
Long-lived
assets may be written-down in the future.
The
Company assesses the carrying value of its long-lived assets, which include
property and equipment and intangible assets, for future recoverability when
events or changed circumstances indicate that the carrying value may not be
recoverable. Management monitors long-lived assets for impairment by considering
estimates including discount rate, future growth rates, general economic,
industry conditions and competition. Future adverse changes in these factors
could result in losses or inability to recover the carrying value of the
long-lived assets. Consequently, our long-lived assets, which amounts to
approximately $2.8M as at December 31, 2007, may be written-down in the
future.
Reduced
Internet use may adversely affect our results.
Our
business is based on Internet driven products and services including direct
online Internet marketing. The emerging nature of the commercial uses of the
Internet makes predictions concerning a significant portion of our future
revenues difficult. As the industry is subject to rapid changes, we believe
that
period-to-period comparisons of its results of operations will not necessarily
be meaningful and should not be relied upon as indicative of our future
performance. It is also possible that in some fiscal quarters, our operating
results will be below the expectations of securities analysts and investors.
In
such circumstances, the price of our Common Shares may decline. The success
of a
significant portion of our operations depends greatly on increased use of the
Internet by businesses and individuals as well as increased use of the Internet
for sales, advertising and marketing. It is not clear how effective Internet
related advertising is or will be, or how successful Internet-based sales will
be. Our results will suffer if commercial use of the Internet, including the
areas of sales, advertising and marketing, fails to grow in the
future.
Our
business depends on the continued growth and maintenance of the Internet
infrastructure
.
The
success and availability of our internet based products and services depend
on
the continued growth, maintenance and use of the Internet. Spam, viruses, worms,
spyware, denial of service attacks, phishing and other acts of malice may affect
not only the Internet’s speed and reliability but also its desirability for use
by customers. If the Internet is unable to meet these threats placed upon it,
our business, advertiser relationships, and revenues could be adversely
affected.
Our
long-term success may be materially adversely affected if the market for
e-commerce does not grow or grows slower than expected.
Because
many of our customers’ advertisements encourage online purchasing and/or
Internet use, our long-term success may depend in part on the growth and market
acceptance of e-commerce. Our business will be adversely affected if the market
for e-commerce does not continue to grow or grows slower than expected. A number
of factors outside of our control could hinder the future growth of e-commerce,
including the following:
|
·
|
the
network infrastructure necessary for substantial growth in Internet
usage
may not develop adequately or our performance and reliability may
decline;
|
|
·
|
insufficient
availability of telecommunication services or changes in telecommunication
services could result in inconsistent quality of service or slower
response times on the Internet;
|
|
·
|
negative
publicity and consumer concern surrounding the security of e-commerce
could impede our growth; and
|
|
·
|
financial
instability of e-commerce customers.
|
Security
breaches and privacy concerns may negatively impact our
business.
Consumer
concerns about the security of transmissions of confidential information over
public telecommunications facilities is a significant barrier to increased
electronic commerce and communications on the Internet that are necessary for
growth of the Company’s business. Many factors may cause compromises or breaches
of the security systems we use or other Internet sites use to protect
proprietary information, including advances in computer and software
functionality or new discoveries in the fields of cryptography and processor
design. A compromise of security on the Internet would have a negative effect
on
the use of the Internet for commerce and communications and negatively impact
our business. Security breaches of their activities or the activities of their
customers and sponsors involving the storage and transmission of proprietary
information, such as credit card numbers, may expose our operating business
to a
risk of loss or litigation and possible liability. We cannot assure you that
the
measures in place are adequate to prevent security breaches.
If
we
fail to detect click fraud
or
other malicious applications or activity of others
,
we
could lose the confidence of our advertisers
as
well as face potential litigation, government regulation or
legislation
,
thereby causing our business to suffer.
We
are
exposed to the risk of fraudulent clicks on our ads
and
other
clicks that advertisers may perceive as undesirable
.
Click
fraud occurs when a person clicks on an ad displayed on a Web site for a reason
other than to view the underlying content. These types of fraudulent activities
could hurt our brands. If fraudulent clicks are not detected, the affected
advertisers may experience a reduced return on their investment in our
advertising programs because the fraudulent clicks will not lead to potential
revenue for the advertisers.
Advertiser
dissatisfaction with click fraud and other traffic quality related claims has
lead to litigation and possible governmental regulation of advertising. Any
increase in costs due to any such litigation, government regulation, or refund
could negatively impact our profitability
.
Index
spammers could harm the integrity of our Web search results, which could damage
our reputation and cause our users to be dissatisfied with our products and
services.
There
is
an ongoing and increasing effort by “index spammers” to develop ways to
manipulate our Web search results. Although they cannot manipulate our results
directly, “index spammers” can manipulate our suppliers like Ask.com,
Gigablast.com or Wisenut.com, which can result in our search engine pages
producing poor results. We take this problem very seriously because providing
relevant information to users is critical to our success. If our efforts to
combat these and other types of manipulation are unsuccessful, our reputation
for delivering relevant information could be diminished. This could result
in a
decline in user traffic, which would damage our business.
Our
business is subject to a variety of U.S. and foreign laws that could subject
us
to claims or other remedies based on the nature and content of the information
searched or displayed by our products and services, and could limit our ability
to provide information regarding regulated industries and products.
The
laws
relating to the liability of providers of online services for activities of
their users are currently unsettled both within the U.S. and abroad. Claims
have
been threatened and filed under both U.S. and foreign law for defamation, libel,
invasion of privacy and other data protection claims, tort, unlawful activity,
copyright or trademark infringement, or other theories based on the nature
and
content of the materials searched and the ads posted or the content generated
by
our users. Increased attention focused on these issues and legislative proposals
could harm our reputation or otherwise affect the growth of our business.
The
application to us of existing laws regulating or requiring licenses for certain
businesses of our advertisers, including, for example, distribution of
pharmaceuticals, adult content, financial services, alcohol or firearms and
online gambling, can be unclear. Existing or new legislation could expose us
to
substantial liability, restrict our ability to deliver services to our users,
limit our ability to grow and cause us to incur significant expenses in order
to
comply with such laws and regulations.
Several
other federal laws could have an impact on our business. Compliance with these
laws and regulations is complex and may impose significant additional costs
on
us. For example, the Digital Millennium Copyright Act has provisions that limit,
but do not eliminate, our liability for listing or linking to third-party Web
sites that include materials that infringe copyrights or other rights, so long
as we comply with the statutory requirements of this act. The Children’s Online
Protection Act and the Children’s Online Privacy Protection Act restrict the
distribution of materials considered harmful to children and impose additional
restrictions on the ability of online services to collect information from
minors. In addition, the Protection of Children from Sexual Predators Act of
1998 requires online service providers to report evidence of violations of
federal child pornography laws under certain circumstances. Any failure on
our
part to comply with these regulations may subject us to additional liabilities.
If
the technology that we currently use to target the delivery of online
advertisements and to prevent fraud on our networks is restricted or becomes
subject to regulation, our expenses could increase and we could lose customers
or advertising inventory.
Web
sites
typically place small files of non-personalized (or “anonymous”) information,
commonly known as cookies, on an Internet user’s hard drive, generally without
the user’s knowledge or consent. Cookies generally collect information about
users on a non-personalized basis to enable Web sites to provide users with
a
more customized experience. Cookie information is passed to the Web site through
an Internet user’s browser software. We currently use cookies to track an
Internet user’s movement through the advertiser’s Web site and to monitor and
prevent potentially fraudulent activity on our network. Most currently available
Internet browsers allow Internet users to modify their browser settings to
prevent cookies from being stored on their hard drive, and some users currently
do so. Internet users can also delete cookies from their hard drives at any
time. Some Internet commentators and privacy advocates have suggested limiting
or eliminating the use of cookies, and legislation (including, but not limited
to, Spyware legislation such as U.S. House of Representatives Bill HR 29 the
“Spy Act”) has been introduced in some jurisdictions to regulate the use of
cookie technology. The effectiveness of our technology could be limited by
any
reduction or limitation in the use of cookies. If the use or effectiveness
of
cookies were limited, we would have to switch to other technologies to gather
demographic and behavioural information. While such technologies currently
exist, they are substantially less effective than cookies. We would also have
to
develop or acquire other technology to prevent fraud. Replacement of cookies
could require significant reengineering time and resources, might not be
completed in time to avoid losing customers or advertising inventory, and might
not be commercially feasible. Our use of cookie technology or any other
technologies designed to collect Internet usage information may subject us
to
litigation or investigations in the future. Any litigation or government action
against us could be costly and time-consuming, could require us to change our
business practices and could divert management’s attention.
Increased
regulation of the Internet may adversely affect our business.
If
the
Internet becomes more strongly regulated, a significant portion of our operating
business may be adversely affected. For example, there is increased pressure
to
adopt and where adopted, strengthen laws and regulations relating to Internet
unsolicited advertisements, privacy, pricing, taxation and content. The
enactment of any additional laws or regulations in Canada, Europe, Asia or
the
United States, or any state or province of the United States or Canada may
impede the growth of the Internet and our Internet-related business, and could
place additional financial burdens on us and our Internet-related
business.
Changes
in key personnel, labour availability and employee relations could disrupt
our
business.
Our
success is dependent upon the experience and abilities of our senior management
and our ability to attract, train, retain and motivate other high-quality
personnel, in particular for our technical and sales teams. There is significant
competition in our industries for qualified personnel. Labour market conditions
generally and additional companies entering industries which require similar
labour pools could significantly affect the availability and cost of qualified
personnel required to meet our business objectives and plans. There can be
no
assurance that we will be able to retain our existing personnel or that we
will
be able to recruit new personnel to support our business objectives and plans.
We believe our employee relations are good. Currently, none of our employees
are
unionized. There can be no assurance, however, that a collective bargaining
unit
will not be organized and certified in the future. If certified in the future,
a
work stoppage by a collective bargaining unit could be disruptive and have
a
material adverse effect on us until normal operations resume.
Possible
future exercise of warrants and options could dilute existing and future
shareholders.
As
at
March 19, 2008, we had 646,392 warrants at a weighted average exercise price
of
$15.60 and 860,801 stock options at a weighted average exercise price of $2.69
outstanding. As at March 19, 2008, the exercise prices of all outstanding
warrants and options, were higher than the market price of our Common Shares.
When the market value of the Common Shares is above the respective exercise
prices of all options and warrants, their exercise could result in the issuance
of up to an additional 1,507,193 Common Shares. To the extent such shares are
issued, the percentage of our Common Shares held by our existing stockholders
will be reduced. Under certain circumstances the conversion or exercise of
any
or all of the warrants or stock options might result in dilution of the net
tangible book value of the shares held by existing Company stockholders. For
the
life of the warrants and stock options, the holders are given, at prices that
may be less than fair market value, the opportunity to profit from a rise in
the
market price of the shares of Common Shares, if any. The holders of the warrants
and stock options may be expected to exercise them at a time when the Company
may be able to obtain needed capital on more favourable terms. In addition,
we
reserve the right to issue additional shares of Common Shares or securities
convertible into or exercisable for shares of Common Shares, at prices, or
subject to conversion and exercise terms, resulting in reduction of the
percentage of outstanding Common Shares held by existing stockholders and,
under
certain circumstances, a reduction in the net tangible book value of existing
stockholders’ Common Shares.
Strategic
acquisitions and market expansion present special risks.
A
future
decision to expand our business through acquisitions of other businesses and
technologies presents special risks. Acquisitions entail a number of particular
problems, including (i) difficulty integrating acquired technologies,
operations, and personnel with the existing businesses, (ii) diversion of
management’s attention in connection with both negotiating the acquisitions and
integrating the assets as well as the strain on managerial and operational
resources as management tries to oversee larger operations, (iii) exposure
to
unforeseen liabilities relating to acquired assets, and (iv) potential issuance
of debt instruments or securities in connection with an acquisition possessing
rights that are superior to the rights of holders of the our currently
outstanding securities, any one of which would reduce the benefits expected
from
such acquisition and/or might negatively affect our results of operations.
We
may not be able to successfully address these problems.
We
also
face competition from other acquirers, which may prevent us from realizing
certain desirable strategic opportunities.
We
do
not plan to pay dividends on the Common Shares.
The
Company has never declared or paid dividends on its shares of Common Shares.
The
Company currently intends to retain any earnings to support its working capital
requirements and growth strategy and does not anticipate paying dividends in
the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of the Company’s Board of Directors after taking into account various
factors, including the Company’s financial condition, operating results, current
and anticipated cash needs and plans for expansion.
