Notes
to Condensed Consolidated Financial Statements
September
30, 2007
(Unaudited)
NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS
OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with Generally Accepted Accounting Principles for interim
financial information and with the instructions to Form 10-QSB and Item 310
of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by Generally Accepted Accounting Principles for complete
financial statements. The accompanying unaudited condensed consolidated
financial statements reflect all adjustments that, in the opinion of management,
are considered necessary for a fair presentation of the financial position,
results of operations, and cash flows for the periods presented. The results
of
operations for such periods are not necessarily indicative of the results
expected for the full fiscal year or for any future period. The accompanying
financial statements should be read in conjunction with the audited consolidated
financial statements of Findex.com, Inc. included in our Form 10-KSB for the
fiscal year ended December 31, 2006.
USE
OF ESTIMATES
The
preparation of consolidated financial statements in conformity with Generally
Accepted Accounting Principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
the
accompanying notes. Significant estimates used in the consolidated financial
statements include the estimates of (i) doubtful accounts, obsolete inventory,
sales returns, price protection and rebates, (ii) provision for income taxes
and
realizability of the deferred tax assets, and (iii) the life and realization
of
identifiable intangible assets. The amounts we will ultimately incur or recover
could differ materially from current estimates.
INVENTORY
Inventory,
including out on consignment, consists primarily of software media, manuals
and
related packaging materials and is recorded at the lower of cost or market
value, determined on a first-in, first-out, and adjusted on a per-item,
basis.
ACCOUNTING
FOR LONG-LIVED ASSETS
We
review
property and equipment and intangible assets for impairment whenever events
or
changes in circumstances indicate that the carrying amount of an asset may
not
be recoverable. Recoverability is measured by comparison of our carrying amount
to future net cash flows the assets are expected to generate. If such assets
are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds its fair market value.
Property and equipment to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
INTANGIBLE
ASSETS
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142,
Goodwill and Other Intangible Assets
, intangible assets with an
indefinite useful life are not amortized. Intangible assets with a finite useful
life are amortized on the straight-line method over the estimated useful lives.
Our software license is amortized over a ten-year useful life.
SOFTWARE
DEVELOPMENT COSTS
In
accordance with SFAS No. 86,
Accounting for the Costs of Computer Software
to Be Sold, Leased, or Otherwise Marketed
, software development costs are
expensed as incurred until technological feasibility and marketability has
been
established, generally with release of a beta version for customer testing.
Once
the point of technological feasibility and marketability is reached, direct
production costs (including labor directly associated with the development
projects), indirect costs (including allocated fringe benefits, payroll taxes,
facilities costs, and management supervision), and other direct costs (including
costs of outside consultants, purchased software to be included in the software
product being developed, travel expenses, material and supplies, and other
direct costs) are capitalized until the product is available for general release
to customers. We amortize capitalized costs on a product-by-product basis.
Amortization for each period is the greater of the amount computed using (i)
the
straight-line basis over the estimated product life (generally from 12 to 18
months), or (ii) the ratio of current revenues to total projected product
revenues. Total cumulative capitalized software development costs were
$2,030,968, less accumulated amortization of $1,471,642 at September 30,
2007.
Capitalized
software development costs are stated at the lower of amortized costs or net
realizable value. Recoverability of these capitalized costs is determined at
each balance sheet date by comparing the forecasted future revenues from the
related products, based on management’s best estimates using appropriate
assumptions and projections at the time, to the carrying amount of the
capitalized software development costs. If the carrying value is determined
not
to be recoverable from future revenues, an impairment loss is recognized equal
to the amount by which the carrying amount exceeds the future revenues. To
date,
no capitalized costs have been written down to net realizable
value.
SFAS
No.
2,
Accounting for Research and Development Costs
, established
accounting and reporting standards for research and development. In accordance
with SFAS No. 2, costs we incur to enhance our existing products after general
release to the public (bug fixes) are expensed in the period they are incurred
and included in research and development costs. Research and development costs
incurred prior to determination of technological feasibility and marketability
and after general release to the public and charged to expense were $76,198
and
$131,013 for the nine months ended September 30, 2007 and 2006, respectively,
included in general and administrative expenses.
