Unassociated Document
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB/A
AMENDMENT
NO. 1
(Mark
One)
x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended: December
31, 2004
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
transition period from ____ to _____
Commission
File Number 001-32255
GURUNET
CORPORATION
(Name of
small business issuer in its charter)
|
Delaware |
98-0202855 |
|
(State
of other jurisdiction of
incorporation
or organization) |
(I.R.S.
Employer Identification Number) |
Jerusalem
Technology Park
Building
98
Jerusalem
91481 Israel
(Address
of principal executive offices)
Issuer's
telephone number, including area code: 972-2-649-5123
Securities
registered under Section 12(b) of the Exchange Act:
|
Title
of Each Class |
Name
of exchange on which registered |
|
Common
Stock, $0.001 par value |
American
Stock Exchange |
Securities
registered under Section 12(g) of the Exchange Act: NONE
Check
whether the issuer: (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. oYes x No
Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy of
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. o
State
issuer’s Revenues for its most recent fiscal year: $193,283
State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days:
6,172,173
shares of $0.001 par value common stock at $18.30 per share as of March 1, 2005
for a market value of $112,950,766. Shares of common stock held by any executive
officer or director of the issuer and any person who beneficially owns 10% or
more of the outstanding common stock have been excluded from this computation
because such persons may be deemed to be affiliates. This determination of
affiliate status is not a conclusive determination for other purposes.
State the
number of shares outstanding of each of the issuer's class of common equity, as
of the latest practicable date: 6,940,619 shares of common stock, $0.001 par
value (as of March 24, 2005.)
Transitional
Small Business Disclosure Format (Check one): Yes o;
No x
Amendment
No. 1
Explanatory
Note
This
amendment is filed to amend Part II Item 5. Market for Common Equity and Related
Stockholder Matters
and
Part II
Item 6 Management’s Discussion and Analysis in order
to more accurately describe the
duration of certain lock-up agreements. We have
also corrected a minor discrepancy between the amount of proceeds received in
our initial public offering disclosed in Item 5 and the
amount disclosed in Item 6. In addition, this amendment amends Part II
Item 7. Financial Statements to include the date of March 31, 2005 on the signed
Report of Independent Registered Public Accounting Firm, which date was
inadvertently not included in the original filing. Lastly, we are amending
Exhibit 10.13 Agreement Between GuruNet Corporation and Maxim Group LLC dated
January 31, 2005 to correct the exercise price of a warrant granted to Maxim,
which was inadvertently stated as $11.10, rather than $11.00 in the original
filing.
Except
for the foregoing, no attempt has been made in this Form 10-KSB/A to modify or
update other disclosures as presented in the original Form 10-KSB.
PART
II
Item
5.
Market for Common Equity and Related Stockholder Matters
Market
Information
Our
common stock is quoted on the American Stock Exchange under the symbol “GRU”.
During the fourth quarter of 2004, the only quarter in 2004 during which our
stock had a liquid trading market, the range of high and low per share sale
prices, as reported, were $9.43 and $4.40, respectively.
Number
of Stockholders
As of
March 24, 2005, there were 54 holders of record of our common
stock.
Dividend
Policy
Historically,
we have not paid any dividends to the holders of our common stock and we do not
expect to pay any such dividends in the foreseeable future as we expect to
retain our future earnings for use in operation and expansion of our
business.
Recent
Sales of Unregistered Securities
Bridge
Notes
On
January 30, 2004 and February 17, 2004, we completed our bridge financing,
consisting of $5.0 million aggregate principal amount of bridge notes bearing
interest at an annual rate of 8%. The aggregate principal amount of the bridge
notes includes $200,000 previously advanced to us by investors that was
converted into bridge notes in connection with the bridge financing. The bridge
notes were due on the earlier of January or February 2005 and the consummation
of our initial public offering (“IPO”).
As our
IPO was not consummated by (i) July 28, 2004, with respect to the bridge notes
issued on January 30, 2004, or (ii) August 15, 2004, with respect to the bridge
notes issued on February 17, 2004, we paid each purchaser a cash amount equal to
1% of the aggregate purchase price paid by such purchaser for the first month
and 1.5% for each month thereafter on every monthly anniversary thereof until
the applicable securities underlying the bridge securities were registered.
Interest from the date of issuance through September 30, 2004 was paid in cash
on July 1, 2004, August 1, 2004, September 1, 2004, October 1, 2004 and October
13, 2004. In aggregate, we paid at the foregoing dates $287,136 due to interest
and $161,124 due to penalties.
Of the
aggregate bridge notes outstanding, $3,160,000 principal amount of the bridge
notes was repaid in cash from the net proceeds of our IPO and $1,840,000 of the
principal amount of the bridge notes was converted on the date of our IPO into
shares of common stock at a conversion price of $3.75. The shares issued upon
conversion of the bridge notes are locked up until October 13, 2005 or
earlier, subject to certain conditions.
Bridge
Warrants
In
connection with the issuance of the bridge notes, we issued bridge warrants to
purchase an aggregate of 1,700,013 shares of common stock exercisable at $7.20
per share. The bridge warrants became exercisable commencing December 31, 2004
and for a period ending on the seventh anniversary of their respective dates of
issuance. In the third quarter of 2004, our board of directors authorized the
issuance of an aggregate of 750,002 additional warrants to the bridge
noteholders. On the date of our IPO, each noteholder received a pro rata share
of these additional warrants (approximately 0.44 warrant for each bridge warrant
held). These additional warrants contained terms identical to the bridge
warrants except for certain expiration provisions. Any shares issued upon their
exercise will be locked up until October 13, 2005 or earlier, subject
to certain conditions.
In
addition, Vertical Ventures, LLC, the lead purchaser in the bridge financing
received a warrant to purchase 265,837 shares of common stock at an exercise
price of $3.75 per share. This warrant is identical to the bridge warrants
except for the exercise price.
In
October 2004, the National Association of Securities Dealers, Inc. determined
that shares issuable upon conversion of bridge notes and exercise of bridge
warrants held by certain bridge noteholders in our bridge financing constituted
underwriter’s compensation, because of the relationship between these
noteholders and one of our underwriters. As a result, these noteholders were
contractually obligated to surrender their 648,534 warrants to us without
consideration and have their $1,350,000 aggregate principal amount of bridge
notes entirely repaid instead of partially or completely converted into common
stock.
Lock-Up
Agreements
All of
the holders of the bridge notes and bridge warrants have entered into lock-up
agreements under which they have agreed not to sell or otherwise dispose of
their shares of common stock underlying their bridge notes and bridge warrants
without the consent of the underwriters except as follows: sales of the shares
underlying the bridge notes and bridge warrants until April 11, 2005 may
be made at per share prices of no less than $7.50 and sales of the shares
underlying the bridge notes and bridge warrants made following April 11, 2005
through October 13, 2005 may be made at per share prices of no less than $5.00.
The underwriters have advised us that in determining whether to give or withhold
their consent to any sale within the applicable lock-up period, they will
consider the market price and volume of our stock at such time and whether such
sale would have an adverse effect on the market for our common stock. The
underwriters have advised us that they will examine each request for a consent
on a case by case basis using the factors enumerated above, which may result in
disparate treatment for stockholders that may be otherwise similarly
situated.
Warrant
Reload
On
February 4, 2005, we entered into an agreement (the “Warrant Reload Agreement”)
with certain holders of the bridge warrants, under which the holders of the
bridge warrants exercised an aggregate of 1,871,783 bridge warrants at the
exercise price of $7.20 per share (with the exception of Vertical
Ventures, LLC, which held a warrant exercisable at $3.75 per
share) for aggregate proceeds to us of approximately $12,220,000, net of fees
and expenses. As an incentive to the holders to exercise their respective bridge
warrants, we issued to the holders 1,029,488 new warrants to purchase such
number of shares of common stock (equal to 55% of the number of shares of common
stock underlying their respective bridge warrants) at an exercise price of
$17.27 per share. The warrants are presently exercisable and expire on February
4, 2010.
Pursuant
to an amendment to the Warrant Reload Agreement, we are obligated to file a
registration statement with the Securities and Exchange Commission on or prior
to April 6, 2005. Our failure to either file the registration statement by April
6, 2005 or have the registration statement declared effective by the Securities
and Exchange Commission on or prior to May 5, 2005, will result in our
obligation to pay to the holders of the warrants, liquidated damages in the
amount of equal to 1% of the aggregate exercise price of the exercised warrants,
for the first month, and 1.5% for each month thereafter, prorated for any
partial month. We incurred fees aggregating $298,214 in connection with the
Warrant Reload Agreement.
Maxim
Warrant
On
January 20, 2005, we entered into an agreement with Maxim Group LLC for the
provision of general financial advisory and investment banking services. The
agreement, with a minimum term of 6 months, is for a monthly retainer fee of
$5,000. In connection with the foregoing agreement, we agreed to grant Maxim
Group LLC a warrant to purchase 100,000 shares of our common stock, exercisable
for 5 years following the date of the agreement at an exercise price equal to
$11.00.