Rapidly
evolving marketplace and competition may adversely impact our
business.
The
markets for our products and services are characterized by (i) rapidly changing
technology, (ii) evolving industry standards, (iii) frequent new product and
service introductions, (iv) shifting distribution channels, and (v) changing
customer demands. The success of the Company will depend on its ability to
adapt
to its rapidly evolving marketplaces. There can be no assurance that the
introduction of new products and services by others will not render our products
and services less competitive or obsolete. We expect to continue spending funds
in an effort to enhance already technologically complex products and services
and develop or acquire new products and services. Failure to develop and
introduce new or enhanced products and services on a timely basis might have
an
adverse impact on our results of operations, financial condition and cash flows.
Unexpected costs and delays are often associated with the process of designing,
developing and marketing enhanced versions of existing products and services
and
new products and services. The market for our products and services is highly
competitive, particularly the market for Internet products and services which
lacks significant barriers to entry, enabling new businesses to enter this
market relatively easily. Competition in our markets may intensify in the
future. Numerous well-established companies and smaller entrepreneurial
companies are focusing significant resources on developing and marketing
products and services that will compete with the Company’s products and
services. Many of our current and potential competitors have greater financial,
technical, operational and marketing resources. We may not be able to compete
successfully against these competitors. Competitive pressures may also force
prices for products and services down and such price reductions may reduce
our
revenues.
To
the extent that some of our revenues and expenses are paid in foreign
currencies, and currency exchange rates become unfavourable, we may lose some
of
the economic value in U.S. dollar terms.
Although
we currently transact a majority of our business in U.S. dollars, as we expand
our operations more of our customers may pay us in foreign currencies.
Conducting business in currencies other than U.S. dollars subjects us to
fluctuations in currency exchange rates. This could have a negative impact
on
our reported operating results. We do not currently engage in hedging
strategies, such as forward contracts, options and foreign exchange swaps
related to transaction exposures to mitigate this risk. If we determine to
initiate such hedging activities in the future, there is no assurance these
activities will effectively mitigate or eliminate our exposure to foreign
exchange fluctuations. Additionally, such hedging programs would expose us
to
risks that could adversely affect our operating results, because we have limited
experience in implementing or operating hedging programs. Hedging programs
are
inherently risky and we could lose money as a result of poor trades. In 2007,
revenues were increased by approximately $128,000 and total expenses were also
increased by $348,000 resulting in a net loss $220,000 due to the fluctuation
of
foreign currencies.
Higher
inflation could adversely affect our results of operations and financial
condition.
We
do not
believe that the relatively moderate rates of inflation experienced in the
United States and Canada in recent years have had a significant effect on our
revenues or profitability. Although higher rates of inflation have been
experienced in a number of foreign countries in which we might transact
business, we do not believe that such rates have had a material effect on our
results of operations, financial condition and cash flows. Nevertheless, in
the
future, high inflation could have a material, adverse effect on the Company’s
results of operations, financial condition and cash flows.
Our
future growth significantly depends to a high degree on our ability to
successfully commercialize the Copernic Desktop Search
®
product, and any failure or delays in that commercialization would adversely
affect our business and results of operations.
On
December 22, 2005, we completed our acquisition of Copernic, which we believe
positioned the Company as a leader in search technologies and applications
and
as a multi-channel online marketing services provider.
Although
w
e
have
high expectations for the Copernic Desktop Search® (CDS) award-winning
product
,
to date
our program to commercialize that product through licensing to large ISP’s and
Internet Portals has not generated significant revenue and we cannot guarantee
we will obtain such significant licensing revenue in the future. Any failure
or
continued
significant delay in successfully commercializing the CDS product could
adversely affect our business and results of operations.
Disclosure
Controls and Procedures
We
are
responsible for establishing and maintaining a system of disclosure controls
and
procedures, as defined in Rule 13a-15 (e) under the Securities Exchange Act
of
1934, (the “Exchange Act”) designed to ensure that information we are required
to disclose in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed
to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the issuer’s management, including its principal executive officer or
officers and principal financial officer or officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.
We
carried out an evaluation, under the supervision of and with the participation
of our management, including our Chief Executive Officer and Chief Financial
Officer, as to the effectiveness of our disclosure controls and procedures
as of
December 31, 2007.
Based
upon that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of
December 31, 2007.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting
is
defined in Rule 13a-15(f) of the Exchange Act as a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that (1) pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts
and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company's assets that could have a
material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect all misstatements. Projections of any assessment of
effectiveness to future periods are subject to the risks that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. Our management
evaluated the effectiveness of our internal control over financial reporting
as
of December 31, 2007. In making this evaluation, management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in “Internal Control — Integrated Framework.” Management’s
evaluation of the effectiveness of our internal control over financial reporting
as of December 31, 2007 identified the following material weaknesses in our
internal control over financial reporting:
Area
|
|
Deficiencies
|
|
Remediation
actions
|
|
Scheduled
date
for
remediation
|
Security
|
|
No
user session time out in place
|
|
An
automatic lock has been implemented for all workstations and servers
|
|
Done
on March
3rd
2008
|
|
|
|
|
|
|
|
Security
|
|
No
efficient log of activities for US servers is available for appropriate
monitoring of activity by IT management
|
|
The
US datacenters will be closed by end of March 31, 2008 and replaced
by
Canadian datacenters already in operations. All processes are in
place and
well documented for new data centers.
|
|
Done
on February
18th
2008
|
|
|
|
|
|
|
|
Entity
level
|
|
Conflict
of segregation of duties: Search application programmer and Database
Administrator
|
|
More
control will be put in place and a design accommodation Implementation
of
internal controls have been done by end of February 2008 to mitigate
situation.
|
|
Done
on February
28th
2008
|
|
|
|
|
|
|
|
Security
|
|
No
monitoring of access granted to temporary users
|
|
A
procedure will be put in place in order to ensure that all 3rd
party
consultants will sign the following forms: NDA, Security Policy.
Also a
timeframe for the user access will also be documented. This will
be
reviewed by the security committee in its first quarter
meeting.
|
|
To
be done on
March
31
st
2008
|
|
|
|
|
|
|
|
Security
|
|
Access
rights review does not include shared folders and database
|
|
New
policies will be implemented as per target date.
|
|
To
be done on April 15
th
2008
|
|
|
|
|
|
|
|
Entity
level
|
|
Privileged
access to financial application to be improved
|
|
A
solution will be designed to have a super user password for accounting
software that will not be known by anyone. Two people will have
a portion
of the password in order to improve the control.
|
|
To
be done on
March
31
st
2008
|
It
should
be noted that while management believes that current disclosure and internal
controls and procedures provide a reasonable level of assurance, it cannot
be
expected that existing disclosure controls and procedures or internal financial
controls will prevent all human error and circumvention or overriding of the
controls and procedures. A control system, no matter how well conceived or
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met.
Capital
Stock Information
The
following table discloses the Company’s outstanding share data:
Number
of issued and outstanding common shares as at March 19,
2008
|
|
Book
value as at December 31, 2007
under
Canadian GAAP
|
|
Book
value as at December 31, 2007
under
US GAAP
|
14,637,531
|
|
$96,556,485
|
|
$113,326,055
|
As
at
March 19, 2008, the Company also had 646,392 warrants and 860,801 stock options
outstanding.
Forward-Looking
Statements
Information
contained in this Management’s Discussion and Analysis of Financial Condition
and Results of Operations includes forward-looking statements, which can be
identified by the use of forward-looking terminology such as “believes,”
“expects,” “may,” “desires,” “will,” “should,” “projects,” "estimates,”
“contemplates,” “anticipates,” “intends,” or any negative such as “does not
believe” or other variations thereof or comparable terminology. No assurance can
be given that potential future results or circumstances described in the
forward-looking statements will be achieved or occur. Such information may
also
include cautionary statements identifying important factors with respect to
such
forward-looking statements, including certain risks and uncertainties that
could
cause actual results to vary materially from the projections and other
expectations described in such forward-looking statements. Prospective
investors, customers, vendors and all other persons are cautioned that
forward-looking statements are not assurances, forecasts or guarantees of future
performance due to related risks and uncertainties, and that actual results
may
differ materially from those projected. Factors which could cause results or
events to differ from current expectations include, among other things: the
severity and duration of the adjustments in our business segments; the
effectiveness of our restructuring activities, including the validity of the
assumptions underlying our restructuring efforts; fluctuations in operating
results; the impact of general economic, industry and market conditions; the
ability to recruit and retain qualified employees; fluctuations in cash flow;
increased levels of outstanding debt; expectations regarding market demand
for
particular products and services and the dependence on new product/service
development; the ability to make acquisitions and/or integrate the operations
and technologies of acquired businesses in an effective manner; the impact
of
rapid technological and market change; the impact of price and product
competition; the uncertainties in the market for Internet-based products and
services; stock market volatility; the trading volume of our stock; the
possibility that our stock may not satisfy our requirements for continued
listing on the NASDAQ Capital Market including whether the minimum bid price
for
the stock falls below $1; and the adverse resolution of litigation. Developments
in the SEC inquiry, purported class action litigation or related events could
have a negative impact on the Company, increase Company expenses or cause events
or results to differ from current expectations
.
For
additional information with respect to these and certain other factors that
may
affect actual results, see the reports and other information filed or furnished
by the Company with the United States Securities and Exchange Commission (“SEC”)
and/or the Ontario Securities Commission (“OSC”) respectively accessible on the
internet at
www.sec.gov
and
www.sedar.com
,
or the
Company’s Web site at www.copernic-inc.com. All information contained in these
audited financial statements and Management’s Discussion and Analysis of
Financial Condition and Results of Operations is qualified in its entirety
by
the foregoing and reference to the other information the Company files with
the
OSC and SEC. Unless otherwise required by applicable securities laws, the
Company disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Period-to-Period
Comparisons
A
variety
of factors may cause period-to-period fluctuations in the Company’s operating
results, including business acquisitions, revenues and expenses related to
the
introduction of new products and services or new versions of existing products,
new or stronger competitors in the marketplace as well as currency fluctuations.
Historical operating results are not indicative of future results and
performance.
Selected
Annual Information
(In
thousand of US dollars, except per share data and in accordance with generally
accepted accounting principles in Canada)
For
the years ended December 31,
|
|
2007
$
|
|
2006
$
|
|
2005
$
|
|
2004
$
|
|
2003
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
8,116
|
|
|
9,596
|
|
|
9,444
|
|
|
14,636
|
|
|
8,939
|
|
Earnings
(loss) from continuing operations
|
|
|
(14,431
|
)
|
|
(4,358
|
)
|
|
(3,343
|
)
|
|
371
|
|
|
89
|
|
Results
of discontinued operations, net of income taxes
|
|
|
-
|
|
|
89
|
|
|
(2,315
|
)
|
|
734
|
|
|
(300
|
)
|
Earnings
(loss) for the year
|
|
|
(14,431
|
)
|
|
(4,269
|
)
|
|
(5,658
|
)
|
|
1,104
|
|
|
(211
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
(0.99
|
)
|
|
(0.31
|
)
|
|
(0.27
|
)
|
|
0.03
|
|
|
0.01
|
|
Net
earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
(0.99
|
)
|
|
(0.30
|
)
|
|
(0.46
|
)
|
|
0.10
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
18,358
|
|
|
33,339
|
|
|
38,327
|
|
|
35,166
|
|
|
11,736
|
|
Quarterly
Financial Highlights
(in
thousand of US dollars, except per share data and in accordance with generally
accepted accounting principles in Canada)
(unaudited)
|
|
2007
|
|
2006
|
|
|
|
Q4
$
|
|
Q3
$
|
|
Q2
$
|
|
Q1
$
|
|
Q4
$
|
|
Q3
$
|
|
Q2
$
|
|
Q1
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
1,654
|
|
|
1,867
|
|
|
1,953
|
|
|
2,642
|
|
|
3,566
|
|
|
1,891
|
|
|
1,929
|
|
|
2,210
|
|
Earnings
(loss) from continuing operations
|
|
|
(10,990
|
)
|
|
(975
|
)
|
|
(1,085
|
)
|
|
(1,381
|
)
|
|
365
|
|
|
(2,553
|
)
|
|
(1,270
|
)
|
|
(900
|
)
|
Results
of discontinued operations, net of income taxes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
55
|
|
|
5
|
|
|
4
|
|
|
25
|
|
Net
earnings (loss) for the period
|
|
|
(10,990
|
)
|
|
(975
|
)
|
|
(1,085
|
)
|
|
(1,381
|
)
|
|
420
|
|
|
(2,548
|
)
|
|
(1,266
|
)
|
|
(875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.75
|
)
|
|
(0.07
|
)
|
|
(0.07
|
)
|
|
(0.10
|
)
|
|
0.03
|
|
|
(0.18
|
)
|
|
(0.09
|
)
|
|
(0.06
|
)
|
Diluted
|
|
|
(0.75
|
)
|
|
(0.07
|
)
|
|
(0.07
|
)
|
|
(0.10
|
)
|
|
0.03
|
|
|
(0.18
|
)
|
|
(0.09
|
)
|
|
(0.06
|
)
|
Net
earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.75
|
)
|
|
(0.07
|
)
|
|
(0.07
|
)
|
|
(0.10
|
)
|
|
0.03
|
|
|
(0.18
|
)
|
|
(0.09
|
)
|
|
(0.06
|
)
|
Diluted
|
|
|
(0.75
|
)
|
|
(0.07
|
)
|
|
(0.07
|
)
|
|
(0.10
|
)
|
|
0.03
|
|
|
(0.18
|
)
|
|
(0.09
|
)
|
|
(0.06
|
)
|
ITEM
6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
DIRECTORS
AND SENIOR MANAGEMENT
Following
is a table, which discloses the names, functions, areas of expertise within
the
Company and present principal occupation(s) of the Company’s directors and
senior management.