We
capitalize costs related to the development of computer software developed
or
obtained for internal use in accordance with the American Institute of Certified
Public Accountants Statement of Position (“SOP”) 98-1,
Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use
. Software
obtained for internal use has generally been enterprise level business and
finance software that we customize to meet our specific operational needs.
We
have not sold, leased, or licensed software developed for internal use to our
customers and have no intention of doing so in the future.
We
capitalize costs related to the development and maintenance of our website
in
accordance with Financial Accounting Standard Board’s (“FASB’s”) Emerging Issues
Task Force (“EITF”) Issue No. 00-2,
Accounting for Website Development
Costs
. Under EITF Issue No. 00-2, costs expensed as incurred are as
follows:
|
▪
|
planning
the website,
|
|
▪
|
developing
the applications and infrastructure until technological feasibility
is
established,
|
|
▪
|
developing
graphics such as borders, background and text colors, fonts, frames,
and
buttons, and
|
|
▪
|
operating
the site such as training, administration and
maintenance.
|
Capitalized
costs include those incurred to:
|
▪
|
obtain
and register an Internet domain name,
|
|
▪
|
develop
or acquire software tools necessary for the development
work,
|
|
▪
|
develop
or acquire software necessary for general website
operations,
|
|
▪
|
develop
or acquire code for web applications,
|
|
▪
|
develop
or acquire (and customize) database software and software to integrate
applications such as corporate databases and accounting systems into
web
applications,
|
|
▪
|
develop
HTML web pages or templates,
|
|
▪
|
install
developed applications on the web server,
|
|
▪
|
create
initial hypertext links to other websites or other locations within
the
website, and
|
|
▪
|
test
the website applications.
|
We
amortize website development costs on a straight-line basis over the estimated
life of the site, generally 36 months. Total cumulative website development
costs, included in other assets on our condensed consolidated balance sheets,
were $113,252, less accumulated amortization of $84,537 at September 30,
2007.
RESTRICTED
CASH
Restricted
cash represents cash held in reserve by our merchant banker to allow for a
potential increase in credit card charge backs from increased consumer
purchases.
REVENUE
RECOGNITION
We
derive
revenues from the sale of packaged software products, product support and
multiple element arrangements that may include any combination of these items.
We recognize software revenue for software products and related services in
accordance with SOP 97-2,
Software Revenue Recognition
, as modified by
SOP 98-9,
Modification of SOP 97-2, With Respect to Certain
Transactions
. We recognize revenue when persuasive evidence of an
arrangement exists (generally a purchase order), we have delivered the product,
the fee is fixed or determinable and collectibility is probable.
In
some
situations, we receive advance payments from our customers. We defer revenue
associated with these advance payments until we ship the products or offer
the
support.
In
accordance with EITF Issue No. 01-9,
Accounting for Consideration Given by a
Vendor to a Customer or a Reseller of the Vendor’s Product
, we generally
account for cash considerations (such as sales incentives – rebates and coupons)
that we give to our customers as a reduction of revenue rather than as an
operating expense.
Product
Revenue
We
typically recognize revenue from the sale of our packaged software products
when
we ship the product. We sell some of our products on consignment to a limited
number of resellers. We recognize revenue for these consignment transactions
only when the end-user sale has occurred. Revenue for software distributed
electronically via the Internet is recognized when the customer has been
provided with the access codes that allow the customer to take immediate
possession of the software on its hardware and evidence of the arrangement
exists (web order).
Some
of
our software arrangements involve multiple copies or licenses of the same
program. These arrangements generally specify the number of simultaneous users
the customer may have (multi-user license), or may allow the customer to use
as
many copies on as many computers as it chooses (a site license). Multi-user
arrangements, generally sold in networked environments, contain fees that vary
based on the number of users that may utilize the software simultaneously.
We
recognize revenue when evidence of an order exists and upon delivery of the
authorization code to the consumer that will allow them the limited simultaneous
access. Site licenses, generally sold in non-networked environments, contain
a
fixed fee that is not dependent on the number of simultaneous users. Revenue
is
recognized when evidence of an order exists and the first copy is delivered
to
the consumer.
Many
of
our software products contain additional content that is “locked” to prevent
access until a permanent access code, or “key,” is purchased. We recognize
revenue when evidence of an order exists and the customer has been provided
with
the access code that allows the customer immediate access to the additional
content. All of the programs containing additional locked content are fully
functional and the keys are necessary only to access the additional content.