Consultant
Stock Options
On March
5, 2005, we entered into an agreement with a consultant
for the provision of services in the areas of public relations and strategic
planning. The agreement, which terminates on January 5, 2006, is for an
aggregate cash amount of $50,000. In connection with the foregoing agreement, we
agreed to grant the consultant, David Epstein, stock options to purchase up to
20,000 shares of common stock. 3,333 options vested immediately upon entering
into the agreement and the remaining 16,667 options will vest ratably over the
ten-month service period.
Common
Stock Issuance
On
December 13, 2004 we entered into an agreement with Barretto Pacific Corporation
for the provision of investor relations consulting services. The agreement,
which terminates on December 13, 2005, is for an aggregate cash amount of
$100,000. In connection with the foregoing agreement, we issued Barretto Pacific
Corporation 7,800 shares of our common stock, bearing a restrictive
legend.
Comerica
Warrant
A warrant
was issued to Comerica Bank — California (“Comerica”) in connection with a Loan
and Security Agreement dated as of April 1, 2002. The warrant entitles Comerica
to purchase 2,172 shares of our common stock at a price of $34.53 per share. The
Comerica Warrant will expire in April 1, 2009, at which time, if the Comerica
Warrant has not been exercised, it shall be deemed to have been automatically
exercised on the expiration date by “cashless” conversion.
With
respect to each of the issuances described in the foregoing section, Recent
Sales of Unregistered Securities, the securities were issued to investors in
reliance upon the exemption from the registration requirements of the Securities
Act, as set forth in Section 4(2) under the Securities Act and Rule 506 of
Regulation D promulgated thereunder relative to sales by an issuer not involving
any public offering. All purchasers of shares of the Registrant’s bridge notes
and warrants described above represented to the Registrant in connection with
their purchase that they were accredited investors and were acquiring the shares
for investment and not distribution, that they could bear the risks of the
investment and could hold the securities for an indefinite period of time. The
purchasers received written disclosures that the securities had not been
registered under the Securities Act and that any resale must be made pursuant to
a registration or an available exemption from such registration.
IPO
On
October 13, 2004, our registration statement on Form SB-2 (Registration No.
333-115424) was declared effective for our IPO, pursuant to which we registered
2,702,500 shares of common stock to be sold by us, including 352,500 shares
subject to the underwriters’ over-allotment option. The stock was offered at a
price of $5.00 per share. The offering closed on October 18, 2004 after the sale
of a total of 2,350,000 shares of our common stock and the over-allotment was
exercised, in full, on November 18, 2004. Total proceeds of this offering,
including the exercise of the over-allotment option, were approximately
$10,800,000, net of underwriters’ discounts and commissions and other offering
expenses. The underwriters of the offering were Maxim Group LLC and
EarlyBirdCapital, Inc. No offering expenses were paid directly or indirectly to
directors, officers (or their associates), or to persons owning 10% or more of
any of our equity securities, or to our affiliates. The Registration Statement
also registered (a) 490,678 shares of common stock that were issued to investors
in our 2004 bridge financing, (b) 2,067,318 shares of common stock underlying
warrants issued to those investors; and (c) 117,500 shares of common stock
underlying the purchase option issued to the underwriters.
Use
of Proceeds of Initial Public Offering
Our IPO
became effective on October 13, 2004. To date, of the net proceeds from the
offering, we applied $3,160,000 towards the repayment of our entire bridge note
debt and we estimate that through March 31, 2005, we will have applied $1.2
million towards funding our day to day operations. We intend to use the
remaining net proceeds from the offering of approximately $6,440,000 as follows:
| |
|
Application
of Net Proceeds |
|
Percentage
of Net Proceeds |
|
|
Sales
and Marketing |
|
$ |
1,630,000 |
|
|
25 |
% |
|
Research
and Development |
|
$ |
1,520,000 |
|
|
24 |
% |
|
Product
Support |
|
$ |
1,250,000 |
|
|
19 |
% |
|
Working
capital and general corporate purposes (1) |
|
$ |
2,040,000 |
|
|
32 |
% |
|
Total: |
|
$ |
6,440,000 |
|
|
100 |
% |
|
(1)
Includes
an aggregate of $795,280 for salaries and directors’ fees representing all
payments to officers and directors anticipated over the next 12
months. |
Pending
use of the net proceeds from our IPO, we have invested the funds in short-term,
interest bearing investments.
Purchases
of Equity Securities
We have
not purchased any equity securities during the three-month period ending
December 31, 2004.
Item
6. Management’s
Discussion and Analysis
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATIONS
The
following discussion of our financial condition and results of operations should
be read in conjunction with the financial statements and the notes to those
statements included elsewhere in this filing. This discussion includes
forward-looking statements that involve risks and uncertainties. As a result of
many factors, such as those set forth under “Risk Factors” and elsewhere in this
filing, our actual results may differ materially from those anticipated in these
forward-looking statements.
General
We
possess technology that helps integrate and retrieve online information from
disparate sources and delivers the result in a single consolidated browser view.
Our answer engine delivers snapshot, multi-faceted definitions and explanations
from attributable reference sources about numerous topics in our database. We
seek to differentiate ourselves by providing our users with relevant reference
information that enhances results achieved through traditional search engines.
Most search engines respond to an Internet user’s query with a long list of
links to more Websites that in some way relate to the query term. Our answer
engine automatically displays relevant, narrative responses to a user’s query
without requiring the user to review a list of hyperlinks sequentially. Our
answer engine also directly displays information in various formats such as
charts, graphs and maps.
During
2003, we sold lifetime subscriptions to our answer engine product, GuruNet,
generally for $40.00. In December 2003, we decided to alter our pricing model
and moved to an annual subscription model, generally, $30.00 per year. In
conjunction with selling subscriptions, we also offered free access to
dictionary, thesaurus, encyclopedia and other basic reference information
through our products. Under our business model during those years, our ability
to generate revenues was dependent upon our ability to increase the number of
subscribers and increase the number of users who used our basic free product.
Usage of our basic free product was our means of encouraging users to upgrade to
our subscription product and increase our subscription revenue. Although we
earned some advertising revenue during those years from pay-per-click keyword
advertising in our subscription and free products, such amounts were not
significant. Our business model at the time strongly encouraged subscriptions,
and thus we limited the amount of content available in our free product. This
approach did not facilitate the amount of traffic we needed to earn significant
amounts of revenue from advertising. Further, the aforesaid business model
required us to maintain an infrastructure for billing and subscriptions, and we
met resistance from customers to pay for “information freely accessible on the
Internet”. A desire to gain more expansive, ubiquitous growth led to our current
implementation, in January 2005, of a free-to-customer product, Answers.com and
"1-Click Answers" software, containing practically all the content that we used
to sell via subscriptions.
On
January 3, 2005 the Company announced the release of Answers.com, a website that
had been launched in August 2004 in beta version. The Company also released
"1-Click Answers" software - allowing users to click anywhere on the screen for
instant facts about a word or phrase. 1-Click Answers allows users working in
any application such as e-mail, spreadsheet, word processing, database or other
program or application to “alt-click” on a word or phrase within a document and
access our online library and display information about that word or phrase in a
pop-up window. While Web users enjoy our integrated reference information, our
Web-based product does not provide the “alt-click” command, and context analysis
that we include in our software. Our revenue model for these products is based
solely on advertising revenue. When a user searches sponsored keywords, a link
to an advertiser’s Website is displayed in a premium position and identified as
a sponsored result to the search. In contrast to the GuruNet product, we do not
plan to generate revenues from selling subscriptions.
In
conjunction with the release of Answers.com, GuruNet.com began functioning
primarily as a corporate site. We are no longer offering new subscriptions to
GuruNet or offering downloads of GuruNet software to users who do not have
existing subscriptions. Notwithstanding, users who purchased GuruNet
subscriptions prior to January 3, 2005, will continue to be fully supported
through their subscription periods, and can access GuruNet services through
GuruNet software or at GuruNet.com.
Revenues
Revenues
in 2004 were $193,283 compared to $28,725 in 2003, an increase of $164,558 or
572.9%. Revenues in 2004 resulted primarily from recognition of deferred
subscriptions license revenues, amounting to approximately $154,000, maintenance
contracts on our corporate enterprise software of approximately $23,000, and
advertising revenues of approximately $17,000. In contrast, revenues during 2003
resulted primarily from maintenance contracts on the corporate enterprise
systems that we sold in 2002. Subscriptions sold in January 2003 through
November 2003 had no impact on 2003 revenues because at that time we sold
lifetime subscriptions. Since the obligation to continue serving content had no
defined termination date and we could not estimate the time period over which
the service would be provided, we did not recognize revenue from those sales.
Beginning December 2003, we began offering GuruNet subscriptions to the public
on an annual subscription basis, rather than a lifetime fee basis. Revenues from
such subscriptions are recognized over the life of the related subscription.
Further, during the second quarter of 2004, we began offering selected users who
purchased lifetime licenses the opportunity to exchange their lifetime license
for an initial free defined-term license to a newer enhanced version of GuruNet.
The cash received from previous sales of lifetime subscriptions is being
recognized over the new defined-term subscription period for users who agreed to
this offer. With the onset of Answers.com, in January 2005, we have ceased
making this offer.