Name
|
|
Functions and areas
of experience within
the Company
|
|
Present Principal Occupation(s)
|
|
Date first elected
Director or
appointed Senior
Officer of the
Company
|
|
|
|
|
|
|
|
Marc
Ferland
|
|
Director
and Officer
|
|
President,
and Chief Executive Officer
Copernic
Inc.
|
|
September
21, 2007
|
|
|
|
|
|
|
|
Daniel
Bertrand
|
|
Officer
|
|
Executive
Vice President and
Chief
Financial Officer
Copernic
Inc.
|
|
July
8, 1999
|
|
|
|
|
|
|
|
Éric
Bouchard
|
|
Officer
|
|
Vice
President - Products
Copernic
Inc.
|
|
December
22, 2005
|
|
|
|
|
|
|
|
David
Goldman
|
|
Director
and Officer
|
|
Executive
Chairman,
Copernic
Inc.
Director,
SNC-Lavalin Group Inc. (an engineering and construction company listed
on
the Toronto Stock Exchange)
|
|
May
24, 2001
|
|
|
|
|
|
|
|
Martin
Bouchard
|
|
Director
|
|
Consultant
|
|
December
22, 2005
|
|
|
|
|
|
|
|
Claude
E. Forget
|
|
Director
|
|
Consultant
|
|
October
11, 1999
|
|
|
|
|
|
|
|
Irwin
Kramer
|
|
Director
|
|
President,
iCongo, Inc.
(an
e-commerce and service company)
|
|
May
24, 2001
|
|
|
|
|
|
|
|
Dr.
David Schwartz
|
|
Director
|
|
Associate
Professor, Bar Ilan
University
School
of Business Administration
|
|
May
23, 2002
|
|
|
|
|
|
|
|
Lawrence
Yelin
|
|
Director
|
|
Attorney,
Fasken Martineau DuMoulin LLP
|
|
September
21, 2007
|
Each
Director’s term of office expires at the earliest of the next annual meeting of
shareholders or his resignation as Director.
With
the
exception of Martin Bouchard and Éric Bouchard who are brothers, to the
knowledge of the Company, there is no family relationship among any of the
persons named in this Item 6, nor were any such persons selected as directors
or
members of senior management pursuant to any arrangement or understanding with
major shareholders, customers, suppliers or others.
STATEMENT
OF CORPORATE GOVERNANCE PRACTICES
The
directors of the Company strongly believe that sound corporate governance is
essential to produce maximum value to shareholders. The following is a summary
of the governance practices of the Company.
The
Board
of Directors has approved and adopted a document entitled “Responsibilities of
the Board of Directors and its three Committees” which sets forth the
responsibilities for the Board and these three committees. That document is
available on SEDAR at
www.sedar.com
. That document includes the Board’s
mandate, the Charters of the Board’s three committees and the Company’s insider
trading policy and code of ethics. The Company’s code of ethics is available on
SEDAR at
www.sedar.com
. In accordance with the policies and guidelines
outlined in that document, the Board of Directors constantly strives to promote
a culture of ethical conduct in an effort to meet the highest industry
standards. All decisions are carefully considered from this point of view and
the Board of Directors does not act until all factors have been adequately
considered. This approach is expected of management and, to a relevant degree,
all employees of the Company.
1.
|
Composition
of the Board of Directors
|
More
than
fifty percent of the directors of the Company are “independent” directors. An
independent director is independent of management and free of any business
or
other relationship which could, or could reasonably be perceived to, materially
interfere with the director’s ability to act in the best interest of the
Company, as required by the standards of the NASDAQ Stock Exchange® and the
Ontario Securities Commission.
The
Chair
of the Board of Directors is David Goldman, who is not an independent director.
Mr. Goldman also sits on the board of directors of SNC-Lavalin Group Inc. The
Board feels strongly that Mr. Goldman’s abilities, extensive experience as a
director of listed companies and role in the Company make him best suited for
this position. The Board will continue to consider whether or not the position
of Chairman should be occupied by an independent director and, if circumstances
change, will take action to adjust the composition of the Board accordingly
or
appoint a lead director who is independent. Independent directors meet, when
they deem it advisable, through in camera sessions conducted after or during
each meeting of the Board.
The
independent directors, when they deem it advisable, make recommendations to
the
Board on various matters. The Board will continue to encourage regular meetings
of the independent directors through in camera sessions as it feels that it
is a
good way to facilitate Board operations independently of management and to
maintain and improve the quality of governance.
The
directors consider the following nominees to be independent to the Company:
Claude E. Forget, Irwin Kramer, Dr. David Schwartz, and Lawrence Yelin. Through
October 2, 2001, Claude E. Forget was Chief Executive Officer of Intasys Billing
Technologies, a subsidiary of the Company, whose business was subsequently
sold.
The Board of Directors has determined that Marc Ferland and David Goldman are
not independent because they are officers of the Company. Martin Bouchard is
not
independent because he was President and Chief Executive Officer of the Company
until March 3, 2008.
During
the 2007
fiscal
year,
the Board of Directors met 8 times and all of the Directors attended all of
the
meetings. Brian Edwards attended 4 of the meetings since he resigned on June
2007. Marc Ferland and Lawrence Yelin attended the last 3 meetings since they
joined the Company as Directors on September 21, 2007. During the 2007 fiscal
year, there were no meetings of the independent directors.
The
Board
of Directors’ mandate is set forth in the document entitled “Responsibilities of
the Board of Directors and its
Three
Committees,” which provides in pertinent part:
It
is the
explicit responsibility of the Board of Directors to assume the global
stewardship of the Company and to ensure
itself
of the
pertinence and efficiency of the key functions and of the following
matters:
|
·
|
Identification
of the principal risks associated with the activities of the Company
and
the establishment of an appropriate system to manage these
risks.
|
|
·
|
Succession
planning, including appointing, training and monitoring
officers.
|
|
·
|
The
communications policy of the Company with its
shareholders.
|
|
·
|
The
integrity of the Company’s internal control and management information
systems.
|
The
Board
has drawn up a written position description for the Chairman of the Board and
CEO. The Chairman of a Board
committee
is
mainly responsible for overseeing how the committee is managed and that it
effectively performs its duties and to guide the committee in the performance
of
its charter mandate and any other matter which the Board delegates to the
committee.
The
Board
ensures
that
each new
director has the necessary abilities, expertise, availability and knowledge
to
properly perform his duties and provides him with the corporate information
and
documentation required to do so. Additional education of directors and
information about our activities is available upon request.
All
directors,
officers
and
employees who have information giving them reasonable grounds to believe that
certain accounting practices or the auditing of the Company are illegal or
irregular, or that other violations of our Code of Ethics have or are occurring,
can and are encouraged to utilize the Company’s Whistleblower
Policy.
No
material change
report
that
pertains to any conduct of a director or officer that constitutes a departure
from the Code of Ethics was filed during financial year 2007.
Our
Code
of Ethics clearly states that the directors and executive officers must avoid
any transaction or event which could give rise to a conflict of interest. If
an
event or transaction occurs in which a director has a material interest, he
must
disclose his interest to the Board and refrain from voting with respect to
any
matter related thereto.
The
role
of the Nominating and Governance Committee is, among other things, to assess
the
effectiveness of the Board, its committees and its directors.
2.
|
Committees
of the Board of Directors
|
The
Company
maintains three standing committees: the Audit and Finance Committee, the
Nominating and Governance Committee and the Compensation Committee.
As
part
of
its
ongoing
review of corporate governance matters, on March 29, 2006 the Company’s Board of
Directors approved Charters constituting a Compensation Committee and a
Nominating and Governance Committee to segregate the nominating and executive
compensation functions into separate Charters as required by the standards
of
the NASDAQ Stock Exchange
®
.
Composition
of the Audit and Finance Committee
The
current members of the Audit and Finance Committee are Irwin Kramer,
Dr. David Schwartz, Claude E. Forget and Lawrence Yelin all of whom are
independent. On March 29, 2006, the Board approved a new Charter of the Audit
and Finance Committee of the Company. The Charter provides that the Audit and
Finance Committee shall assist the Board in fulfilling its responsibilities
relating to corporate accounting and reporting practices of the Company and
in
the quality and integrity of financial reports of the Company. The Audit and
Finance Committee meets with the financial officers of the Company, including
the Chief Financial Officer, and the independent auditors to review financial
reporting matters, the system of internal accounting controls and the overall
audit plan and examines the quarterly and year-end financial statements before
their presentation to the Board. In addition, the Audit Committee fixes the
compensation and other terms of engagement of the Company’s independent
auditors. In 2007, the Audit and Finance Committee met 8 times and the Company’s
independent auditors were present at 6 of these meetings.
Composition
of the Nominating and Governance Committee
The
current members of the Nominating and Governance Committee are Irwin Kramer,
Dr. David Schwartz, Claude E. Forget and Lawrence Yelin.
The
Nominating
and
Governance Committee is responsible for, among other things, overseeing and
making recommendations to the Board on the following matters:
|
(i)
|
the
search for and compensation of all senior executives and management
of the
Company and its subsidiaries, including periodic review of
same;
|
|
(ii)
|
the
Company’s management structure and succession
plans;
|
|
(iii)
|
the
recommendation of new candidates as potential directors of the Company
and
the assessment of the performance of current directors and committees;
and
|
|
(iv)
|
the
review and recommendation of procedures to be followed with respect
to
corporate governance guidelines.
|
Composition
of the Compensation Committee
The
current members of the Compensation Committee are Irwin Kramer, Dr. David
Schwartz, Claude E. Forget and Lawrence Yelin.
The
Compensation
Committee is responsible for, among other things, overseeing and making
recommendations to the Board on the following matters:
|
(i)
|
the
compensation of all senior executives and management of the Company
and
its subsidiaries, including periodic review of
same;
|
|
(ii)
|
the
incentive plans for employees of the Company and its subsidiaries;
and
|
|
(iii)
|
the
Company’s Stock Option Plan and the granting of stock options
thereunder.
|
Report
on Executive Compensation
As
part
of
its
ongoing
dedication to creating shareholder value and promoting corporate success, the
Compensation Committee establishes executive compensation in order to attract,
retain and motivate key executives in the increasing competitive Internet and
information technology sectors and to reward significant performance
achievements.
Consistent
with the Company’s objectives, and in order to further align shareholder and
executive interests, the Compensation Committee places emphasis on base salary,
incentive compensation, discretionary bonus and long-term incentive compensation
by granting of stock options in establishing executive compensation.
Consequently, the standard executive compensation package of the Company is
composed of four major components: (i) base salary and benefits, (ii) short-term
incentive and (iii) long-term incentive compensation.
In
making
compensation decisions with respect to each of these components, the
Compensation Committee considers external market data for executives. Towers
Perrin was retained by the Chair of the Compensation Committee in 2007, 2006
and
2005
to
assist with preparing information and providing advice on officer and Board
of
Director compensation arrangements. Materials prepared by Towers Perrin have
been presented by the Chair to the Compensation Committee for review and
decisions. Towers Perrin’s scope of services in the most recent fiscal year
included providing advice and market data related to Board of Director and
officer compensation arrangements, assisting with the design of special
compensation programs, and other general executive compensation assistance.
Towers Perrin does not provide any other services to the Company. The
Compensation Committee uses the compensation data from Towers Perrin as one
of
several factors in determining the appropriate levels of base salary, short-term
and long-term incentives that fairly compensate the Company’s executive
officers.