The
customer’s obligation to pay for the software is not contingent on delivery of
the “key” to access the additional content.
We
reduce
product revenue for estimated returns and price protections that are based
on
historical experience and other factors such as the volume and price mix of
products in the retail channel, trends in retailer inventory and economic trends
that might impact customer demand for our products. We also reduce product
revenue for the estimated redemption of end-user rebates on certain current
product sales. Our rebate reserves are estimated based on the terms and
conditions of the specific promotional rebate program, actual sales during
the
promotion, the amount of redemptions received and historical redemption trends
by product and by type of promotional program. We did not offer any rebate
programs to our customers during the three and nine months ended September
30,
2007 and 2006 and maintain a reserve for rebate claims remaining unpaid from
2000 and 2001.
Service
Revenue
We
offer
several technical support plans and recognize support revenue over the life
of
the plans, generally one year.
Multiple
Element Arrangements
We
also
enter into certain revenue arrangements for which we are obligated to deliver
multiple products or products and services (multiple elements). For these
arrangements, which include software products, we allocate and defer revenue
for
the undelivered elements based on their vendor-specific objective evidence
(“VSOE”) of fair value. VSOE is generally the price charged when that element is
sold separately.
In
situations where VSOE exists for all elements (delivered and undelivered),
we
allocate the total revenue to be earned under the arrangement among the various
elements, based on their relative fair value. For transactions where VSOE exists
only for the undelivered elements, we defer the full fair value of the
undelivered elements and recognize the difference between the total arrangement
fee and the amount deferred for the undelivered items as revenue (residual
method). If VSOE does not exist for undelivered items that are services, we
recognize the entire arrangement fee ratably over the remaining service period.
If VSOE does not exist for undelivered elements that are specified products,
we
defer revenue until the earlier of the delivery of all elements or the point
at
which we determine VSOE for these undelivered elements.
We
recognize revenue related to the delivered products or services only if (i)
the
above revenue recognition criteria are met, (ii) any undelivered products or
services are not essential to the functionality of the delivered products and
services, (iii) payment for the delivered products or services is not contingent
upon delivery of the remaining products or services, and (iv) we have an
enforceable claim to receive the amount due in the event that we do not deliver
the undelivered products or services.
Shipping
and Handling Costs
We
record
the amounts we charge our customers for the shipping and handling of our
software products as product revenue and we record the related costs as cost
of
sales on our condensed consolidated statements of operations.
Customer
Service and Technical Support
Customer
service and technical support costs include the costs associated with performing
order processing, answering customer inquiries by telephone and through
websites, email and other electronic means, and providing technical support
assistance to our customers. In connection with the sale of certain products,
we
provide a limited amount of free technical support assistance to customers.
We
do not defer the recognition of any revenue associated with sales of these
products, since the cost of providing this free technical support is
insignificant. The technical support is provided within one year after the
associated revenue is recognized and free product enhancements (bug fixes)
are
minimal and infrequent. We accrue the estimated cost of providing this free
support upon product shipment and include it in cost of sales.
INCOME
TAXES
We
utilize SFAS No. 109,
Accounting for Income Taxes
. SFAS No. 109
requires the use of the asset and liability method of accounting for income
taxes. Under this method, deferred income taxes are provided for the temporary
differences between the financial reporting basis and the tax basis of our
assets and liabilities. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled.
EARNINGS
PER SHARE
We
follow
SFAS No. 128,
Earnings Per Share
, to calculate and report basic and
diluted earnings per share (“EPS”). Basic EPS is computed by dividing income
available to common shareholders by the weighted average number of shares of
common stock outstanding for the period. Diluted EPS is computed by giving
effect to all dilutive potential shares of common stock that were outstanding
during the period. For us, dilutive potential shares of common stock consist
of
the incremental shares of common stock issuable upon the exercise of stock
options and warrants for all periods, convertible notes payable and the
incremental shares of common stock issuable upon the conversion of convertible
preferred stock.