Cash
received from subscriptions sold in 2004 was approximately $182,000, compared to
approximately $537,000 in 2003. The decrease is due to a number of factors,
including our offering one-year subscriptions, generally at $30 per year, rather
than lifetime subscriptions, generally for $40, beginning December 2003; and
that we are in development stage and still testing various marketing approaches,
which caused variability in subscription volume. Additionally, in October 2002,
we began charging a fee for our individual reference product, now known as
GuruNet. Prior to such time, our individual reference product was available to
the public for free. During 2003, we converted a significant number of users of
our free product, which had been available to the public between 1999 and
October 2002, to a paid subscription of our upgraded GuruNet product. This
contributed significantly to the amount we sold in 2003.
Cost
of Revenues
Cost of
revenues in 2004 was $647,055 compared to $723,349 in 2003, a decrease of
$76,294 or 10.5%. The net decrease is primarily attributable to higher content
costs incurred in the first quarter of 2003 than we typically incur each
quarter, offset by additional web hosting costs approximating
$40,000.
Cost of
revenues is comprised of fees to third party providers of content, web hosting
services and technical and customer support salaries, benefits and overhead
costs.
Gross
Margin
Gross
margin in 2004 was ($453,772) compared to ($694,624) in 2003, a decrease in the
negative margin of $240,852 or 34.7%. The decrease was due to increased revenues
and decreased cost of revenues, as discussed above.
Research
and Development Expenses
Research
and development expenses in 2004 were $1,033,521 compared to $910,114 in 2003,
an increase of $123,407 or 13.6%. The increase is due primarily to
compensation-related expense increases as our research and development team grew
in order to develop and test newer versions of GuruNet. The salaries, benefits
and overhead costs of personnel, conducting research and development of software
and Internet products comprise research and development expenses.
Sales
and Marketing Expenses
Sales and
marketing expenses in 2004 were $932,455 compared to $478,942 in 2003, an
increase of $453,513 or 94.7%. The increase is due primarily to increases in
advertising, promotion and marketing consulting costs by approximately $280,000
due to our increased focus on promoting our product, and an increase in sales
and marketing compensation related expenses of approximately $70,000, due to the
addition of sales and marketing employees and agents. Salaries, benefits and
overhead costs of personnel, and public relations services and advertising
programs, comprise sales and marketing expenses.
General
and Administrative Expenses
General
and administrative expenses in 2004 were $1,125,064 compared to $678,645 in
2003, an increase of $446,419 or 65.8%. The increase relates primarily to
increases in the number of personnel, and salaries of personnel, which resulted
in an increase, in aggregate, of approximately $128,000; increased travel of
approximately $70,000; increased legal, accounting and other professional costs
of $160,000; increased director fees and expenses of approximately $75,000; and
increases in our insurance costs of approximately $25,000. The increases in the
line expenses that comprise General and Administrative Expenses, including those
mentioned previously, are mostly related, directly or indirectly, to the
increased costs associated with being a public company. Further, some of those
costs actually began, in anticipation and prior to our IPO.
General
and administrative expenses consist primarily of salaries, benefits and overhead
costs for executive and administrative personnel, e-commerce fees, insurance,
fees for professional services, including consulting, legal, and accounting
fees, travel costs, non-cash stock compensation expense for the issuance of
stock options and other general corporate expenses. Overhead costs are comprised
primarily by rent, utilities and depreciation.
Interest
Income (Expense), Net
Interest
(expense) income, net in 2004 was ($4,382,583), compared to $719 in 2003,
representing a net increase in interest expense of $4,383,302. Interest expense,
net in 2004 is comprised of approximately $3,962,000 of amortization of note
discounts and deferred charges relating to the convertible promissory notes,
which are described in the footnotes to the accompanying financial statements.
The remainder is comprised of 8% interest on the face of the $5 million
convertible promissory notes and of monthly liquidated damages in the amount of
1% to 1.5% of the aggregate purchase price of the Notes, approximating $450,000,
less interest income of approximately $29,000. Interest income, net in 2003 is
comprised primarily of interest income earned.
Gain
on extinguishment of debt
Gain on
extinguishment of debt, in 2004, of $1,493,445 resulted from the following: In
conjunction with the $5 million in bridge notes that we issued in the first
quarter of 2004, we recorded a note discount, with a corresponding increase in
paid-in capital, of approximately $2,476,000, to account for the beneficial
conversion terms that the promissory note holders received, in comparison to the
expected IPO offering price. Upon repayment of approximately 63% of the bridge
notes, in October 2004, the percentage of the intrinsic value of the beneficial
conversion feature at the date of extinguishment was reversed in paid-in
capital, in the amount of approximately $1,493,000, and interest in the same
amount, previously recorded relating to the beneficial conversion feature that
was reversed in paid-in capital, was functionally reversed by the recording of a
gain on extinguishment of debt.
Other
Expense, Net
Other
expense, net in 2004 was $116,012 as compared to $12,586 in 2003, an increase of
$103,426. When we initially began preparing for our IPO, in 2004, we incurred
approximately $90,000 in costs relating to our plan to have us listed on the
Nasdaq SmallCap Market and the Boston Stock Exchange. In October 2004, the
Company decided to instead list on the American Stock Exchange, and as a result
we wrote off the aforesaid costs in the fourth quarter of 2004. The increase in
other expense resulted primarily from such write-off. The remaining balance in
other expense, net, in 2004 and 2003, is comprised primarily by foreign exchange
gains(losses) and the write-off of tax advances that we do not expect to realize
due to our “approved enterprise, ” as discussed below.
Income
Tax Expense
Our
effective tax rate differs from the statutory federal rate due to differences
between income and expense recognition prescribed by the United States and
Israeli tax laws and Generally Accepted Accounting Principles. We utilize
different methods and useful lives for depreciating property and equipment. The
recording of certain provisions results in expense for financial reporting but
the amount is not deductible for income tax purposes until actually paid. Our
deferred tax assets are mostly offset by a valuation allowance because
realization depends on generating future taxable income, which, in our
estimation, is not more likely to transpire, than not to transpire.
We had
net operating loss carryforwards for federal and state income tax purposes of
approximately $35 million at December 31, 2004 and $26 million at December 31,
2003. The federal net operating losses will expire if not utilized on various
dates from 2019 through 2024. The state net operating losses will expire if not
utilized on various dates from 2009 through 2013. Our Israeli subsidiary has
capital loss carryforwards of approximately $604,000 that can be applied to
future capital gains for an unlimited period of time under current tax rules.
The Tax
Reform Act of 1986 imposed substantial restrictions on the utilization of net
operating losses and tax credits in the event of an ownership change of a
corporation. Thus, in accordance with Internal Revenue Code, Section 382, our
recent Initial Public Offering and other ownership changes that have transpired,
will significantly limit our ability to utilize net operating losses and credit
carryforwards.
Our
subsidiary had income in 2004 and 2003, resulting from its cost plus agreement
with the parent company, whereby it charges us for research and development
services it provides to us, plus 12.5%. However, the subsidiary is an “approved
enterprise” under Israeli law, which means that income arising from the
subsidiary’s approved activities is subject to zero tax under the “alternative
benefit” path for a period of ten years. In the event of distribution by the
subsidiary of a cash dividend out of retained earnings which were tax exempt due
to the “approved enterprise” status, the subsidiary would have to pay a 10%
corporate tax on the amount distributed, and the recipient would have to pay a
15% tax (to be withheld at source) on the amounts of such distribution
received.
As of
December 31, 2004, we accrued approximately $75,000, net, to reflect the
estimated taxes that our subsidiary would have to pay if it distributed its
accumulated earnings to us. Should the subsidiary derive income from sources
other than the approved enterprise during the relevant period of benefits, this
income will be taxable at the tax rate in effect at that time (currently 35%,
gradually being reduced to 30% in 2005-2008). Through December 31, 2004, our
Israeli subsidiary received tax benefits of approximately $700,000.
Net
Loss
Our net
loss increased to $6,590,519 in 2004, from $2,808,783 in 2003, as a result of
the changes in our revenues, cost of sales and expenses as described above.
Critical
Accounting Estimates
While our
significant accounting policies are more fully described in the notes to the
Company's audited consolidated financial statements for the year ended December
31, 2004, we believe the following accounting policies to be the most critical
in understanding the judgments and estimates we use in preparing our
consolidated financial statements.
Use
of Estimates
Our
discussion and analysis of our financial condition and results of operations is
based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of our consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses. On an ongoing basis, we evaluate our estimates and
judgments, including those related to revenue recognition, accrued expenses and
the fair value of our common and preferred stock, so long as we were a private
company, particularly as it relates to stock-based compensation. We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions and could have a
material impact on our reported results.