In
setting the compensation package for executives, the Compensation Committee
balances consideration of base salary with short-term incentive compensation
so
that a significant proportion of executive officers’ compensation is linked to
objectives aligned with the interests of the Company’s shareholders. The
compensation packages include:
Salary
and benefits policies of the Company are determined by bench marking similar
businesses in the Internet sector and are targeted at the mid range in the
sectors, taking into account the economic trends, the Company’s competitive
position and performance and extraordinary contributions to the Company.
ii)
|
Short-Term
Incentive Compensation
|
The
Company provides
short
-term
cash incentive compensation to those individuals of its senior management and
its subsidiaries whose responsibilities and attainment of personal and Company
objectives exceed established expectations, based on individual contributions,
operating results, and financial performance. The amount of these payments
are
approved by the Compensation Committee and are based on specific goals in these
areas. Incentive compensation targets for each individual are set during the
first quarter of each year.
In
the
case of Named Executive Officers, as defined hereinafter under the heading
“Statement of Executive Compensation”, targeted
incentive
compensation varies in
proportion
to base
salary, depending primarily on the level of responsibility of the individual.
Generally, when operating results and financial performance objectives are
exceeded bonuses are higher, when the objectives are not met the incentive
bonuses are lower or nil depending on the circumstances and the individual’s
contribution to the Company.
The
Board
of Directors, upon recommendation of the Compensation Committee, also may award
bonuses as deemed necessary to compensate management for circumstances where
warranted to reward extraordinary contributions to the Company not reflected
in
our
results
of
operations if and when deemed in the Company’s best interest.
For
the
year ended December 31, 2007, for all of the officers, no incentive compensation
was earned related to Company objectives as minimal financial targets were
not
met; however, some executive officers were paid bonuses based upon their
contributions to the Company.
iii)
|
Long-Term
Incentive Compensation
|
The
long-term
incentive
component of the Company’s compensation program consists of the stock option
plan of the Company which provides for the issuance of options to executive
officers and other employees, directors or consultants to purchase common shares
of the Company. The stock option plan of the Company is described below under
the heading “
Stock
Option Plan
”.
The
Compensation Committee determines the executives, employees and directors
eligible for the granting of options pursuant to the stock option plan. It
also
determines the size of each grant and the date on which each grant is to become
effective. The exercise price of options granted may not be less than the market
price of the Company’s common shares as traded on the NASDAQ Stock
Exchange
®
in U.S.
dollars determined as of the date the options are granted. The number of options
granted annually to recipients is determined by the Compensation Committee
on a
discretionary basis.
The
Compensation
Committee
may, in
its discretion, determine when the options granted under the stock option plan
may be exercised or vested, provided that the term of such options can not
exceed ten (10) years.
Unless
otherwise stipulated by the terms of a stock option grant, which terms are
approved by the Compensation Committee,
options
granted
pursuant to the stock option plan will lapse thirty (30) days after the holder
ceases to be employed by the Company. In the event of death, any vested option
of a holder lapses three (3) months after his or her death. In the event that
the holder’s employment terminates due to disability, the holder may exercise
the vested options for one (1) year after the date of termination of employment.
If the holder is terminated for cause, vested options terminate
immediately.
In
July
2007, the Company reviewed its stock option plan to assess its retention
potential for key employees. The review was initiated following the resignation
of a number of key employees due to a competitive labor market in the high
tech
industry in the Quebec City region. PCI Perrault Consulting Inc. was retained
by
the Chair of the Compensation Committee to assist with preparing information
and
providing advice.
In
light
of the above and consistent with the Company’s objectives to retain key
employees, the Board of Directors has, on September 18, 2007, reviewed and
accepted stock option grants to key employees that would vest on equal
increments over a three-year period.
At
the
time that the Stock Option Plan was reviewed in July 2007, 1,400,000 Common
Shares were reserved for issuance under this plan. Taking into account options
that have been cancelled of forfeited, options to acquire a net total of 652,000
Common Shares have been granted on September 18, 2007 under the Stock Option
Plan. As of January 1, 2008, 186,565 Common Shares remain available for future
grants.
Conclusion
The
Company’s executive compensation policy links executive compensation to
corporate results and individual
contribution
,
as well
as stock performance and long-term results. The Compensation Committee regularly
reviews the various executive compensation components to ensure that they
maintain their competitiveness in the industry and continue to focus on the
Company’s objectives, values and business strategies.
Depending
on specific circumstances, the Compensation Committee may also recommend
employment terms and conditions that deviate from the above described policies.
Statement
of Executive Compensation
The
following
summary
table,
presented in accordance with applicable securities legislation, sets forth
all
compensation provided by the Company and its affiliates for the fiscal years
ended December 31, 2005, 2006 and 2007 to:
(i)
|
the
Chief Executive Officer;
|
(ii)
|
the
Chief Financial Officer;
|
(iii)
|
each
of the Company’s three most highly compensated executive officers, other
than the Chief Executive Officer and the Chief Financial Officer,
who were
serving as executive officers at the end of December 31, 2007 and
whose
total salary and bonus exceeded CA$150,000,
and
|
(iv)
|
such
other individuals for whom the foregoing disclosure would have been
made
but for the fact that such individual was not an officer of the Company
at
the end of December 31, 2007 (collectively, the “Named Executive
Officers”).
|
Summary
Compensation Table
Compensation
is payable in Canadian dollars and converted by using the yearly average U.S.
exchange rate. Exchange rate conversions were .82622 in 2005, .88206 in 2006
and
0.93565 in 2007.
|
|
|
|
Annual
Compensation
|
|
Name
and Principal Occupation
|
|
Year
|
|
Salary
U.S. $
|
|
Bonus
U.S. $
|
|
Other Annual
Compensation
U.S. $
(Taxable Benefits Related
to Exercised Options and
Other)
|
|
Guy
Fauré
1
President
and Chief Executive Officer
|
|
|
2007
2006
2005
|
|
|
46,403
224,705
199,520
|
|
|
-
179,940
49,573
|
2
|
|
502,977
3,718
3,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Goldman
3
Executive
Chairman
|
|
|
2007
2006
2005
|
|
|
Nil
Nil
Nil
|
|
|
Nil
Nil
Nil
|
|
|
78,430
Nil
Nil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Martin
Bouchard
4
President
and Chief Executive Officer
|
|
|
2007
2006
2005
|
|
|
220,526
176,158
-
|
|
|
22,456
13,231
-
|
|
|
3,813
2,382
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel
Bertrand
Executive
Vice President and
Chief
Financial Officer
|
|
|
2007
2006
2005
|
|
|
172,897
153,326
136,040
|
|
|
12,982
116,644
57,835
|
5
|
|
117,534
3,722
3,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Éric
Bouchard
Vice
President - Products
|
|
|
2007
2006
2005
|
|
|
169,155
149,798
-
|
|
|
10,161
23,992
-
|
|
|
3,813
2,372
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patrick
Hopf
6
Vice
President - Business Development
|
|
|
2007
2006
2005
|
|
|
154,145
125,816
107,016
|
|
|
-
88,488
53,503
|
7
|
|
47,817
2,869
1,660
|
|
1
Mr.
Fauré resigned from his positions as the President, Chief Executive Officer and
a member of the Board of Directors of the Company effective as of January 31,
2007. In connection with his resignation, the Company paid Mr. Fauré termination
compensation and recorded the termination costs of CDN$510,000 in Q1 2007,
changed the duration of option agreements and allowed accelerated vesting of
options. These changes represented an additional non-cash item expense of
approximately US$267,000 which was recorded in Q1 2007.
2
Performance bonus of $22,492 and retention compensation of
$157,448.
3
The
Company and Dave Goldman Advisors Ltd., a company controlled by Mr. Goldman,
entered into a consulting agreement pursuant to which David Goldman provides
his
services to the Company. In addition, as part of the compensation paid to David
Goldman, the Company agreed to grant him options under the Company’s stock
option plan.
4
Martin
Bouchard
resigned
from his
position as the President and Chief Executive Officer effective as of March
3,
2008 for personal reasons. He was replaced by Marc Ferland.
5
Performance
bonus of $9,209 and retention bonus of $107,435
.
6
On
February 11, 2008, the Company announced the departure of Patrick Hopf,
effective February 11, 2008.
7
Performance bonus of $6,986 and retention bonus of $81,502.
Option
Grants During the Most Recently Completed Financial
Year
|
|
|
|
Long
Term Compensation
|
|
All
Other Compensation
|
|
|
|
|
|
Awards
|
|
Payouts
|
|
U.S.
$
|
|
Name
and Principal Occupation
|
|
Year
|
|
Securities
Under
Options
#
|
|
Shares
or Units Subject to Resale Restrictions
($)
|
|
LTIP Payouts
$
|
|
|
|
Guy
Fauré
1
President
and Chief Executive Officer
|
|
|
2007
2006
2005
|
|
|
Nil
Nil
176,500
|
|
|
Nil
Nil
Nil
|
|
|
Nil
Nil
Nil
|
|
|
477,182
Nil
Nil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Goldman
2
Executive
Chairman
|
|
|
2007
2006
|
|
|
20,000
Nil
|
|
|
Nil
Nil
|
|
|
Nil
Nil
|
|
|
108,291
125,004
|
2
|
|
|
|
2005
|
|
|
75,000
|
|
|
Nil
|
|
|
Nil
|
|
|
173,859
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Martin
Bouchard
3
President
and Chief Executive Officer
|
|
|
2007
2006
2005
|
|
|
155,000
Nil
N/A
|
|
|
Nil
Nil
N/A
|
|
|
Nil
Nil
N/A
|
|
|
Nil
Nil
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel
Bertrand
Executive
Vice President and Chief Financial Officer
|
|
|
2007
2006
2005
|
|
|
98,000
Nil
87,500
|
|
|
Nil
Nil
Nil
|
|
|
Nil
Nil
Nil
|
|
|
Nil
Nil
Nil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Éric
Bouchard
Vice
President – Products
|
|
|
2007
2006
2005
|
|
|
78,000
Nil
N/A
|
|
|
Nil
Nil
N/A
|
|
|
Nil
Nil
N/A
|
|
|
Nil
Nil
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patrick
Hopf
4
Vice
President
–Business
Development
|
|
|
2007
2006
2005
|
|
|
73,000
Nil
46,800
|
|
|
Nil
Nil
Nil
|
|
|
Nil
Nil
Nil
|
|
|
Nil
Nil
Nil
|
|
|
1.
|
Mr.
Fauré resigned from his positions as the President, Chief Executive
Officer and a member of the Board of Directors of the Company effective
as
of January 31, 2007. In connection with his resignation, the Company
paid
Mr. Fauré termination compensation and recorded the termination costs of
CDN$510,000 in Q1 2007, changed the duration of option agreements
and
allowed accelerated vesting of options. These changes represented
an
additional non-cash item expense of approximately US$267,000 which
was
recorded in Q1 2007.
|
|
2.
|
The
Company and Dave Goldman Advisors Ltd., a company controlled by Mr.
Goldman, entered into a consulting agreement pursuant to which David
Goldman provides his services to the Company. In addition, as part
of the
compensation paid to David Goldman, the Company agreed to grant him
options under the Company’s stock option
plan.
|
|
3.
|
Martin
Bouchard
resigned
from his position as the President and Chief Executive Officer effective
as of March 3, 2008 for personal reasons. He was replaced by Marc
Ferland.
|
|
4.
|
On
February 11, 2008, the Company announced the departure of Patrick
Hopf,
effective February 11,
2008.
|
Employment
Agreements and Change of Control Provisions
During
2007, the Company had employment arrangements and agreements with the following
Named Executive Officers. All sums mentioned herein are in Canadian
Dollars.
On
July
8, 1999, Daniel
Bertrand
,
Executive Vice President and Chief Financial Officer of the Company entered
into
an employment agreement with the Company. Pursuant to the terms and conditions
of his employment agreement, Mr. Bertrand is paid an annual salary of
CA$192,400. Mr. Bertrand is also entitled to a bonus for meeting financial
and
individual performance levels, to a maximum of 60% of his base salary for far
exceeding expected performance levels. Mr. Bertrand is also entitled to
receive stock options under the Company’s stock option plan.