When
discontinued operations, extraordinary items, and/or the cumulative effect
of an
accounting change are present, income before any of such items on a per share
basis represents the “control number” in determining whether potential shares of
common stock are dilutive or anti-dilutive. Thus, the same number of potential
shares of common stock used in computing diluted EPS for income from continuing
operations is used in calculating all other reported diluted EPS amounts. In
the
case of a net loss, it is assumed that no incremental shares would be issued
because they would be anti-dilutive. In addition, certain options and warrants
are considered anti-dilutive because the exercise prices were above the average
market price during the period. Anti-dilutive shares are not included in the
computation of diluted EPS, in accordance with SFAS No. 128.
RECENT
ACCOUNTING PRONOUNCEMENTS
Fair
Value
In
September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
,
to provide enhanced guidance for using fair value to measure assets and
liabilities. The standard also expands disclosure requirements for
assets and liabilities measured at fair value, how fair value is determined,
and
the effect of fair value measurements on earnings. The standard
applies whenever other authoritative literature requires, or permits, certain
assets or liabilities to be measured at fair value, but does not expand the
use
of fair value. SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those years. Early adoption is permitted. We plan
to adopt SFAS No. 157 as of January 1, 2008. The balance sheet items carried
at
fair value consist of derivatives and other financial
instruments. Additionally, we use fair value concepts to test various
long-lived assets for impairment and to initially measure assets and liabilities
acquired in a business combination. Management is currently
evaluating the impact of adoption on how these liabilities are currently
measured.
In
February 2007 the FASB issued SFAS No. 159,
The Fair Value Option for
Financial Assets and Financial Liabilities,
to provide companies with an
option to report selected financial assets and liabilities at fair
value. The standard’s objective is to reduce both complexity in
accounting for financial instruments and the volatility in earnings caused
by
measuring related assets and liabilities differently. The standard
requires companies to provide additional information that will help investors
and other users of financial statements to more easily understand the effect
of
the company’s choice to use fair value on its earnings. It also
requires companies to display the fair value of those assets and liabilities
for
which the company has chosen to use fair value on the face of the balance
sheet. The new standard does not eliminate disclosure requirements
included in other accounting standards, including requirements for disclosures
about fair value measurements included in SFAS 157,
Fair Value
Measurements
, and SFAS 107,
Disclosures about Fair Value of Financial
Instruments
. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. We plan to adopt SFAS No. 159 as of January
1, 2008. We are in the process of evaluating this standard and
therefore have not yet determined the impact that the adoption will have on
our
financial position, results of operations or cash flows.
RECLASSIFICATIONS
Certain
accounts in our 2006 financial statements have been reclassified for comparative
purposes to conform with the presentation in our 2007 financial
statements.
NOTE
2 – GOING CONCERN
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with Generally Accepted Accounting Principles in the
United States applicable to a going concern. As of September 30, 2007, we had
a
year-to-date net loss of $656,175, and negative working capital of $2,116,247
and $1,705,824, and an accumulated deficit of $7,754,572 and $7,098,397 as
of
September 30, 2007 and December 31, 2006, respectively. Although these factors
raise substantial doubt as to our ability to continue as a going concern through
December 31, 2007, we have taken several actions to mitigate against this risk.
These actions include selling some of our intangible assets (See Note 11) and
pursuing mergers and acquisitions that will provide profitable operations and
positive operating cash flow.