Revenue
Recognition
In 2003,
the Company sold lifetime subscriptions to its consumer product and did not
recognize revenue from those sales since the obligation to continue serving such
content had no defined termination date and adequate history to estimate the
life of the customer relationship was not available. Cash received from such
lifetime licenses is reflected as long-term deferred revenues on the
accompanying balance sheets. Beginning December 2003 and throughout 2004, the
Company, generally, sold consumers one-year subscriptions to GuruNet. We
recognize the amounts we received from those subscriptions over the life of the
related subscription. Beginning April 2004, certain users who purchased lifetime
subscriptions in 2003 exchanged their lifetime subscriptions for free two-year
subscriptions to a newer, enhanced version of the GuruNet product. The cash
previously received from such users is being recognized as revenues over the new
two-year subscription. Beginning January 2005, we no longer offer subscriptions
to our consumer products and/or websites. Rather, our consumer business model is
now an advertising-only model. Notwithstanding, we have not terminated
fixed-term and lifetime subscriptions to GuruNet that we previously sold. This
means that those users will continue to receive content and will not have to
upgrade their software. The software they downloaded in conjunction with their
subscription will be supported. Our accounting treatment relating to those
subscriptions has not changed, since we continue to honor those subscriptions.
Accounting
for Stock-based Compensation
In
January 2003, FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation
— Transition and Disclosure, an amendment of FASB Statement No. 123” (“SFAS
148”), which provides alternative methods of transition for a voluntary change
to a fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS
123 to require prominent disclosures in annual financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. We have determined that until required
otherwise, we will continue to account for stock-based compensation for
employees under APB 25, and elect the disclosure-only alternative under SFAS 123
and provide the enhanced disclosures as required by SFAS 148.
We record
deferred stock-based compensation expense for stock options granted to employees
and directors if the market value of the stock at the date of grant exceeds the
exercise price of the option. We recognize expenses as we amortize the deferred
stock-based compensation amounts over the related vesting periods. The market
value of our stock, so long as we were a private company, was determined by us
based on a number of factors including comparisons to private equity investments
in us. These valuations are inherently highly uncertain and subjective. If we
had made different assumptions, our deferred stock-based compensation amount,
our stock-based compensation expense, our net loss and our net loss per share
could have been significantly different.
The fair
value of stock options granted to non-employees is measured throughout the
vesting period as they are earned, at which time we recognize a charge to
stock-based compensation. The fair value is determined using the Black-Scholes
option-pricing model, which considers the exercise price relative to the market
value of the underlying stock, the expected stock price volatility, the
risk-free interest rate and the dividend yield, and an estimate of the average
time option grants will be outstanding before they are ultimately exercised and
converted into common stock. As discussed above, the market value of the
underlying stock was based on assumptions of matters that are inherently highly
uncertain and subjective. Since, prior to our IPO there had been no public
market for our stock, our assumptions about stock price volatility are based on
the volatility rates of comparable publicly held companies. These rates may or
may not reflect our stock price volatility following the offering. If we had
made different assumptions about the fair value of our stock or stock price
volatility, the related stock based compensation expense and our net loss and
net loss per share amounts could have been significantly different.
We are
required in the preparation of the disclosures required under SFAS 148 to make
certain estimates when ascribing a value to employee stock options granted
during the year. These estimates include, but are not limited to, an estimate of
the average time option grants will be outstanding before they are ultimately
exercised and converted into common stock. These estimates are integral to the
valuing of these option grants. Any changes in these estimates may have a
material effect on the value ascribed to these option grants. This would in turn
affect the amortization used in the disclosures we make under SFAS 148, which
could be material. For disclosure purposes only, the fair value of options
granted in the past to employees was estimated on the date of grant using the
minimum-value method with the following weighted average assumptions: no
dividend yield; risk-free interest rates of 2.18% to 6.68%; and an expected life
of three to five years. The fair value of options granted to employees
subsequent to May 12, 2004, the date of our first filing with the U.S.
Securities and Exchange Commission in connection with our IPO is measured, for
disclosure purposes only, according to the Black-Scholes option-pricing model,
with the
following weighted average assumptions: no dividend yield; risk-free interest
rates of 2.17% to 3.78%; volatility between 61.57% and 66.76%; and an expected
life of four years. If we
had made different assumptions than those noted above, the related disclosures
under SFAS 148 could have been significantly different.
Finally, the
Financial Accounting Standards Board ("FASB") recently enacted Statement of
Financial Accounting Standards 123-revised 2004 ("SFAS 123R"), "Share-Based
Payment" which replaces Statement of Financial Accounting Standards No. 123
("SFAS 123"), Accounting for Stock-Based Compensation". The impact of SFAS 123R
on future periods is discussed in the section of this Management’s Discussion
& Analysis titled, Recent Accounting Pronouncements.
Accounting
For Income Taxes
As part
of the process of preparing our consolidated financial statements, we are
required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves management estimating our actual current tax
exposure together with assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included within our consolidated
balance sheet. We must then assess the likelihood that our deferred tax assets
will be recovered from future taxable income and, to the extent we believe that
recovery is not likely, we must establish a valuation allowance. To the extent
we establish a valuation allowance or increase this allowance in a period, we
must include an expense within the tax item in the statement of operations.
Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. We have fully offset our
US deferred tax asset with a valuation allowance. Our lack of earnings history
and the uncertainty surrounding our ability to generate taxable income prior to
the expiration of such deferred tax assets were the primary factors considered
by management in establishing the valuation allowance. Deferred tax assets and
liabilities in the financial statements result from the tax amounts that would
result if our Israeli subsidiary distributed its retained earnings to us. This
subsidiary is entitled to a tax holiday, as described above, yet continues to
generate taxable income in respect of services provided to us, and therefore
were the subsidiary to distribute its retained earning to us, we believe that
the deferred tax asset relating to the Israeli subsidiary would be realized. In
the event that our subsidiary’s products would not generate such taxable income,
we would need to write off the deferred tax asset as an expense in the statement
of operations. It should be noted that as the income is derived from us, it is
eliminated upon consolidation.
Foreign
Currency Translation
Beginning
February 2004, our Israeli subsidiary began paying substantially all of its
salaries linked to the dollar, rather than the New Israeli Shekel (“NIS”). Based
on this change, and in conjunction with all other relevant factors our
management has determined that the subsidiary’s functional currency, beginning
the first quarter of 2004, is the U.S. dollar (“USD”). SFAS 52, Appendix A,
paragraph 42 cites economic factors that, among others, should be considered
when determining functional currency. We determined that the cash flow, sales
price and expense factors for our subsidiary, which prior to 2004 all indicated
functional currency in foreign currency, have changed in 2004 to indicate the
functional currency is the USD.
Our
subsidiary’s revenue is derived based on a cost plus methodology. Prior to 2004,
salary expense, its primary expense, was determined in the foreign currency
resulting in income and expenses being based on foreign currency. However, in
2004, a triggering event occurred that, in our opinion, warranted a change of
the functional currency of our subsidiary to that of our currency, USD. Salary
expense, the primary expense of our subsidiary, began to be denominated in USD.
This led to a change with respect to the currency of the cash flow, sales price
and expense economic factors and resulted in a determination that our
subsidiary’s functional currency had changed to that of our functional currency.
Had we
determined that our subsidiary’s functional currency was different than what was
actually used, whether in 2004 or 2003, we believe that the effect of such
determination would not have had a material impact on our financial statements.
Note
Discount on Convertible Promissory Notes
In
January and February 2004, we issued an aggregate of $5.0 million principal
amount of 8% convertible promissory notes. We estimated that approximately
$809,000 of the $5.0 million relates to the value of the warrants, resulting in
a note discount of $809,000. In accordance with EITF 00-27, such note discount
was being amortized over the life of the bridge notes. In October 2004, in
conjunction with our IPO, $1,840,000 of the $5 million of promissory notes we
owed to Bridge Note holders, converted into 490,678 shares of common stock and
the remaining $3,160,000 was repaid. On October 13, 2004, the effective date of
our IPO (the “IPO Effective Date”), the unamortized discount relating to the
portion of the notes that converted into shares was immediately recognized as
interest expense. To the extent that the notes were repaid, the intrinsic value
of the beneficial conversion feature at the date of extinguishment was decreased
in equity and a gain on extinguishment of debt was recorded.
Further,
in July 2004, we decided to grant the holders of the Convertible Promissory
Notes and Warrants an aggregate of 750,002 additional warrants, of which 198,530
were cancelled prior to the IPO. Each holder received approximately 0.44
warrants for each bridge warrant previously held. In connection therewith, we
recorded an additional deferred charge with a corresponding increase in paid-in
capital, of approximately $262,000, (net of effect of cancellation of shares,)
to account for the additional benefit that the convertible promissory holders
received. The aforesaid deferred charge was amortized to interest expense over
the remaining life of the promissory notes. On the IPO Effective Date, the
unamortized balance of such deferred charges was immediately recognized as
interest expense.
The fair
value of the warrants was determined by us based on a number of factors
including the exercise price, and the expected volatility in the share price.
Such valuation is inherently highly uncertain and subjective. Furthermore, the
discount on the beneficial conversion feature of the convertible promissory
notes was calculated taking into consideration our estimate of the fair value of
these warrants. If we had made different assumptions, our note discounts,
additional paid in capital, interest expense in respect of the amortization, our
net loss and our net loss per share could have been significantly different.