On
August
12, 2004, the
Company
amended
the employment arrangement of the Executive Vice President and Chief Financial
Officer. As a result, if there is a change of control of the Company,
Mr. Bertrand will receive a lump sum payment equal to the greater of the
past 18 months salary payments, or CA$225,000 if he:
(ii)
|
does
not accept a relocation outside of the greater Montreal
area;
|
(iii)
|
does
not accept an offer of employment at reduced levels of responsibility;
or
|
(iv)
|
does
not accept an offer of compensation (including performance/incentive
plan
targets and long-term compensation) which is less than his current
level.
|
David
Goldman was Chairman and Chief Executive Officer of the Company until January
12, 2004 when he became the Executive Chairman of the Company. During the year
ended 2003, Mr. Goldman was not paid any salary or benefits by the Company
but rather was rewarded solely through the granting of stock options which
are
awarded at the discretion of the Nominating, Human Resource and Governance
Committee. This position was not considered as a full time position and
therefore the level of this award was based solely on the overall achievements
and performance of the Company.
On
May 1,
2002, the Company entered into a consulting agreement with David Goldman through
Dave Goldman Advisors Ltd. These consulting arrangements may be terminated
on
sixty (60) days’ notice by either party. On August 12, 2004, the
Company
amended
the consulting agreement with Dave Goldman Advisors Ltd. As a result, if there
is change of control of the Company, Dave Goldman Advisors Ltd. will receive
a
lump sum payment equal to the greater of the past 24 months consulting payments
or CA$300,000 if:
(i)
|
the
consultant agreement is terminated;
|
(ii)
|
Mr.
Goldman does not accept a relocation or to perform a substantial
part of
his services outside of the greater Montreal
area;
|
(iii)
|
Mr.
Goldman’s responsibilities are greatly reduced for which reason he
terminates the agreement; or
|
(iv)
|
the
total compensation offered to the consultant is
reduced.
|
On
May
23, 2005, the consulting agreement was further amended to increase the hourly
rate of Dave Goldman Advisors Ltd. for services rendered from CA$200 to
CA$250.
Total
fees for 2007 were $108,291 (2006: $141,971; 2005: $202,404). The transactions
are in the normal course of operations and are measured at the exchange amount
which is the amount of the consideration established and agreed to by the
related parties
Martin
Bouchard signed an employment agreement with the Company on December 22, 2005.
In 2007, Martin Bouchard’s annual salary was established at CA$240,000 with an
entitlement to short term annual incentive compensation for meeting targeted
financial performance, to a maximum of 75% of his base salary for far exceeding
targeted performance levels.
Martin
Bouchard’s employment agreement provides that in the event of a change of
control or sale of the Company, Martin Bouchard may terminate his employment
agreement and will be entitled to one year’s base salary. The employment
agreement also provides that the Company may at any time with or without cause
terminate the agreement. In such event, the Company must pay Martin Bouchard
the
lesser of (i) the base salary of Martin Bouchard from the date of termination
until December 31, 2008, and (ii) one year’s base salary. Martin Bouchard’s
resignation on March 3, 2008 did not trigger the termination provision of the
employment agreement and therefore, no termination payment was paid by the
Company to Martin Bouchard under the employment agreement.
On
March
3, 2008, the Company entered into a consulting agreement with Martin Bouchard
through 4332903 Canada Inc. This company is remunerated for services rendered
on
an hourly rate of CA$250. These consulting arrangements may be terminated on
sixty (60) days’ notice by either party.
Éric
Bouchard has been Vice President - Products since the acquisition of Copernic
Technologies Inc. by the Company. Eric Bouchard signed an employment agreement
with the Company on December 22, 2005. Éric Bouchard’s annual salary is
CA$188,200 with an entitlement to short term annual incentive compensation
for
meeting targeted financial performance, to a maximum of 60% of his base salary
for far exceeding targeted performance levels. This compensation package was
contractually negotiated at the time of the acquisition of Copernic Technologies
Inc. and was approved by the Compensation Committee as it was consistent with
the compensation and bonus arrangements with other officers.
Eric
Bouchard’s employment agreement provides that in the event of a change of
control or sale of the Company, Eric Bouchard may terminate his employment
agreement and will be entitled to one year’s base salary. The employment
agreement also provides that the Company may at any time with or without cause
terminate the agreement. In such event, the Company must pay Eric Bouchard
the
lesser of (i) the base salary of Eric Bouchard from the date of termination
until December 31, 2008, and (ii) one year’s base salary.
On
October 11, 2007, the Company entered into a consulting agreement with Marc
Ferland through Gen24 Marketing, a division of 6556027 Canada Inc. The agreement
provided for a USD$5,000 per month retainer and 5% commissions on recognized
revenue of customers and investment proceeds for a 3-year period received from
certain specified customers brought in by Gen24 Marketing to the Company. The
consulting agreement is cancellable on thirty (30) days’ notice by either party.
Total
fees for 2007 were $15,454.
The
monthly retainer of Gen24 Marketing was increased to $10,000 for the month
of
February, 2008 and the consulting agreement was terminated as of February 29,
2008.
On
March
3, 2008, Marc Ferland entered into an employment agreement with the Company
regarding his appointment as President and Chief Executive Officer. Pursuant
to
the terms and conditions of his employment agreement, Mr. Ferland is paid an
annual salary of CA$250,000. Mr. Ferland is also entitled to a bonus for meeting
certain financial performance levels, to a maximum of 50% of his base salary.
Under his employment agreement, Mr. Ferland is also entitled to receive,
before April 27, 2008, 100,000 stock options under the Company’s stock option
plan. If there is a change of control of the Company, Mr. Ferland will
receive a lump sum payment equal to one and a half times his annual base salary
if he:
(ii)
|
does
not accept a relocation outside of the greater Montreal
area;
|
(iii)
|
does
not accept an offer of employment at reduced levels of responsibility;
or
|
(iv)
|
does
not accept an offer of compensation (including performance/incentive
plan
targets and long-term compensation) which is less than his current
level.
|
Stock
Option Plan
In
1999,
the Company adopted a new stock option plan (the “Plan”), replacing all previous
stock option plans of the Company, to provide eligible officers, directors,
employees and consultants of the Company and its subsidiaries compensation
opportunities that will encourage share ownership and enhance the Company’s
ability to attract, retain and motivate such persons and reward significant
performance achievements. Options under the Plan may not be granted with a
term
exceeding ten years. The exercise price of the options may not be less than
the
market price of the Company’s common shares determined as of the date the
options were granted. Unless the Board determines otherwise, options granted
under the Plan are exercisable within 30 days after an optionee ceases to be
employed or retained by the Company (other than for reason of cause in which
event they terminate immediately, death in which event they are exercisable
within three months and disability in which event they are exercisable within
one year). The Plan, which was approved by shareholders on June 30, 1999, and
subsequently amended as approved by shareholders on June 20, 2000, May 23,
2002
and June 7, 2006 provides that the aggregate number of common shares reserved
for issuance under the Plan shall not exceed 1,400,000 common shares. The
granting of options is subject to the further conditions that: (i) the number
of
outstanding common shares of the Company reserved for options to optionees
or
issued to optionees within any one year period shall not exceed fifteen percent
(15%) of the outstanding common shares of the Company, and (ii) at no time
may
any optionee hold more than five percent (5%) of the outstanding common shares
of the Company under option.
The
following table discloses individual grants of options to the Named Executive
Officers to purchase or acquire common shares of the Company pursuant to the
Plan for the financial year ended December 31, 2007.
Aggregate
Options Exercised During the Most Recently Completed Financial Year and
Financial Year-end Option Values
Name
|
|
Securities
Acquired on
Exercise
(#)
|
|
Aggregate Value
Realized
(U.S.
$)
|
|
Unexercised
Options at FY-End
(#)
Exercisable/
Unexercisable
|
|
Value of
Unexercised
in-the-Money
Options at FY-End (U.S. $)
Exercisable/
Unexercisable
|
|
David
Goldman
|
|
|
40,000
|
|
|
78,430
|
|
|
54,000 / 45,000
|
|
|
Nil
/ Nil
|
|
Daniel
Bertrand
|
|
|
40,000
|
|
|
103,370
|
|
|
45,250 / 129,250
|
|
|
Nil
/ Nil
|
|
Patrick
Hopf
|
|
|
15,000
|
|
|
40,061
|
|
|
27,401 / 89,733
|
|
|
Nil
/ Nil
|
|
Martin
Bouchard
|
|
|
Nil
|
|
|
Nil
|
|
|
Nil / 155,000
|
|
|
Nil
/ Nil
|
|
Éric
Bouchard
|
|
|
Nil
|
|
|
Nil
|
|
|
Nil / 78,000
|
|
|
Nil
/ Nil
|
|
Claude
E. Forget
|
|
|
Nil
|
|
|
Nil
|
|
|
16,667 / 18,333
|
|
|
Nil
/ Nil
|
|
Dr.
David Schwartz
|
|
|
8,333
|
|
|
26,416
|
|
|
8,334 / 18,333
|
|
|
Nil
/ Nil
|
|
Irwin
Kramer
|
|
|
Nil
|
|
|
Nil
|
|
|
Nil
/ Nil
|
|
|
Nil
/ Nil
|
|
W.
Brian Edwards
|
|
|
8,334
|
|
|
18,543
|
|
|
Nil
/ Nil
|
|
|
Nil
/ Nil
|
|
Marc
Ferland
|
|
|
Nil
|
|
|
Nil
|
|
|
Nil
/ 25,000
|
|
|
Nil
/ Nil
|
|
Lawrence
Yelin
|
|
|
Nil
|
|
|
Nil
|
|
|
Nil
/ 25,000
|
|
|
Nil
/ Nil
|
|
Guy
Fauré
|
|
|
177,500
|
|
|
458,746
|
|
|
60,500
/ Nil
|
|
|
Nil
/ Nil
|
|
Option
and SAR Repricing
No
options were repriced during the year ended December 31
,
2006
and
2007.
Remainder
of page intentionally left blank.
Securities
Under Option to Directors and Named Executive Officers as at December 31,
200
7
Names
|
|
Securities
Under
Options
Granted
(#)
|
|
Exercise
or Base
Price
(US$/Security)
|
|
Market
Value of
Securities
Underlying
Options
on the Date
of
Grant
(US$/Security)
|
|
Expiration
Date
|
|
Daniel
Bertrand
|
|
|
85,000
|
|
|
1.74
|
|
|
1.74
|
|
|
09/18/2012
|
|
Daniel
Bertrand
|
|
|
50,000
|
|
|
2.28
|
|
|
2.28
|
|
|
11/08/2010
|
|
Daniel
Bertrand
|
|
|
14,000
|
|
|
3.58
|
|
|
3.58
|
|
|
11/05/2010
|
|
Daniel
Bertrand
|
|
|
13,000
|
|
|
5.15
|
|
|
5.15
|
|
|
01/23/2012
|
|
Daniel
Bertrand
|
|
|
12,500
|
|
|
6.28
|
|
|
6.28
|
|
|
02/15/2012
|
|
Claude
E. Forget
|
|
|
25,000
|
|
|
2.28
|
|
|
2.28
|
|
|
11/08/2010
|
|
Claude
E. Forget
|
|
|
10,000
|
|
|
4.24
|
|
|
4.24
|
|
|
06/08/2012
|
|
David
Goldman
|
|
|
50,000
|
|
|
2.28
|
|
|
2.28
|
|
|
11/08/2010
|
|
David
Goldman
|
|
|
29,000
|
|
|
3.58
|
|
|
3.58
|
|
|
11/05/2010
|
|
David
Goldman
|
|
|
20,000
|
|
|
4.24
|
|
|
4.24
|
|
|
06/08/2012
|
|
Irwin
Kramer
|
|
|
25,000
|
|
|
2.28
|
|
|
2.28
|
|
|
11/08/2010
|
|
Irwin
Kramer
|
|
|
10,000
|
|
|
4.24
|
|
|
4.24
|
|
|
06/08/2012
|
|
Dr. David
Schwartz
|
|
|
16,667
|
|
|
2.28
|
|
|
2.28
|
|
|
11/08/2010
|
|
Dr. David
Schwartz
|
|
|
10,000
|
|
|
4.24
|
|
|
4.24
|
|
|
06/08/2012
|
|
Patrick
Hopf
|
|
|
60,000
|
|
|
1.74
|
|
|
1.74
|
|
|
09/18/2012
|
|
Patrick
Hopf
|
|
|
30,834
|
|
|
2.28
|
|
|
2.28
|
|
|
11/08/2010
|
|
Patrick
Hopf
|
|
|
6,500
|
|
|
3.58
|
|
|
3.58
|
|
|
11/05/2010
|
|
Patrick
Hopf
|
|
|
13,000
|
|
|
5.15
|
|
|
5.15
|
|
|
01/23/2012
|
|
Patrick
Hopf
|
|
|
6,800
|
|
|
6.28
|
|
|
6.28
|
|
|
02/15/2012
|
|
Éric
Bouchard
|
|
|
65,000
|
|
|
1.74
|
|
|
1.74
|
|
|
09/18/2012
|
|
Éric
Bouchard
|
|
|
13,000
|
|
|
5.15
|
|
|
5.15
|
|
|
01/23/2012
|
|
Martin
Bouchard
|
|
|
130,000
|
|
|
1.74
|
|
|
1.74
|
|
|
09/18/2012
|
|
Martin
Bouchard
|
|
|
25,000
|
|
|
5.15
|
|
|
5.15
|
|
|
01/23/2012
|
|
Guy
Fauré
|
|
|
5,000
|
|
|
2.57
|
|
|
2.57
|
|
|
01/31/2009
|
|
Guy
Fauré
|
|
|
29,000
|
|
|
3.58
|
|
|
3.58
|
|
|
01/31/2009
|
|
Guy
Fauré
|
|
|
26,500
|
|
|
6.28
|
|
|
6.28
|
|
|
01/31/2009
|
|
Marc
Ferland
|
|
|
25,000
|
|
|
1.67
|
|
|
1.67
|
|
|
09/21/2012
|
|
Lawrence
Yelin
|
|
|
25,000
|
|
|
1.67
|
|
|
1.67
|
|
|
09/21/2012
|
|
The
information with respect to shares beneficially owned, controlled or directed
by
directors of the Company or Named Executive Officers is in each instance based
upon information furnished by the person concerned. The Company’s articles of
incorporation provide for Common Shares as the only authorized class of shares,
all of which have the same rights. Options to acquire shares held by directors
or Named Executive Officers, are listed in the above table entitled
Securities
Under Option to Directors and Named Executive Officers
and not
included in the information below. To the knowledge of the Company, the
following directors and Named Executive Officers hold the following shares
of
the Company as at March 19, 2008.