NOTE
3 – INVENTORIES
At
September 30, 2007, inventories consisted of the following:
Raw
materials
|
|
$
|
69,373
|
|
Finished
goods
|
|
|
61,383
|
|
Less
reserve for obsolete inventory
|
|
|
(19,121
|
)
|
Inventories
|
|
$
|
111,635
|
|
NOTE
4 – RESERVES AND ALLOWANCES
At
September 30, 2007, the allowance for doubtful accounts included in Accounts
receivable, trade, net, consisted of the following:
Balance
December 31, 2006
|
|
$
|
11,000
|
|
Bad
debts provision (included in Other operating expenses)
|
|
|
17,164
|
|
Accounts
written off
|
|
|
(10,697
|
)
|
Collection
of accounts previously written off
|
|
|
715
|
|
Balance
September 30, 2007
|
|
$
|
18,182
|
|
At
September 30, 2007, the reserve for obsolete inventory included in Inventories
consisted of the following:
Balance
December 31, 2006
|
|
$
|
---
|
|
Provision
for obsolete inventory
|
|
|
19,121
|
|
Obsolete
inventory written off
|
|
|
---
|
|
Balance
September 30, 2007
|
|
$
|
19,121
|
|
At
September 30, 2007, the reserve for sales returns included in Other current
liabilities consisted of the following:
Balance
December 31, 2006
|
|
$
|
98,132
|
|
Return
provision – sales
|
|
|
381,700
|
|
Return
provision – cost of sales
|
|
|
(57,255
|
)
|
Returns
processed
|
|
|
(345,869
|
)
|
Balance
September 30, 2007
|
|
$
|
76,708
|
|
NOTE
5 – DERIVATIVE LIABILITIES
At
September 30, 2007, our derivative liability consisted of the
following:
Warrant
A
|
|
$
|
---
|
|
Warrant
B
|
|
|
334,402
|
|
Warrant
C
|
|
|
278,530
|
|
Derivatives
|
|
$
|
612,932
|
|
In
May
2004, we issued a three-year warrant (Warrant A) to purchase up to 600,000
shares of our common stock to a consultant. This warrant was exercisable on
a
cashless basis at the option of the warrant holder at a price per share of
$0.15. This warrant was accounted for as a liability according to the guidance
of EITF 00-19,
Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company’s Own Stock
, and the guidance of EITF
00-19-2,
Accounting for Registration Payment Arrangements
. On May
1, 2007, this warrant expired unexercised. See Note 6.
In
November 2004, we issued two five-year warrants to purchase up to an aggregate
of 21,875,000 shares of our common stock in connection with a certain Stock
Purchase Agreement completed with a New York-based private investment
partnership on July 19, 2004. The first warrant (Warrant B) entitles the holder
to purchase up to 10,937,500 shares of our common stock at a price of $0.18
per
share, and the second warrant (Warrant C) entitles the holder to purchase up
to
10,937,500 additional shares of our common stock at a price of $0.60 per share.
Each warrant is subject to standard adjustment provisions and each provides
for
settlement in registered shares of our common stock and may, at the option
of
the holder, be settled in a cashless, net-share settlement. The warrant holder
is prevented from electing a cashless exercise so long as there is in effect
a
registration statement covering the shares underlying these warrants. The
maximum number of shares of our common stock to be received for each warrant
in
a net-share settlement would be 10,937,500 but the actual number of shares
settled would likely be significantly less and would vary based on the last
reported sale price (as reported by Bloomberg) of our common stock on the date
immediately preceding the date of the exercise notice. These warrants are
accounted for as a liability according to the guidance of EITF 00-19 and the
fair value of each warrant has been determined using the Black-Scholes valuation
method with the assumptions listed in the table below.
|
|
Warrant
B
|
|
|
Warrant
C
|
|
Expected
term – years
|
|
|
2.11
|
|
|
|
2.11
|
|
Stock
price at September 30, 2007
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
Expected
dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected
stock price volatility
|
|
|
212
|
%
|
|
|
212
|
%
|
Risk-free
interest rate
|
|
|
4.10
|
%
|
|
|
4.10
|
%
|
The
warrants are revalued at each balance sheet date by using the parameters above,
reducing the expected term to reflect the passing of time, and using the stock
price at the balance sheet date. Net fair value adjustments included in other
income and expenses on the consolidated statements of operations were expense
adjustments of ($139,809) and ($86,064) for the three and nine months ended
September 30, 2007, respectively, and income adjustments of $237,009 and
$1,109,548 for the three and nine months ended September 30, 2006,
respectively.
NOTE
6 – STOCKHOLDERS’ EQUITY
COMMON
STOCK
In
June
2007, we committed to issue a total of 562,500 restricted shares of common
stock
to our outside director, at the closing price as of June 29, 2007 ($0.032),
in
lieu of cash payments of amounts accrued for services as a member of our board
from the period of October 1, 2006 through June 30, 2007. This issuance was
valued at $18,000.
In
July
2007, we entered into a stock subscription agreement with a business development
consultant for the sale of 1,300,000 shares of common stock at a price of $0.025
per share. We realized $32,500 from this subscription.
In
August
2007, pursuant to settlement of an agreement with an individual for business
consulting services, we committed to issue 500,000 restricted shares of common
stock, valued at $0.04, in lieu of cash.