Recently
Issued Accounting Pronouncements
In March
2004, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No.
03-01, “The
Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments” (“EITF
03-1”). EITF 03-1 provides guidance on other-than-temporary impairment models
for marketable debt and equity securities accounted for under SFAS No. 115,
“Accounting
for Certain Investments in Debt and Equity Securities” (“SFAS
No. 115”), and non-marketable equity securities accounted for under the cost
method. The EITF developed a basic three-step model to evaluate whether an
investment is other-than-temporarily impaired. On September 30, 2004, the FASB
issued FSP 03-1-1, “Effective Date of Paragraphs 10-20 of EITF Issue 03-1, ’The
Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments’,” delaying the effective date for the recognition and measurement
guidance of EITF 03-1, as contained in paragraphs 10-20, until certain
implementation issues are addressed and a final FSP providing implementation
guidance is issued. Until new guidance is issued, companies must continue to
comply with the disclosure requirements of EITF 03-1 and all relevant
measurement and recognition requirements in other accounting literature. We do
not expect the adoption of EITF 03-1 to have a material effect on its financial
statements.
In
December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets -
an amendment to APB No. 29." This
Statement amends Opinion No. 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception
for exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange.
Adoption of this statement is not expected to have a material impact on our
results of operations and financial condition.
In
December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards 123-revised 2004 ("SFAS 123R"),
"Share-Based Payment" which replaces Statement of Financial Accounting Standards
No. 123 ("SFAS 123"), Accounting for Stock-Based Compensation" and supersedes
APB Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." SFAS
123R requires the measurement of all employee share-based payments to employees,
including grants of employee stock options, using a fair-value-based method and
the recording of such expense in our consolidated statements of income. The
accounting provisions of SFAS 123R are effective for us for reporting periods
beginning after December 15, 2005. We are required to adopt SFAS 123R in the
first quarter of fiscal 2006. The pro forma disclosures previously permitted
under SFAS 123 no longer will be an alternative to financial statement
recognition. See Note 2 in our Notes to the Consolidated Financial Statements
for the pro forma net loss and net loss per share amounts, as if we had used a
fair-value-based method similar to the methods required under SFAS 123R to
measure compensation expense for employee stock incentive awards. Although we
have not yet determined the method of adoption and whether the adoption of SFAS
123R will result in amounts that are similar to the current pro forma
disclosures under SFAS 123, we are evaluating the requirements under SFAS 123R
and the impact their adoption will have on our consolidated statements of
operations and net income (loss) per share.
Liquidity
and Capital Resources
General
From our
inception through December 31, 2004, our operations have been funded almost
entirely through the proceeds we received from issuance of four series of
convertible preferred stock, convertible promissory notes in the first quarter
of 2004, and our IPO in last quarter of 2004. The amounts raised were used
primarily to fund research and development, sales and marketing, business
development and general and administrative costs.
As of
December 31, 2004, we had $8,907,183 of assets consisting of $1,565,415 in cash
and cash equivalents, $5,850,000 in investment securities, $277,819 in other
current assets and the remaining balance in property and equipment, long-term
deposits, domain name, capitalized software development costs and deferred tax
asset. Total liabilities as of December 31, 2004, reflect current liabilities of
$1,004,513, consisting primary of accounts payable and accrued expenses and
compensation. Long-term liabilities of $1,078,548, is comprised primarily by
liabilities in respect of employee severance obligations and deferred revenues,
long-term.
Cash
flows in 2004 and 2003 were as follows:
|
|
|
2004 |
|
2003 |
|
|
Net
cash used in operating activities |
|
$ |
(4,269,514 |
) |
$ |
(1,361,028 |
) |
|
Net
cash used in investing activities |
|
$ |
(6,181,856 |
) |
$ |
(35,913 |
) |
|
Net
cash provided by financing activities |
|
$ |
11,904,779 |
|
$ |
45,884 |
|
The
increase in net cash used in operating activities during 2004 compared to 2003,
of $2,908,486, is the result of a number of factors, the most significant of
which, are as follows: Firstly, our operating loss in 2004 was $3,544,812,
approximately, $782,000 more than 2003. We also incurred approximately $450,000
of cash interest, in 2004, while interest expense was insignificant in 2003.
Finally, changes in our operating assets and liabilities impacted favorably on
cash, in 2003, by approximately $1,137,000, while in 2004, changes in our
operating assets and liabilities caused cash to decrease approximately $337,000.
The aforesaid decrease to cash resulting from changes in operating assets and
liabilities in 2004 was driven by many factors, the largest of which is an
increase in our prepaid content at December 31, 2004, of approximately $238,000
over the balance of that account at December 31, 2003. The increase to cash
resulting from changes in operating assets and liabilities in 2003 was driven by
many factors the largest of which were the increase in long-term deferred
revenue due to the sale of lifetime subscriptions, and decreases to accounts
receivable that resulted from the collection of accounts relating to 2002
enterprise sales, in early 2003.
Cash used
in investing activities of $6,181,856 in 2004 is attributable primarily to
purchases of investment securities of $5,850,000, capital expenditures of
$209,875, the purchase of a domain name for $80,200, and capitalized software
development costs of $39,736. Cash used in investing activities of $35,913 in
2003, is attributable to capital expenditures of $48,454 offset by a decrease in
long-term deposits.
Cash and
cash equivalents and investment securities at December 31, 2003 were
insufficient to provide the capital we needed to operate. In January and
February 2004, we issued $5.0 million aggregate principal amount of bridge
notes, which brought us $4,125,000, net of issuance costs and not including the
$200,000 we received from the sale of promissory notes to four investors in
2003. The proceeds of the convertible promissory notes enabled us to continue
operating during the first nine months of 2004.
On
October 13, 2004, we completed our IPO of 2.35 million shares of our common
stock at $5 per share pursuant to a Registration Statement on Form SB-2.
Additionally, the underwriters exercised their over-allotment option and
purchased an additional 352,500 shares of our common stock, at $5 per share, on
November 18, 2004. Total proceeds of the IPO, including the exercise of the
over-allotment option, were approximately $10,786,000, net of underwriting fees
and offering expenses of approximately $2,726,000. In conjunction with the
offering, $1,840,000 of the $5 million of promissory notes we owed to Bridge
Note holders, converted into 490,678 shares of common stock and the remaining
$3,160,000 was repaid from the net proceeds of the offering.
Cash flow
from financing activities during 2003 was comprised primarily of $200,000 we
received from the sale of promissory notes to four investors, less approximately
$155,000 we expended on costs relating to the $5.0 million of bridge notes
issued in 2004.
Current
and Future Financing Needs
We have
incurred negative cash flow from operations since we started our business. We
have spent, and expect to continue to spend, substantial amounts in connection
with implementing our business strategy. As noted above, we raised approximately
$10,786,000, net of underwriting fees and offering expenses, through our IPO and
the over-allotment option. After repaying the portion of the bridge notes that
did not convert to common shares, of $3,160,000, approximately $7.6 million
remained. Further, in February 2005 the Company entered into an agreement (the
"Warrant Reload Agreement"), with certain holders of warrants that were issued
by the Company in 2004 in connection with the bridge financing, pursuant to
which such holders exercised an aggregate of 1,871,783 Bridge Warrants. As a
result, the Company raised approximately $12,225,000, net of costs relating to
the exercise. Further, in 2005, to date, we raised additional amounts, in excess
of $1 million, from other exercises of options and warrants. Based on our
current plans, we believe that the net proceeds of the aforementioned IPO and
the over-allotment option, and Warrant Reload Agreement will be sufficient to
enable us to meet our planned operating needs for the foreseeable future and to
fund possible future acquisitions. Notwithstanding, we may decide to raise funds
in the future, via public or private sales of our shares or debt and/or other
sources, to finance acquisitions and growth.
Off-Balance
Sheet Arrangements
We have
not entered into any transactions with unconsolidated entities in which we have
financial guarantees, subordinated retained interests, derivative instruments or
other contingent arrangements that expose us to material continuing risks,
contingent liabilities or any other obligations under a variable interest in an
unconsolidated entity that provides us with financing, liquidity, market risk or
credit risk support.
Obligations
and Commitments
As of
December 31, 2004, we had the following known contractual obligations,
commitments and contingencies:
|
Year
Ending December 31 |
|
Purchase
Contracts
|
|
Operating
Leases
|
|
Total |
|
| |
|
|
|
|
|
|
|
|
2005 |
|
$ |
269,516 |
|
$ |
183,421 |
|
$ |
364,937 |
|
|
2006 |
|
|
2,500 |
|
|
55,644 |
|
|
58,144 |
|
|
2007 |
|
|
— |
|
|
20,210 |
|
|
20,210 |
|
|
Total |
|
$ |
272,016 |
|
$ |
259,275 |
|
$ |
443,291 |
|
Factors
That May Affect Future Operating Results
You
should carefully consider the risks described below and elsewhere in this
report, which could materially and adversely affect our business, results of
operations or financial condition. In those cases, the trading price of our
common stock could decline and you may lose all or part of your
investment.