Director/
Named Executive Officer
|
|
Number
of Company
Shares
Held
1
|
|
%
of Total Number of
shares
Is Issued and
Outstanding
|
|
|
|
|
|
|
|
Marc
Ferland, President and Chief Executive Officer, Director
|
|
|
0
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
Martin
Bouchard, Director
|
|
|
50,000
|
|
|
0.3
|
%
|
|
Claude
E. Forget, Director
|
|
|
65,000
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
David
Goldman, Executive Chairman,
Director
|
|
|
75,000
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
Irwin
Kramer, Director
|
|
|
2,000
|
|
|
0
|
%
|
|
Dr.
David Schwartz, Director
|
|
|
3,533
|
|
|
0
|
%
|
|
Daniel
Bertrand, Executive Vice President and Chief Financial Officer
|
|
|
100
|
|
|
0
|
%
|
|
Éric
Bouchard, Vice President - Products
|
|
|
25,000
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
Lawrence
Yelin, Director
|
|
|
0
|
|
|
0
|
%
|
On
May
10, 2007, the Company adopted minimum shareholding requirements for directors
and officers. Minimum shareholding requirements are 100,000 shares for the
CEO,
40,000 shares for the Chair, 20,000 shares for Executive and Senior Vice
Presidents, 10,000 shares for Vice Presidents, and 10,000 shares for directors
with current officers and directors having five years from this date to achieve
these levels or, for new officers and directors, five years from the effective
date of their appointment.
1.
Does not include shares subject to receipt upon exercise of
options.
The
following table provides a breakdown of persons employed by main category of
activity for each of the past three financial years.
N
UMBER OF
E
MPLOYEES BY
C
ATEGORY OF
A
CTIVITY
|
|
Y
EAR
|
|
SEARCH / MEDIA
|
|
SOFTWARE
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
16
|
|
|
36
|
|
2006
|
|
|
23
|
|
|
36
|
|
2005
|
|
|
39
|
|
|
36
|
|
Pension
and Retirement Benefits
The
Company does not set aside nor accrue any amounts to provide pension, retirement
or similar benefits.
ITEM
7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
MAJOR
SHAREHOLDERS
To
the
knowledge of the Company, no shareholder currently owns, directly or indirectly,
or exercises control or direction over voting securities carrying more than
5%
of the voting rights attaching to any class of voting securities of the
Company.
The
Company’s Common Shares are widely held in the United States, Canada and
Europe.
To
the
knowledge of the Company, the Company is not directly or indirectly owned or
controlled by another corporation(s), by any foreign government or by any other
natural or legal person(s), whether severally or jointly acting as a “group”
within the meaning of the United States Securities Exchange Act of 1934, as
amended. To the knowledge of the Company, there are no arrangements, which
may
at a subsequent date result in a change in control of the Company.
RELATED
PARTY TRANSACTIONS
The
Company and Dave Goldman Advisors Ltd., a company controlled by Mr. Goldman,
entered into a consulting agreement pursuant to which David Goldman provides
services as an Executive Chairman at an hourly fee of CA$250. Total fees for
2007 were $108,291, (2006 -$125,003; 2005 - $202,685). The payment of these
sums
has been approved by the Compensation Committee. The transactions are in the
normal course of operations and are measured at the exchange amount which is
the
amount of the consideration established and agreed to by the related parties.
The
Company and Marc Ferland, a member of the board of directors of the Company,
entered into an agreement pursuant to which Marc Ferland performs various sales
and marketing projects. He is remunerated $5,000 per month retainer and 5%
commissions on recognized revenue (as per Canadian GAAP) of customers and
investment proceeds for a 3 year period brought in by his corporation, Gen24
Marketing, to the Company. Total fees for 2007 were $15,454. On March 3, 2008
Mr. Ferland was appointed President and CEO. The consulting agreement was
therefore terminated when Mr. Ferland was appointed President and CEO of the
Company.
INTEREST
OF EXPERTS AND COUNSEL
Not
Applicable.
ITEM
8. FINANCIAL INFORMATION
CONSOLIDATED
FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION
The
audited consolidated financial statements of the Company and certain other
financial information of the Company are included under Item 17 of this Annual
Report on Form 20-F.
LEGAL
OR ARBITRATION PROCEEDINGS
None.
POLICY
ON DIVIDEND DISTRIBUTIONS
The
Company has never declared or paid dividends on its Common Shares. The Company
currently intends to retain any earnings to support its working capital
requirements and growth strategy and does not anticipate paying dividends in
the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of the Company’s Board of Directors after taking into account various
factors, including the Company’s financial condition, operating results, current
and anticipated cash needs and plans for expansion.
SIGNIFICANT
CHANGES
There
have been no significant changes since the date of the audited, consolidated
financial statements of the Company included in this Annual Report on Form
20-F.
Resignation
and departure of two officers
On
February 11, 2008 the Company announced the departure of Patrick Hopf, Executive
Vice President of Business Development. 117,134 options held by Mr. Hopf were
cancelled, resulting in a reversal of employee stock-based compensation expense
of $48,542 which will be recorded in Q1 2008.
On
February 8, 2008 the Company announced that its President and Chief Executive
Officer, Martin Bouchard, tendered his resignation, effective March 3, 2008,
citing personal reasons. Mr. Bouchard will continue as a member of the board
of
directors and has agreed to be available to the Company on a consulting basis.
155,000 options held by Mr. Bouchard were cancelled, resulting in a reversal
of
employee stock-based compensation expense of $49,320 which will be recorded
in
Q1 2008. Mr. Marc Ferland, a director of the Company, is appointed President
and
CEO commencing on March 3, 2008.
Write-down
of intangible assets and goodwill
In
Q4
2007, the Company concluded that its software unit was facing delays in
execution and changes of market conditions of its commercial deployment
solutions. Based on the Company’s assessment of the fair value of its assets
related to the software unit, the Company concluded that these assets had
suffered a loss in value and the fair values of intangible assets and goodwill
were significantly less than their carrying value. Therefore, write-downs of
$1,333,415 for trade names, $652,055 for customer relationships and goodwill
of
$7,214,531 were recorded in 2007.
Also
in
Q4 2007, the Company reported decreased revenues due to industry pressures
on
advertising rates, slow down in sponsored clicks, pop-up campaigns and general
demand for all graphic ads. Based on the Company assessment of the fair value
of
its assets related to search / media unit, the Company concluded that the
goodwill related to this unit had suffered a loss in value and the fair value
of
the related goodwill was significantly less then its carrying value. Therefore,
a write-down of goodwill of $846,310 for search / media unit was recorded in
2007 to bring it to nil.
Write-down
of investment
In
Q4
2007, based on its assessment of the fair value of the Company’s investment in
LTRIM, the Company concluded that its investment had suffered a loss in value
other than a temporary decline due to LTRIM’s significant corporate
restructuring and therefore recorded a write-down of $150,000 to bring it to
nil.
Closure
of SEC investigation
On
September 19, 2007, The United States Securities and Exchange Commission (“SEC”)
informed the Company by letter that it had closed its investigation of the
Company, commenced in 2004, concerning certain trading in the shares of the
Company and other matters, and that the SEC did not intend to recommend
enforcement action against the Company.
Settlement
of class action lawsuit
On
July
16, 2007, the Company announced that the United States District Court, Southern
District of New York (the “Court”) had approved the settlement of the class
action following a hearing on July 9, 2007, at which time the Court heard from
all parties before concluding that the settlement was fair and all
procedural requisites were met. As a result, all claims asserted in the class
actions against the Company and the individual officer defendants have been
resolved, with the exception of three shareholders who have indicated they
will
exclude themselves from the settlement so as to preserve rights to maintain
separate actions should they elect to do so. The amount paid into escrow,
along with any interest earned, was distributed as provided under the settlement
to pay class members, plaintiffs' attorney fee, and the costs of claims
administration. Subsequently, one of the three shareholders has declined its
right to the class action lawsuit.
Name
change of Mamma.com Inc. to Copernic Inc.
On
June
8, 2007, the Company’s shareholders approved changing the Company’s name from
Mamma.com Inc. to Copernic Inc. at its Annual General and Special Meeting of
the
Shareholders. On June 14, 2007, articles of amendment were filed at the Ministry
of Consumer and Business Services of Ontario effecting the name change. On
June
21, 2007, the Company’s stock ticker symbol was changed to “CNIC”.
Agreement
for financial advisory services
On
June
7, 2007, the Company retained ThomasLloyd Capital LLC (“ThomasLloyd Capital”) as
its financial and investment banking advisor. In consideration for these
services, the Company has committed to pay ThomasLloyd Capital a monthly fee
of
$5,000 for seven months beginning June 1, 2007, plus a success fee of the
greater of $1,000,000 (but in no event shall such amount exceed 3% of the
transaction value) or 2% of the transaction value but in no event to exceed
$2,000,000 (less any amounts previously paid as monthly fees) plus an additional
fee of $200,000, credited against the above fees payable upon delivery of a
fairness opinion.
Resignation
of two officers
In
January 2007, two officers resigned from their positions. In connection with
their resignations, the Company paid and recorded termination costs of
CDN$510,000 in Q1 2007, changed the duration of their option agreements and
allowed accelerated vesting options for one of the officers. These changes
represented an additional non-cash item expense of $253,236 which was recorded
in Q1 2007.
Granting,
exercising and cancellation of stock options
On
January 23, 2007, the Company granted to officers and employees 70,500 and
21,803 stock options, respectively, at an exercise price of $5.15 expiring
in
five years.
On
February 26, 2007, 10,000 stock options were granted to a new employee, at
an
exercise price of $4.99 expiring in five years.
On
March
29, 2007, the Company granted 2,632 stock options to an employee at an exercise
price of $4.75 expiring in five years.
On
April
30, 2007, the Company granted 40,000 stock options to a new employee at an
exercise price of $4.90 expiring in five years.
On
June
8, 2007, the Company granted 60,000 stock options to directors at an exercise
price of $4.24 expiring in five years.
On
September 18, 2007, the Company granted 652,000 stock options to officers and
employees at an exercise price of $1.74 expiring in five years.
On
September 21, 2007, the Company granted 50,000 stock options to two new board
members at an exercise price of $1.67 expiring in five years.
As
at
September 30, 2007, 296,667 stock options were exercised with exercising prices
ranging between $1.53 to $2.57 and 59,037 stock options were
cancelled.
As
at
November 8, 2007, the Company granted 4,000 stock options to an employee at
an
exercise price of $2.23 expiring in five years.
As
at
December 31, 2007, 296,667 stock options were exercised with exercising prices
ranging between $1.53 to $2.57 and 83,065 were cancelled or had
expired.
As
at
March 19, 2008, 352,634 stock options were cancelled or
expired.