COMMON
STOCK OPTIONS
In
April
2007, 50,000 vested stock options with an exercise price of $0.11, related
to a
former employee, expired unexercised. We did not grant any options or other
stock-based awards to the individual for whom the options expired, during the
six months prior to and after the option expirations.
In
July
2007, 80,000 vested stock options with an exercise price of $0.10, related
to
former employees, expired unexercised. We did not grant any options
or other stock-based awards to the individuals for whom the options expired,
during the six months prior to and after the option expirations.
In
August
2007, 40,000 vested stock options with an exercise price of $0.10, related
to a
former employee, expired unexercised. We did not grant any options or
other stock-based awards to the individual for whom the options expired, during
the six months prior to and after the option expirations.
COMMON
STOCK WARRANTS
In
May
2007, a warrant to purchase up to 600,000 restricted shares of our common stock
with an exercise price of $0.15 per share expired unexercised. See Note
5.
In
June
2007, a warrant to purchase up to 250,000 restricted shares of our common stock
with an exercise price of $0.10 per share expired unexercised.
In
July
2007, we amended an agreement with a business development consultant to provide
for additional compensation of warrants to purchase up to 2,300,000 shares
of
common stock at $0.032 per share. The agreement provides that
warrants to purchase up to 1,300,000 shares of common stock vested on August
31,
2007 and warrants to purchase up to 1,000,000 shares of common stock vest on
January 1, 2008. These warrants were valued at $48,160 using the
Black-Scholes method and recorded as an expense.
NOTE
7 – INCOME TAXES
The
provision (benefit) for taxes on net loss for the three and nine months ended
September 30, 2007 and 2006 consisted of the following:
|
|
Three
Months
|
|
|
Nine
Months
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Current:
|
|
Federal
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
|
$
|
---
|
|
State
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
|
|
---
|
|
Deferred:
|
|
Federal
|
|
|
(140,937
|
)
|
|
|
(112,543
|
)
|
|
|
(151,162
|
)
|
|
|
(84,655
|
)
|
State
|
|
|
38
|
|
|
|
(2,366
|
)
|
|
|
163
|
|
|
|
(4,802
|
)
|
|
|
|
(140,899
|
)
|
|
|
(114,909
|
)
|
|
|
(150,999
|
)
|
|
|
(89,457
|
)
|
Total
tax provision (benefit)
|
|
$
|
(140,899
|
)
|
|
$
|
(114,909
|
)
|
|
$
|
(150,999
|
)
|
|
$
|
(89,457
|
)
|
NOTE
8 – EARNINGS PER COMMON SHARE
The
following table shows the amounts used in computing earnings per common share
and the average number of shares of dilutive potential common
stock:
For
the Three Months Ended September 30,
|
|
2007
|
|
|
2006
|
|
Net
income (loss)
|
|
$
|
(306,942
|
)
|
|
$
|
26,349
|
|
Preferred
stock dividends
|
|
|
---
|
|
|
|
---
|
|
Net
income (loss) available to common shareholders
|
|
$
|
(306,942
|
)
|
|
$
|
26,349
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
51,632,339
|
|
|
|
49,558,317
|
|
Dilutive
effect of:
|
|
Convertible
debt
|
|
|
---
|
|
|
|
1,535,714
|
|
Stock
options
|
|
|
---
|
|
|
|
---
|
|
Warrants
|
|
|
---
|
|
|
|
73,379
|
|
Diluted
weighted average shares outstanding
|
|
|
51,632,339
|
|
|
|
51,167,410
|
|
For
the Nine Months Ended September 30,
|
|
2007
|
|
|
2006
|
|
Net
loss
|
|
$
|
(656,175
|
)
|
|
$
|
1,211
|
|
Preferred
stock dividends
|
|
|
---
|
|
|
|
---
|
|
Net
loss available to common shareholders
|
|
$
|
(656,175
|
)
|
|
$
|
1,211
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
50,411,806
|
|
|
|
49,294,214
|
|
Dilutive
effect of:
|
|
Convertible
debt
|
|
|
---
|
|
|
|
1,535,714
|
|
Stock
options
|
|
|
---
|
|
|
|
676,043
|
|
Warrants
|
|
|
---
|
|
|
|
154,269
|
|
Diluted
weighted average shares outstanding
|
|
|
50,411,806
|
|
|
|
51,660,240
|
|
NOTE
9 – COMMITMENTS AND CONTINGENCIES
We
are
subject to legal proceedings and claims that arise in the ordinary course of
our
business. In the opinion of management, the amount of ultimate liability with
respect to these actions will not materially affect our financial statements
taken as a whole.