Risk
Factors
You
should carefully consider the following risks and the other information in this
Report and our other filings with the SEC before you decide to invest in our
company or to maintain or increase your investment. We believe that the risks
and uncertainties described below are all of the material risks that we will
face. Our business, operating results and financial condition could be seriously
harmed and you could lose your entire investment by the occurrence of any of the
following risks. In such case, the trading price of our common stock could
decline, and you may lose all or part of your investment.
Risks
Related to our Business
Our
current business model, based on monetizing visitor traffic to our Website
through sponsored links and paid advertisements, was initiated in the beginning
of January 2005 and is in its early stages. Our limited experience executing on
our new business model and the very short history of metrics available to us,
make it difficult to evaluate our future prospects and the risk of success or
failure of our business.
Implementation
of our current business model, announced on January 3, 2005, is in its early
stages. Under the new model, we will be utilizing sponsored links and
advertisements to generate revenues. The introductory stage of executing on our
current business model means that we have very limited operating history on
which to evaluate potential for future success. Additionally, at the present we
have limited experience in effectively monetizing Answers.com. The combination
of the foregoing factors makes it difficult to evaluate the potential for
success or failure of our business.
We
have experienced significant and continuing operating losses. If such losses
continue, the value of your entire investment may decline.
We
incurred operating losses of $2,762,325 in 2003 and $7,549,011 in 2002.
Furthermore, we incurred operating losses of $3,544,812 in 2004. From our
inception in 1998 through October 2004, our operations had been funded almost
entirely through the proceeds of approximately $38,000,000 that we received from
the issuance of four series of convertible preferred stock between December 1998
and June 2000, and the issuance of the bridge notes in the bridge financing. On
October 13, 2004 we completed our IPO of 2,350,000 shares of common stock at
$5.00 per share. Total proceeds of the offering were approximately $10,800,000
net of underwriters discounts and commissions and other offering expenses. In
February 2005, certain holders of the bridge warrants exercised an aggregate of
1,941,215 bridge warrants at the exercise price of $7.20 per share, with the
exception of one holder, who held a warrant with an exercise price of $3.75,
resulting in aggregate gross proceeds to us of approximately
$13,060,000.
If
our existing co-branding partnerships and revenue-sharing arrangements with
third-party Websites and service providers are not renewed or continued, we will
lose advertising revenue, which would have an adverse effect on our
business.
We have
entered into co-branding agreements and revenue-sharing arrangements with
certain entities, including Comet Systems Inc., a leader in connected,
intelligent desktop software and A9.com, a new search engine introduced by
A9.com, Inc., a subsidiary of Amazon.com, Inc. These agreements may be
terminated or discontinued by our co-branding partners and third-party Websites.
Termination of such agreements will result in the loss of advertising revenue
and may negatively affect our financial condition.
If
Google, Inc. decides to discontinue directing user traffic to Answers.com
through its “definition link”, we will lose a significant portion of our
traffic, which would result in a reduction in our advertising revenues and
adversely affect our financial condition.
A
significant percentage of our direct query traffic is directed to Answers.com by
the “definition link” appearing on Google’s Website result pages. This
arrangement is informal, is not based on a contractual relationship and can be
discontinued by Google at its sole discretion, at any given time. Further, as a
result of this arrangement, we obtain a significant amount of secondary traffic
(i.e.
users who visit our site via the “definition link” and perform additional
searches on Answers.com.) A
decision on Google’s part to end this arrangement would significantly reduce our
query total as well as damage our branding, and possibly our industry
validation. If
Google ceases to direct traffic to Answers.com through its “definition link”, we
will experience a significant reduction in our advertising revenues, which would
adversely affect our financial condition.
If
search engines were to alter their algorithms or otherwise restrict the flow of
consumers visiting our Website, our financial results would
suffer.
Search
engines and portals serve as origination Websites for consumers in search of
information. We rely heavily on search engines for a substantial portion of the
users visiting Answers.com. If Google (the primary search engine directing
traffic towards our Website), or other search engines were to decide to change
the algorithms responsible for directing search queries or if they were to
restrict the flow of consumers visiting Answers.com, we would experience a
significant decrease in traffic and revenues which would in turn adversely
affect our financial condition.
If
we are unable to retain current Internet users or attract new Internet users, we
will not be able to generate revenues, which would likely result in our
inability to continue our business.
Given the
wide availability of free search engines and reference sites, we may not be able
to retain current Internet users or attract additional Internet users. If the
user traffic on our Website and the advertising revenue generated by such
Internet users does not increase significantly, our business, results of
operations and financial condition could be materially adversely affected.
If
we do not continue to develop 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 developing and providing products and services. Several of
our competitors continue to develop innovations in web search, online
advertising and providing information to people. As a result, we must continue
to invest resources in research and development in order to enhance our web
search technology and introduce innovative, easy-to-use products and services.
If we are unable to develop useful and innovative products and services, users
may become dissatisfied and use our competitors’ products.
We
seek to generate our revenue mostly from paid advertising, and the reduction in
spending by or loss of advertisers could seriously harm our business.
We seek
to generate our revenue mostly from sponsored links and paid advertisements. Our
advertisement providers may discontinue their arrangements with us at any time.
If we are unable to generate sufficient Internet traffic and consumers,
advertisers will not continue advertising on our Website, which would negatively
affect our financial condition.
Our
business depends on our ability to strengthen our brand. If we are not able to
enhance public awareness of our answer engine product, we will be unable to
increase user traffic and will fail to attract advertisers, which may result in
lost revenues.
Expanding
and strengthening public awareness of our brand is critical to the success of
our business. Strengthening our brand may require us to make substantial
investments and these investments may not be successful. We have positioned
ourselves as an answer engine rather than a traditional search engine, however,
in order to maintain and strengthen the brand, we must continue to develop our
reference information and continue to provide quality services. If we are unable
to continuously deliver quality services, our brand name will
suffer.
We
face risks relating to the duration of, and our dependence on, our content
provider agreements. Our failure to maintain commercially acceptable content
provider relationships would result in a less attractive product to consumers,
and therefore subject us to lost revenue as a result of a loss of consumers and
advertisers.
We are
heavily dependent on license agreements with our content providers, which are
generally for one-year terms. There can be no assurance that we will be able to
renew these contracts at all or on commercially acceptable terms or that our
costs with respect to these contracts will not increase prohibitively following
any renewal. If we are unable to contain the costs of these agreements or, if
renewal is not possible, or we are unable to develop relationships with
alternative providers of content or maintain and enhance our existing
relationships, our product will be less attractive to Internet users, which
could result in a decrease advertising revenues.
We
have little control over the content of third-party Websites, and failure to
provide users with quality reference information could result in a less
attractive product to consumers, and therefore subject us to lost revenue as a
result of a loss of consumers and advertisers.
We have
little control over the content displayed by third-party Websites on our
Website. If these third-party Websites do not contain quality, current
information, the utility of our product to the user will be reduced, which could
deter new Internet users from using our search engine.
We
face risks relating to our limited use of framing third party Websites inside
our gurunet.com Website. If our framing functionality is challenged, we may be
subject to litigation which could require us to either cease framing or pay the
third party Website owner, either of which could decrease the value of our
product to users resulting in lost revenues.
Unauthorized
“framing” creates potential copyright and trademark issues as well as potential
false advertising claims. Framing occurs when we bring to our Website someone
else’s Website that is being viewed by an Internet user and the other Website
becomes “framed” by our site. Though some lawsuits on framing have been filed
against certain entities in the market, to our knowledge none so far has
resulted in fully litigated opinions. There can be no assurance that our limited
framing functionality used on gurunet.com will not be challenged. In the event
of a successful challenge, we may be required to cease this functionality, seek
a license from the Website owner, pay damages or royalties or otherwise be
required to change the way we connect to certain other Websites. Any of these
actions could have an adverse effect on our business.
We
are dependent upon maintaining and expanding our computer and communications
systems. Failure to do so could result in interruptions and failures of our
product which would make our product less attractive to consumers, and therefore
subject us to lost revenue as a result of a loss of consumers and advertisers.
Our
ability to provide high quality customer service largely depends on the
efficient and uninterrupted operation of our computer and communications systems
to accommodate the consumers and advertisers using our products. Our failure to
maintain high capacity data transmission without system downtime and improve our
network infrastructure would adversely affect our business and results of
operations. We believe that our current network infrastructure is insufficient
to support a significant increase in the use of our products. Although we are
enhancing and expanding our network infrastructure, we have experienced periodic
interruptions and failures including problems associated with customers
downloading our products, which we believe will continue to occur.
If
we were to lose the services of our key personnel, we may not be able to execute
our business strategy which could result in the failure of our business.
Our
future ability to execute our business plan depends upon the continued service
of our executive officers and other key technology, marketing, sales and support
personnel. Except for Robert S. Rosenschein, our Chief Executive Officer, our
employment agreements with our officers and key employees are terminable by
either party upon 30-90 days notice. If we lost the services of one or more of
our key employees, or if one or more of our executive officers or employees
joined a competitor or otherwise competed with us, our business may be adversely
affected and our stock price may decline. In particular, the services of key
members of our research and development team would be difficult to replace. We
cannot assure you that we will be able to retain or replace our key personnel.