ITEM
9. THE OFFER AND LISTING
U.S.
and German Trading Markets
The
Company’s Common Shares are quoted on the NASDAQ Stock Exchange® - Capital
Market under the symbol “CNIC” and on the Third Market Segment of the Frankfurt
and Berlin stock exchanges in Germany under the symbol “IYS1”. On June 21, 2007
following the change of the Company’s name to Copernic Inc., the Company’s
shares begin to trade under the symbol CNIC. Prior to June, 2007, the Company’s
shares were quoted under various other trading symbols. With a corporate name
change taking effect in August 1996 the Company’s Common Share trading symbol
was changed to “INTAF” and in April 1999 the symbol was changed to “INTA”. On
January 12, 2004, following the approval of the change of name of the Company
to
Mamma.com Inc. the symbol was changed to “MAMA”. On July 11, 2001, the Company
filed articles of amendment consolidating its issued and outstanding Common
Shares on the basis of one post-consolidation Common Share for every ten
pre-consolidation Common Shares. The Company’s Common Shares started trading on
the NASDAQ Small Cap Market® on a consolidated basis at the opening of the
markets on July 13, 2001.
The
following table sets forth the price history of the Company’s Common Shares
reported on the NASDAQ Stock Market® and on the Third Market Segment of the
Frankfurt and Berlin stock exchanges in Germany, which reflect inter-dealer
prices without retail mark-ups or commissions and may not represent actual
transactions. As per the Explanatory Notes to this Annual Report on Form 20-F,
all prices referred to below are adjusted to take into account the July 2001
consolidation of the Company’s Common Shares on the basis of 1
post-consolidation common share for every 10 pre-consolidation Common
Shares.
NASDAQ
Stock Exchange Capital Market®
Annual
High and Low Market Prices– 5 Years Ended December 31,
2007
(based on closing prices)
Year
|
|
High
|
|
Low
|
|
|
|
|
|
2007
|
|
5.90
|
|
1.41
|
|
|
|
|
|
2006
|
|
7.95
|
|
0.97
|
|
|
|
|
|
2005
|
|
6.28
|
|
2.12
|
|
|
|
|
|
2004
|
|
15.90
|
|
3.26
|
|
|
|
|
|
2003
|
|
4.51
|
|
1.25
|
NASDAQ
Stock Exchange Capital Market®
Quarterly
High and Low Market Prices – 2 Years Ended December 31, 2007 (based on
closing prices)
Quarter
End
|
|
High
|
|
Low
|
|
|
|
|
|
12/31/07
|
|
3.47
|
|
1.41
|
|
|
|
|
|
9/30/07
|
|
3.56
|
|
1.45
|
|
|
|
|
|
6/30/07
|
|
5.60
|
|
2.62
|
|
|
|
|
|
3/31/07
|
|
5.90
|
|
4.07
|
|
|
|
|
|
12/31/06
|
|
7.95
|
|
1.11
|
|
|
|
|
|
9/30/06
|
|
1.34
|
|
0.97
|
|
|
|
|
|
6/30/06
|
|
2.07
|
|
1.13
|
|
|
|
|
|
03/31/06
|
|
3.54
|
|
2.03
|
NASDAQ
Stock Exchange Capital Market® Monthly High and Low Market Prices – 6
Months Ended February 29, 2008 (based on closing
prices)
Month
|
|
High
|
|
Low
|
|
|
|
|
|
Feb
|
|
1.41
|
|
1.24
|
|
|
|
|
|
Jan
|
|
1.55
|
|
1.03
|
|
|
|
|
|
Dec
|
|
1.92
|
|
1.41
|
|
|
|
|
|
Nov
|
|
3.07
|
|
1.67
|
|
|
|
|
|
Oct
|
|
3.47
|
|
2.83
|
|
|
|
|
|
Sep
|
|
3.56
|
|
1.66
|
Frankfurt
Exchange (based on closing prices) - High and Low Market Prices – 4 Years
Ended December 31, 2007 (in euros)
Year
|
|
High
|
|
Low
|
|
|
|
|
|
2007
|
|
2.65
|
|
0.60
|
|
|
|
|
|
2006
|
|
5.94
|
|
0.70
|
|
|
|
|
|
2005
|
|
4.80
|
|
1.77
|
|
|
|
|
|
2004
|
|
13.80
|
|
2.58
|
Frankfurt
Exchange (based on closing prices) Quarterly High and Low Market Prices – 2
Years Ended December 31, 2007 and Latest Quarter (in
euros)
Quarter
|
|
High
|
|
Low
|
|
|
|
|
|
12/31/07
|
|
2.59
|
|
0.78
|
|
|
|
|
|
9/30/07
|
|
2.65
|
|
0.97
|
|
|
|
|
|
6/30/07
|
|
4.12
|
|
1.91
|
|
|
|
|
|
3/31/07
|
|
4.59
|
|
3.19
|
|
|
|
|
|
12/31/06
|
|
5.94
|
|
0.89
|
|
|
|
|
|
09/30/06
|
|
1.13
|
|
0.70
|
|
|
|
|
|
06/30/06
|
|
1.73
|
|
0.91
|
|
|
|
|
|
03/31/06
|
|
2.65
|
|
1.70
|
Frankfurt
Exchange (based on closing prices) Monthly High and Low Market Prices – 6
Months Ended February 29, 2008 (in euros)
Month
|
|
High
|
|
Low
|
|
|
|
|
|
February
2008
|
|
0.99
|
|
0.82
|
|
|
|
|
|
January
2008
|
|
1.07
|
|
0.67
|
|
|
|
|
|
December
2007
|
|
1.29
|
|
0.78
|
|
|
|
|
|
November
2007
|
|
2.14
|
|
1.14
|
|
|
|
|
|
October
2007
|
|
2.59
|
|
2.07
|
|
|
|
|
|
September
2007
|
|
2.65
|
|
1.21
|
Equity
Transfer Services, Inc. of Toronto, Ontario, Canada acts as registrar and
transfer agent for the Company’s common shares.
ITEM
10. ADDITIONAL INFORMATION
SHARE
CAPITAL
Not
Applicable.
MEMORANDUM
AND ARTICLES OF ASSOCIATION
The
Company was incorporated under the laws of the Province of Ontario on July
5,
1985 as ‘Quartet Management Ltd.’, and has an Ontario Corporation Number of
630609. By articles of amendment filed on March 27, 1987, the Company changed
its name to ‘Health Care Products Inc. By articles of amendment filed on March
28, 1994, the Company changed its name to ‘Celltech Media Inc.’. By articles of
amendment filed on June 21, 1995, the Company changed its name to ‘Smartel
Communications Corporation’ and by articles of amendment filed on July 29, 1996,
the Company changed its name to ‘Intasys Corporation’. On July 11, 2001, the
Company filed articles of amendment consolidating its issued and outstanding
Common Shares on the basis of one post-consolidation common share for every
ten
pre-consolidation Common Shares. By articles of amendment filed on January
8,
2004 the Company changed its name to ‘Mamma.com Inc.’ By articles of amendment
filed on June 14, 2007 the Company changed its name to ‘Copernic
Inc.’
Section
5
of the Company’s articles of incorporation indicates that there are no
restrictions on the business the Company may carry on or on the powers it may
exercise. Pursuant to Section 15 of the
Business
Corporations Act
(Ontario) (“OBCA”), a corporation has the capacity and the rights, powers and
privileges of a natural person.
With
respect to a material contract, proposal or arrangement between the Company
and
one or more directors thereof or between the Company and another person of
which
a director of the Company is a director or in which a director has a material
interest, such material contract, proposal or arrangement, as the case may
be,
is neither void nor voidable by reason only of that relationship or by reason
only that a director with an interest in the transaction is present at or is
counted to determine the presence of a quorum at a meeting of directors or
committee of directors that authorized the transaction, if (i) the director
disclosed his or her interest in accordance with the OBCA; (ii) the transaction
was approved by the directors or the shareholders of the Company, as applicable;
and (iii) it was reasonable and fair to the Company at the time it was approved.
Generally, the business corporation laws of the United States vary significantly
on this issue from state to state. Delaware Law accords similar treatment (a)
if
conditions (i) and (ii) above are satisfied or (b) if (iii), without regard
to
conditions (i) and (ii), is satisfied, except that any ratification by the
board
must be by a vote of disinterested members.
Neither
the Company’s articles of incorporation nor its bylaws restrict the directors
from exercising any power (in the absence of an independent quorum) to approve
their compensation.
The
directors of the Company may from time to time, without the authorization of
the
shareholders:
(a)
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borrow
money upon the credit of the Company;
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(b)
|
issue,
re-issue, sell or pledge debt obligations of the Company, including
without limitation, bonds, debentures, notes or other similar obligations
of the Company whether secured or unsecured;
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(c)
|
subject
to Section 20 of the OBCA, give a guarantee on behalf of the Company
to
secure performance of any present or future indebtedness, liability
or
obligation of any person; or
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(d)
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charge,
mortgage, hypothecate, pledge or otherwise create a security interest
in
all or any currently owned or subsequently acquired, real or personal,
moveable or immovable property of the Company, including without
limitation, book debts, rights, powers, franchises and undertakings,
to
secure any present or future indebtedness, liabilities or other
obligations of the Company.
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Although
most progressive U.S. state corporate codes grant similar powers to corporate
boards of directors, some U.S. states still require shareholder approval of
liens in substantially all of a corporation’s assets.
The
directors may from time to time, by resolution, delegate any or all of the
powers referred to above to a director, committee of directors or one or more
officers of the Company. These powers may be varied by enacting a new by-law
by
resolution of the directors, which by-law must then be subsequently approved
at
a meeting of shareholders or by shareholder resolution. U.S. state corporate
laws establish no general rule concerning directors’ ability to delegate such
duties. More progressive U.S. state corporate laws such as Delaware’s General
Corporation Law allow a board of directors to establish a committee of one
or
more directors and delegate such powers to such committee without a by-law
or
stockholder approval.
The
Company’s articles of incorporation do not contain any provisions for the
retirement of directors as the result of reaching a certain age limit. The
Company’s by-laws contain a minimum age requirement of 18 years to be named a
director.
Directors
need not be shareholders of the Company.
The
Company is authorized to only issue, and its share capital consists of only,
Common Shares. Each common share entitles the holder to receive notice of,
and
to vote on the basis of one vote per common share, at all meetings of
shareholders, to receive any dividend declared by the Company on the Common
Shares and to receive the remaining property of the Company on its dissolution,
liquidation or wind-up. The shareholders do not have the rights to share in
the
profits of the Company. The laws of most US states vest Common Shares with
similar powers. The Company has never and does not have plans to declare any
dividends.
In
order
to change the rights of holders of Common Shares, an amendment to the Company’s
articles is required. Pursuant to Section 168 of the OBCA, such an amendment
can
be effected at a meeting of shareholders upon agreement by a majority of the
shareholders. Pursuant to Section 170, the holders of shares of a class are
entitled to vote separately as a class upon a proposal to amend the articles
that would have the effect of altering the rights of that class or altering
the
rights of that class relative to the other classes of shares. Progressive U.S.
state corporate codes generally require similar procedures except that corporate
laws such as New York’s Business Corporation Law and Delaware’s General
Corporation Law permit stockholders to authorize such amendments by majority
consent in writing, without a meeting, subject to certain
limitations.
The
annual meeting of shareholders shall be held at such time, day and place as
the
Board, Chairman of the Board or the President may from time to time determine,
provided that an annual meeting must be called not later than 15 months after
the holding of the immediately preceding annual meeting. The Board, the Chairman
of the Board, the President, the Managing Director or Vice President shall
have
the power to call a special meeting of shareholders at any time.
In
addition, pursuant to Section 105 of the OBCA, the holders of not less than
5%
of the issued shares of a corporation that carry the right to vote at a meeting
sought to be held, may requisition the directors to call a meeting of
shareholders for the purposes stated in the requisition. Such requisition shall
state the business to be transacted at the meeting. Although there is no general
rule, progressive U.S. state corporation laws provide that the by-laws shall
determine stockholders’ rights to call stockholder meetings. The directors of a
corporation shall call a meeting of shareholders upon receiving the requisition
unless a meeting of shareholders has already been called or a record date has
been fixed and the appropriate notice has been provided. If the directors do
not, within twenty-one days after receiving the requisition, call a meeting
and
if the above-noted exceptions are not met, any shareholder who signed the
requisition may call the meeting.