Our
employment agreements with our management team each contain a provision for
an
annual bonus equal to 1% of our income from operations adjusted for other income
and interest expense (4% total). We accrue this bonus on a quarterly basis.
Our
management team consists of our Chief Executive Officer (with a base annual
salary of $150,000), our Chief Financial Officer (with a base annual salary
of
$110,000), our Chief Technology Officer (with a base annual salary of $150,000)
and our Vice President of Sales (with a base annual salary of $110,000). In
addition to the bonus provisions and annual base salary, each employment
agreement provides for payment of all accrued base salaries ($10,873 included
in
Other current liabilities at September 30, 2007), bonuses ($30,542 included
in
other current liabilities at September 30, 2007), and any vested deferred
vacation compensation ($32,874 included in other current liabilities at
September 30, 2007) for termination by reason of disability. The agreements
also
provide for severance compensation equal to the then base salary until the
later
of (i) the expiration of the term of the agreement as set forth therein or
(ii)
one year, when the termination is other than for cause (including termination
by
reason of disability). There is no severance compensation in the event of
voluntary termination or termination for cause.
In
2003
and 2004, we reduced our reserve for rebates payable based, in part, on our
ability to meet the financial obligation of claims carried forward from our
last
rebate program in 2001. As such, we may have a legal obligation to pay rebates
in excess of the liability recorded.
Our
royalty agreements for new content generally provide for advance payments to
be
made upon contract signing. In addition, several new agreements
provide for additional advance payments to be made upon delivery of usable
content and publication. We accrue and pay these advances when the
respective milestone is met.
We
do not
collect sales taxes or other taxes with respect to shipments of most of our
goods into most states in the U.S. Our fulfillment center and
customer service center networks, and any future expansion of those networks,
along with other aspects of our evolving business, may result in additional
sales and other tax obligations. One or more states may seek to
impose sales or other tax collection obligations on out-of-jurisdiction
companies that engage in e-commerce. A successful assertion by one or
more states that we should collect sales or other taxes on the sale of
merchandise or services could result in substantial tax liabilities for past
sales, decrease our ability to compete with traditional retailers, and otherwise
harm our business.
Currently,
decisions of the U.S. Supreme Court restrict the imposition of obligations
to
collect state and local taxes and use taxes with respect to sales made over
the
Internet. However, a number of states, as well as the U.S. Congress,
have been considering various initiatives that could limit or supersede the
Supreme Court’s constitutional concerns and resulted in a reversal of its
current position, we could be required to collect sales and use taxes in
additional states. The imposition by state and local governments of
various taxes upon Internet commerce could create administrative burdens for
us,
put us at a competitive disadvantage if they do not impose similar obligations
on all of our online competitors and decrease our future sales.
NOTE
10 – RISKS AND UNCERTAINTIES
Our
future operating results may be affected by a number of factors. We depend
upon
a number of major inventory and intellectual property suppliers. If a critical
supplier had operational problems or ceased making materials available to us,
operations could be adversely affected.
NOTE
11 – SUBSEQUENT EVENTS
In
October 2007, we entered into an unsecured 10-day note agreement with a
shareholder for $25,000. The agreement called for interest at 6% and
provided for a $2,000 origination fee. The note was repaid in
full.
In
October 2007, we entered into and consummated an Asset Purchase Agreement with
an unrelated company for the sale of our Membership Plus product line for
$1,675,000 cash. We have not classified this asset as “held for sale”
at September 30, 2007 as we are currently in the process of determining the
total unamortized historical cost of the product line and have engaged a third
party expert to assist us in that determination. The historical cost
of the Membership Plus product line was originally lumped, along with the
historical cost of our other software product lines, into the total software
license and is included on the balance sheet in Software license,
net. In addition, $9,788 included in Inventories and $91,879 included
in Capitalized software development, net are additional costs associated with
the Membership Plus product line. Finally, the Asset Purchase
Agreement included open accounts receivable directly related to the Membership
Plus product line (approximately $20,000 included in Accounts receivable, trade,
net at September 30, 2007).