We have key person life insurance in the amount of $1,000,000 for Robert
Rosenschein, but not for any of our other officers.
Risks
Related to our Industry
Third
parties could claim that our company is infringing on their intellectual
property rights, which could result in substantial costs, diversion of
significant managerial resources and significant harm to the company's
reputation.
The
industry in which our company operates is characterized by the existence of a
large number of patents and frequent litigation based on allegations of patent
infringement. We expect
that Internet technologies, software products and services may be increasingly
subject to third-party infringement claims as the number of competitors in our
industry segment grows and the functionality of products in different industry
segments overlaps. From time
to time, third parties may assert patent, copyright, trademark and other
intellectual property rights to technologies and software products in various
jurisdictions that are important to our business. Additionally, third parties
may assert claims of copyright infringement with respect to the content
displayed on our Website. For example, a third party may claim that data
displayed on our Website pursuant to a licensing arrangement with our content
provider is in violation of a legitimate copyright.
A
successful infringement claim against us by any third party, could subject the
combined company to:
| · |
substantial
liability for damages and litigation costs, including attorneys'
fees; |
| · |
lawsuits
that prevent the company from further use of its intellectual property and
require the company to permanently cease and desist from selling or
marketing products that use such intellectual
property; |
| · |
having
to license the intellectual property from a third party, which could
include significant licensing and royalty fees not presently paid by us
and add materially to the our costs of
operations; |
| · |
having
to develop as a non-infringing alternative, new intellectual property
which could delay projects and add materially to our costs of operations;
and |
| · |
having
to indemnify third parties who have entered into agreements with the
company with respect to losses they incurred as a result of the
infringement, which could include consequential and incidental damages
that are material in amount. |
Even if
we are not found liable in a claim for intellectual property infringement, such
a claim could result in substantial costs, diversion of significant resources
and management attention, termination of customer contracts and the loss of
customers and significant harm to the reputation of the combined
company.
Misappropriation
of our intellectual property could harm our reputation, affecting our
competitive position and costing us money.
Our
ability to compete with other software companies depends in part upon the
strength of our proprietary rights in our technologies. We
believe that our intellectual property will be critical to our success and
competitive position. We rely on a combination of U.S. and foreign patents,
copyrights, trademark and trade secret laws to establish and protect our
proprietary rights. If we are unable to protect our intellectual property
against unauthorized use by third parties, our reputation could be damaged and
our competitive position adversely affected.
Attempts
may be made to copy aspects of our products or to obtain and use information
that we regard as proprietary. Accordingly, we may not be able to prevent
misappropriation of our technology or deter others from developing similar
technology. Our strategy to deter misappropriation could be undermined
if:
| · |
the
proprietary nature or protection of our methodologies are not recognized
in the United States or foreign countries; |
| · |
third
parties misappropriate our proprietary methodologies and such
misappropriation is not detected; and |
| · |
competitors
create applications similar to ours but which do not technically infringe
on our legally protected rights. |
If these
risks materialize, the combined company could be required to spend significant
amounts to defend its rights and divert critical managerial resources. In
addition, the combined company's proprietary methodologies may decline in value
or its rights to them may become unenforceable. If any of the foregoing were to
occur, our business could be materially adversely affected.
New
technologies could block the display of our advertisements, which would diminish
the likelihood of generating revenues from advertisements and adversely affect
our operating results.
Technologies
may be developed to block the display of our advertisements. We expect that a
portion of our net revenues will be derived from fees paid to us by advertisers
in connection with the display of advertisements on our destination Website. As
a result, ad-blocking technology could, in the future, adversely affect our
operating results.
Government
regulation and legal uncertainties may require us to incur significant expenses
in complying with any new regulations.
The laws
and regulations applicable to the Internet and our products are evolving and
unclear and could damage our business. There are currently few laws or
regulations directly applicable to access to, or commerce on, the Internet. Due
to the increasing popularity and use of the Internet, it is possible that laws
and regulations may be adopted, covering issues such as user privacy, pricing,
taxation, content regulation, quality of products and services, and intellectual
property ownership and infringement. This legislation could expose us to
substantial liability as well as dampen the growth in use of the Internet,
decrease the acceptance of the Internet as a communications and commercial
medium, or require us to incur significant expenses in complying with any new
regulations. Because the increased use of the Internet has burdened the existing
telecommunications infrastructure and many areas with high Internet usage have
begun to experience interruptions in phone services, local telephone carriers
have petitioned the FCC to regulate the Internet and to impose access fees.
Increased regulation or the imposition of access fees could substantially
increase the costs of communicating on the Internet, potentially decreasing the
demand for our products. A number of proposals have been made at the federal,
state and local level that would impose additional taxes on the sale of goods
and services through the Internet. Such proposals, if adopted, could
substantially impair the growth of electronic commerce and could adversely
affect us. Moreover, the applicability to the Internet of existing laws
governing issues such as property ownership, copyright, defamation, obscenity
and personal privacy is uncertain. We may be subject to claims that our products
violate such laws. Any new legislation or regulation in the United States or
abroad or the application of existing laws and regulations to the Internet could
damage our business and cause our stock price to decline.
Due to
the global nature of the Internet, it is possible that the governments of other
states and foreign countries might attempt to regulate its transmissions or
prosecute us for violations of their laws. We might unintentionally violate
these laws. Such laws may be modified, or new laws may be enacted, in the
future. Any such development could damage our business.
Our
long-term financial viability may depend upon the growth and acceptance of
Internet advertising as an effective alternative to traditional advertising
media. If the market for Internet advertising does not continue to grow, our
revenues and operating results could suffer.
Because
our revenues are derived from advertisements, we compete with traditional media
including television, radio and print, in addition to other Websites, for a
share of advertisers’ total advertising expenditures. We may face the risk that
advertisers might find Internet advertising to be less effective than
traditional media at promoting their products or services and may further reduce
or eliminate their expenditures on Internet advertising. Many advertisers and
advertising agencies have only limited experience advertising on the Internet
and have not devoted a significant portion of their advertising expenditures to
Internet advertising. Acceptance of the Internet among advertisers will depend,
to a large extent, on the perceived effectiveness of Internet advertising and
the continued growth of commercial usage of the Internet. Filter software
programs that limit or prevent advertising from being displayed on a user’s
computer are available. It is unclear whether this type of software will become
widely accepted, but if it does, it would negatively affect Internet-based
advertising. Our business could be seriously harmed if the market for Internet
advertising does not continue to grow.
Risks
Related to our Common Stock
Our
Common Stock May Be Affected By Limited Trading Volume And May Fluctuate
Significantly.
Our
common stock is traded on the American Stock Exchange. There can be no assurance
that an active trading market for our common stock will be sustained. Failure to
maintain an active trading market for our common stock may adversely affect our
shareholders' ability to sell our common stock in short time periods, or at all.
Our common stock has experienced, and may experience in the future, significant
price and volume fluctuations, which could adversely affect the market price of
our common stock.
There
may be substantial sales of our common stock after the expiration of lock-up
periods, which could cause our stock price to fall.
Of the
6,940,619 shares of our common stock outstanding on March 24, 2005, 1,551,158
shares are restricted as a result of U.S. federal and state securities laws and
various lock-up agreements that holders have signed that restrict their ability
to transfer our stock until April 11, 2005 or October 13, 2005. The underwriters
may waive or reduce the terms of these lockups. After the lock-up periods, all
of foregoing shares will be immediately available for sale in the public market
without registration under Rule 144. Sales of a substantial number of shares of
our common stock could cause the price of our securities to fall and could
impair our ability to raise capital by selling additional
securities.
We
could issue “blank
check”
preferred stock without stockholder approval with the effect of diluting then
current stockholder interests.
Our
certificate of incorporation authorizes the issuance of up to 1,000,000 shares
of “blank check” preferred stock with designations, rights and preferences as
may be determined from time to time by our board of directors. Accordingly, our
board of directors is empowered, without stockholder approval, to issue a series
of preferred stock with dividend, liquidation, conversion, voting or other
rights which could dilute the interest of, or impair the voting power of, our
common stockholders. The issuance of a series of preferred stock could be used
as a method of discouraging, delaying or preventing a change in control.
Although we do not presently intend to issue any shares of preferred stock, we
may do so in the future.
Provisions
in our charter documents and under Delaware law could discourage a takeover that
stockholders may consider favorable.
Provisions
of our Amended and Restated Certificate of Incorporation and Bylaws could make
it more difficult for a third party to acquire us, even if doing so would be
beneficial to our stockholders. For example, our board of directors is divided
into three classes, with one class being elected each year by our stockholders,
which generally makes it more difficult for stockholders to replace a majority
of directors and obtain control of our board. In addition, stockholder meetings
may be called only by our board of directors, the chairman of the board and the
president, advance notice is required prior to stockholder proposals and
stockholders may not act by written consent. Further, we have authorized
preferred stock that is undesignated, making it possible for our board of
directors to issue preferred stock with voting or other rights or preferences
that could impede the success of any attempt to change control of
GuruNet.