Notice
of
the time and place of each meeting of shareholders shall be given not less
than
21 nor more than 50 days before the date of the meeting to each director and
the
auditor of the Company and to each shareholder who, at the close of business
on
the record date for notice or, if no record date for notice is fixed, at the
close of business on the day proceeding the day on which notice is given, is
entered in the securities register as the holder of one or more shares of the
Company carrying the right to vote at the meeting. For every meeting of
shareholders, the Company shall prepare a list of shareholders entitled to
receive notice of the meeting, arranged in alphabetical order and showing the
number of shares entitled to vote at the meeting held by each
shareholder.
The
only
persons entitled to be present at a meeting of shareholders shall be those
entitled to vote thereat, the directors and auditors, if any, of the Company
and
others who, although not entitled to vote, are entitled or required under the
OBCA or the articles or by-laws of the Company to be present at the meeting.
Any
other person may be admitted on the invitation of the Chairman of the meeting
or
with the consent of the meeting.
There
are
no restrictions in the Company’s articles or by-laws, nor under the OBCA or the
provision of the Securities Act (Ontario) or Securities Act (Quebec) limiting
the right to own, hold or exercise voting rights on the Company’s securities.
Most, if not all U.S. states have enacted some form of takeover disclosure
law
or business combination act requiring certain disclosures and/or limiting the
right to own or vote shares acquired in certain situations including hostile
business combinations.
There
are
no provisions in the Company’s articles or by-laws that would have the effect of
delaying, deferring or preventing a change in control of the Company and that
would operate only with respect to a merger, acquisition or corporate
restructuring involving the Company.
Pursuant
to the Securities Act (Ontario) (the “Securities Act”), any shareholder holding
or exercising control over more than 10% of the voting rights attached to all
outstanding voting securities of a Company is considered an insider of that
company and among other things is required to disclose any trades in shares
of
that company. Similarly, Section 16 and Rule 16(a) of the U.S. Securities
Exchange Act of 1934 (“1934 Act”), under which the Company is registered,
requires holders of 10% or more of the securities of a 1934 Act registered
company to file reports disclosing ownership and transactions in that company’s
securities. The Company, however, currently is deemed a “foreign private issuer”
and is exempt from these provisions. Section 101 of the Securities Act requires
that any person who acquires beneficial ownership of, or the power to exercise
control over, a total of 10% or more of a company’s voting or equity securities
in any class shall issue a news release and file a report containing the
particulars and purpose behind the acquisition. Further reports must be issued
every time such person acquires an additional 2% or more of the company’s voting
or equity securities, or there is a change in any of the material facts
disclosed in the former report. Similarly, Section 13(d) and Regulation 13D
of
the 1934 Act requires any person who acquires beneficial ownership or more
than
5% of an equity security of any company registered under the 1934 Act to file
a
report disclosing the particulars and purpose behind the acquisition. Amendments
must be filed to this report every time such person acquires or disposes of
1%
or more of the equity security or there is some other material change in the
report on file. In addition, Section 14(d) and Regulation 14D of the 1934 Act
imposes certain filing and disclosure requirements on persons making “tender
offers” for equity securities of a 1934 Act registered company.
The
articles of incorporation and by-laws of the Company do not contain any
conditions governing changes in the Company’s capital that are more stringent
than the applicable law.
MATERIAL
CONTRACTS
The
Company has not entered into any material contracts during the last two fiscal
years other than in the ordinary course of business and other than those
described in “Item 4 - Information on the Company” or elsewhere in this Annual
Report on Form 20-F.
EXCHANGE
CONTROLS
There
is
no Canadian law, government decree or regulation that restricts the export
or
import of capital or that affects the remittance of dividends, interest or
other
payments to a non-resident holder of Common Shares other than withholding tax
requirements.
There
is
no limitation imposed by Canadian law or by the articles or other charter
documents of the Company on the right of a non-resident to hold or vote Common
Shares, other than as provided in the Investment Canada Act, as amended (the
“Investment Act”). The Investment Act generally prohibits implementation of a
reviewable investment by an individual, government or agency thereof,
corporation, partnership, trust, joint venture or other entity that is not
a
“Canadian,” as defined in the Investment Act (a “non-Canadian”), unless, after
review, the Minister responsible for the Investment Act is satisfied that the
investment is likely to be of net benefit to Canada based on the criteria set
out in the Investment Act. Investment in Common Shares of the Company (or other
voting shares) by a non-Canadian (other than a “WTO investor,” as defined below)
would be reviewable under the Investment Act if it constitutes an acquisition
of
control of the Company, and the value of the assets of the Company were
$5,000,000 Canadian or more. Such an investment in Common Shares of the Company
by a WTO investor would be reviewable under the Investment Act if the value
of
the assets of the Company equaled or exceeded $295,000,000 Canadian for
investments made in 2008. The Investment Act contains rules to determine if
an
investment constitutes an acquisition of control of a particular entity. For
example, any non-Canadian, whether a WTO investor or otherwise, would acquire
control of the Company for purposes of the Investment Act if such non-Canadian
acquired a majority of the Common Shares of the Company. The acquisition of
less
than a majority but at least one-third of the Common shares of the Company
is
presumed to be an acquisition of control of the Company, unless it could be
established that on the acquisition the Company was not controlled in fact
by
the acquirer through the ownership of Common Shares. In general, an individual
is a WTO Investor if such individual is a “national” of a country (other than
Canada) that is a member of the World Trade Organization (“WTO Member”) or has a
right of permanent residence in relation to that WTO Member. A corporation
or
other entity is a WTO investor if it is a “WTO Investor-controlled entity”
pursuant to detailed rules set out in the Investment Act.
Certain
transactions involving Common Shares of the Company would be exempt from the
Investment Act, including, without limitation: (a) an acquisition of Common
Shares of the Company if the acquisition were made in connection with the
person’s business as a trader or dealer in securities; (b) an acquisition of
control of the Company’s business in connection with the realization of a
security interest granted for a loan or other financial assistance and not
for
any purpose related to the provisions of the Investment Act; and (c) an
acquisition of control of the Company’s business by reason of an amalgamation,
merger, consolidation or corporate reorganization, following which the ultimate
direct or indirect control in fact of the Company, through the ownership of
voting interests (as defined in the Investment Act), remains
unchanged.
TAXATION
The
following is a summary of certain federal income tax provisions applicable
to
United States corporations, citizens and resident alien individuals who purchase
Common Shares and who will hold such shares as capital property for the purpose
of the Income Tax Act (Canada) (the “ITA”). This discussion does not purport to
deal with all relevant aspects of U.S. or Canadian taxation. Shareholders are
advised to consult their own tax advisors regarding the United States income
tax
consequences of holding and disposing of the Common Shares as well as any
consequences arising under state and local tax laws or the tax laws of
jurisdictions outside the United States. The summary is based on the assumption
that, for Canadian tax purposes and at all relevant times, a holder of Common
Shares (a) is neither resident nor deemed to be resident in Canada for the
purposes of the ITA, but is resident in the United States for the purposes
of
the Canada – United States Income Tax Convention (1980) (the “Treaty”); (b)
deals at arm’s length with the Company and is not affiliated with the Company;
(c) holds the Common Shares as capital property and does not use or hold and
is
not deemed to use or hold the Common Shares in the course of carrying on a
business in Canada; and (d) is not an insurer or a financial
institution.
This
summary is based on the current provisions of the Treaty and accompanying
protocols, the ITA, the regulations under the ITA, specific proposals to amend
the ITA or the regulations thereunder announced by the Canadian Minister of
Finance prior to the date of this report and our understanding of the current
administrative and assessing practices of the Canada Revenue Agency (or CRA).
This summary does not otherwise take into account or anticipate any changes
in
law, whether by legislative, governmental or judicial action, nor does it take
into account tax laws or considerations of any province or territory of
Canada.
The
summary is for general information only and does not take into account the
individual circumstances of any particular investor. Therefore, investors are
urged to consult their own tax advisors with respect to the tax consequences
of
an investment in the Common Shares of the Company based on their specific
circumstances, including any consequences of an investment in the Common Shares
arising under state, local or provincial tax laws of other jurisdictions,
including the United States.
For
United States federal income tax purposes, a United States corporation, citizen
or resident alien generally will realize, to the extent of the Company’s current
or accumulated earnings and profits, taxable ordinary income on the receipt
of
cash dividends on the Common Shares equal to the gross amount of such dividends
without reduction for any Canadian withholding tax. Subject to certain
limitations, such withholding tax generally may be credited, against the
holder’s United States federal income tax liability or, alternatively, may be
deducted in computing the holder’s United States federal taxable income.
Dividends paid on the Common Shares will not be eligible for the “dividends
received” deduction, available under certain circumstances to United States
corporations.
Dividends
paid to a holder on Common Shares, including deemed dividends and stock
dividends, will be subject to Canadian non-resident withholding tax, which
is
generally applicable to dividends paid by a corporation resident in Canada
to a
resident of the United States. Under the terms of the Treaty, non-resident
withholding tax is generally levied at a rate of 15% of the gross amount of
the
dividend. If, however, the beneficial owner of the dividends is a company
resident in the United States for the purposes of the Treaty that owns at least
10% of the voting stock of the Company paying the dividends, the rate of
withholding tax under the Treaty is further reduced to 5%. Under the terms
of
the proposed Protocol amending the Treaty between Canada and the United States,
which was signed on September 21, 2007 but which is not yet in force, a company
that is resident of the United States will be considered to own the voting
stock
owned by an entity that is considered fiscally transparent under the laws of
the
United States and that is not a resident of Canada in proportion to the
company’s ownership interest in the Company. This proposed amendment to the
Treaty will have effect for amounts paid or credited on or after the first
day
of the second month that begins after the date on which the proposed Protocol
enters into force.
A
holder
may be subject to Canadian income tax in respect of any capital gains realized
on a disposition or deemed disposition of Common Shares. However, a holder
will
be exempt from Canadian tax on a capital gain realized on an actual or deemed
disposition of Common Shares unless the Common Shares are “taxable Canadian
property” (as defined in the ITA) to the holder at the time of the disposition.
Provided the Common Shares are listed on a designated stock exchange for the
purposes of the ITA (the National Association of Securities Dealers Automated
Quotation System is a designated stock exchange under the ITA), the Common
Shares (as well as any interests in or options for Common Shares) will not
be
“taxable Canadian property” to a holder, unless the holder, persons with whom
the holder did not deal at arm’s length for the purposes of the ITA or the
holder together with such persons owned 25% or more of the shares of any class
or series of the capital stock of the Company at any time during the 60-month
period immediately preceding the disposition or deemed disposition of the Common
Shares. The Common Shares may be deemed to be “taxable Canadian property” where
the holder acquired them in certain circumstances, including upon the
disposition of other “taxable Canadian property”. In the event that the Common
Shares do constitute “taxable Canadian property”, any capital gain realized on
their disposition by a holder may be exempt from Canadian tax pursuant to the
provisions of the Treaty. Holders of Common Shares must consult their own tax
advisers to determine if any such Canadian income tax must be paid.
For
United States federal income tax purposes, upon a sale or exchange of a Common
Share, a holder will recognize gain or loss equal to the difference between
the
amount realized on such sale or exchange and the holder’s tax basis in such
common share. For non-corporate taxpayers, the maximum tax rates imposed are
15%
on net capital gains and 35% on ordinary income. US capital gains may result
in
additional taxes by application of the Alternative Minimum Tax. As a taxpayer’s
income rises, US federal income tax law phases-out US personal exemptions and
increasingly limits the availability of itemized deductions which may increase
the effective tax rates. The deduction of net capital losses against ordinary
income currently is severely limited under US federal income tax law. Holders
of
Common Shares must consult their own tax advisers to determine the effect of
federal, state and local income taxes upon a sale or exchange of Common
Shares.
DOCUMENTS
ON DISPLAY
Documents
concerning the Company which are referred to in the document and otherwise
available for public inspection may be inspected at the executive offices of
the
Company as well as the executive or operating offices of the Company’s operating
subsidiaries. Any request for inspection must be made in writing addressed
to
the Company’s executive offices to the attention of Mr. Daniel Bertrand,
Executive Vice President and Chief Financial Officer. Such request must
explicitly identify the person making the request, the documents pertaining
to
the request as well as the date and time that the person making such request
desires to inspect such documents. The Company reserves all rights to refuse
or
limit a request.
ITEM
11.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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CURRENCY
RISK
The
Company has employees located in Canada and the United States where the local
currency is used. No forward exchange contracts are used to sell currencies
at
fixed forward rates.
INTEREST
RATE RISK
The
Company has short term investments and temporary investments bearing average
interest rates between 4.06% and 5.23%. No other financial instruments are
used.
ITEM
12.
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DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES
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Not
applicable.