Delaware
law also could make it more difficult for a third party to acquire us.
Specifically, Section 203 of the Delaware General Corporation Law, to which our
company is subject, may have an anti-takeover effect with respect to
transactions not approved in advance by our board of directors, including
discouraging attempts that might result in a premium over the market price for
the shares of common stock held by our stockholders.
We
are at risk of securities class action litigation.
In the
past, securities class action litigation has often been brought against a
company following a decline in the market price of its securities. This risk is
especially relevant for us because Internet companies have experienced
significant stock price volatility in recent years. If we faced such litigation,
it could result in substantial costs and diversion of management’s attention and
resources, which could adversely affect our business.
Risks
Related to our Location in Israel
Conditions
in Israel may limit our ability to produce and sell our product, which would
lead to a decrease in revenues.
Because
our operations are conducted in Israel and our principal offices and sole
research and development facilities are located in Jerusalem, Israel, our
operations are directly affected by economic, political and military conditions
affecting Israel. Specifically, we could be adversely affected by:
| · |
any
major hostilities involving Israel; |
| · |
a
full or partial mobilization of the reserve forces of the Israeli
army; |
| · |
the
interruption or curtailment of trade between Israel and its present
trading partners; |
| · |
risks
associated with the fact that a significant number of our employees and
key officers reside in what are commonly referred to as occupied
territories; and |
| · |
a
significant downturn in the economic or financial conditions in
Israel. |
Since the
establishment of the State of Israel in 1948, a number of armed conflicts have
taken place between Israel and its Arab neighbors and a state of hostility,
varying in degree and intensity, has led to security and economic problems for
Israel. Despite negotiations to effect peace between Israel and its Arab
neighbors, the future of these peace efforts is uncertain. Since October 2000,
there has been a significant increase in violence, civil unrest and hostility,
including armed clashes between the State of Israel and the Palestinians, and
acts of terror have been committed inside Israel and against Israeli targets in
the West Bank and Gaza Strip. There is no indication as to how long the current
hostilities will last or whether there will be any further escalation. Any
further escalation in these hostilities or any future conflict, political
instability or violence in the region may have a negative effect on our
business, harm our results of operations and adversely affect our share price.
Furthermore,
there are a number of countries that restrict business with Israel or with
Israeli companies, which may limit our ability to make sales in those
countries.
Our
operations could be disrupted as a result of the obligation of personnel to
perform military service.
Our key
employees and executive officers all reside in Israel, and many of them are
obligated to perform annual military reserve duty. Our operations could be
disrupted by the absence for a significant period of one or more of our
directors, officers or key employees due to military service. Any such
disruption could adversely affect our business, results of operations and
financial condition.
We
may not be able to enforce covenants not-to-compete under current Israeli law
which might result in added competition for our products.
We have
non-competition agreements with all of our employees, almost all of which are
governed by Israeli law. These agreements prohibit our employees from competing
with or working for our competitors, generally during and for up to 12 months
after termination of their employment. However, Israeli courts are reluctant to
enforce non-compete undertakings of former employees and tend, if at all, to
enforce those provisions for relatively brief periods of time in restricted
geographical areas and only when the employee has obtained unique value to the
employer specific to that employer’s business and not just regarding the
professional development of the employee.
The
change in the exchange rate between the United States dollar and foreign
currencies is volatile and may negatively impact our costs which could adversely
affect our operating results.
We incur
certain of our expenses for our operations in Israel in New Israeli Shekels
(NIS) and translate these amounts into United States dollars for purposes of
reporting consolidated results. As a result, fluctuations in foreign currency
exchange rates may adversely affect our expenses and results of operations as
well as the value of our assets and liabilities. Fluctuations may adversely
affect the comparability of period-to-period results. In addition, we hold
foreign currency balances, primarily NIS, that will create foreign exchange
gains or losses, depending upon the relative values of the foreign currency at
the beginning and end of the reporting period, which may affect our net income
and earnings per share. Although we may use hedging techniques in the future
(which we currently do not use), we may not be able to eliminate the effects of
currency fluctuations. Thus, exchange rate fluctuations could have a material
adverse impact on our operating results and stock price.
The
Israeli government tax benefits program in which we currently participate and
from which we receive benefits requires us to meet several conditions. These
programs or benefits may be terminated or reduced in the future, which may
result in an increase in our tax liability.
Our
Israeli subsidiary receives tax benefits authorized under Israeli law for
capital investments that are designated as “Approved Enterprises.” To be
eligible for these tax benefits, we must meet certain conditions. If we fail to
meet such conditions, these tax benefits could be cancelled, and we could be
required to pay increased taxes or refund the amount of tax benefits we
received, together with interest and penalties. Israeli governmental authorities
have indicated that the government may in the future reduce or eliminate the
benefits of such programs. The termination or reduction of these programs and
tax benefits could increase our Israeli tax rates, and thereby reduce our net
profits or increase our net losses.
We
are subject to certain employee severance obligations, which may result in an
increase in our expenditures.
Under
Israeli law, employers are required to make severance payments to dismissed
employees and employees leaving employment in certain other circumstances, on
the basis of the latest monthly salary for each year of service. This obligation
may result in an increase in our expenditures. All obligations arising from
services rendered through December 31, 2004, have been provided for in the
financial statements as of December 31, 2004.
Item
7. Financial
Statements
The full
text of our audited consolidated financial statements for the fiscal year ended
December 31, 2004 begins on page F-1 of this Annual Report on Form
10-KSB
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
| |
GuruNet
Corporation |
|
| |
|
|
|
| |
|
|
|
|
Date:
April 4, 2005 |
By:
|
/s/
Steven
Steinberg
|
|
|
|
Steven
Steinberg |
|
|
Chief
Financial Officer |
| |
|
GuruNet
Corporation (Formerly Atomica Corporation)
and
Subsidiary
(A
Development Stage Enterprise)
Consolidated
Financial Statements as of December 31, 2004
|
Contents |
|
| |
Page |
| |
|
|
Report
of Independent Registered Public Accounting Firm |
F-2 |
| |
|
|
Consolidated
Balance Sheets |
F-3 |
| |
|
|
Consolidated
Statements of Operations |
F-5 |
| |
|
|
Consolidated
Statement of Changes in Stockholders’ Equity (Deficit) and Comprehensive
Income (Loss) |
F-6 |
| |
|
|
Consolidated
Statements of Cash Flows |
F-8 |
| |
|
|
Notes
to the Consolidated Financial Statements |
F-10 |
Report
of Independent Registered Public Accounting Firm
To
the Stockholders of GuruNet Corporation:
We have
audited the accompanying consolidated balance sheets of GuruNet Corporation,
formerly Atomica Corporation (a Development Stage Enterprise), and Subsidiary
(collectively referred to as “the Company”) as of December 31, 2004 and 2003,
and the related consolidated statements of operations, changes in stockholders’
equity (deficit) and comprehensive income (loss), and cash flows for the years
then ended, and the period from December 22, 1998 (inception) to December 31,
2004. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the Standards of the Public Company
Accounting Oversight Board (United States). Such auditing standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by the Board of Directors and by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2004 and 2003, and the results of their operations, changes in stockholders’
equity (deficit) and comprehensive income (loss), and their cash flows for the
years then ended and for the period from December 22, 1998 (inception) to
December 31, 2004, in conformity with generally accepted accounting principles
in the United States of America.
Somekh
Chaikin
Certified
Public Accountants (Israel)
A member
of KPMG International
Jerusalem,
Israel
March 31,
2005
See
accompanying notes to the consolidated financial statements
(GuruNet
Corporation (Formerly Atomica Corporation)
and
Subsidiary
(A
Development Stage Enterprise)
Consolidated
Balance Sheets
| |
|
|
|
|
|
|
|
| |
|
|
$ |
|
|
$ |
|
|
Assets |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Current
assets: |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Cash
and cash equivalents (Note 3) |
|
|
1,565,415
|
|
|
123,752
|
|
| |
|
|
|
|
|
|
|
|
Investment
securities(Note 3) |
|
|
5,850,000
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
Receivables
(Note 2 e) |
|
|
18,145
|
|
|
11,934
|
|
| |
|
|
|
|
|
|
|
|
Prepaid
expenses |
|
|
259,674 |
|
|
20,481
|
|
| |
|
|
|
|
|
|
|
|
Deferred
charges (Note 4) |
|
|
-
|
|
|
155,116
|
|
| |
|
|
|
|
|
|
|
|
Total
current assets |
|
|
7,693,234
|
|
|
311,283
|
|
| |
|
|
|
|
|
|
|
|
Long-term
deposits (restricted) (Note
5) |
|
|
167,304
|
|
|
165,449
|
|
| |
|
|
|
|
|
|
|
|
Deposits
in respect of employee severance obligations (Note
9) |
|
|
462,735
|
|
|
339,651
|
|
| |
|
|
|
|
|
|
|
|
Property
and equipment, net (Note
6) |
|
|
305,804
|
|
|
206,408
|
|
| |
|
|
|
|
|
|
|
|
Other
assets: |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Intangible
assets, net (Note 7) |
|
|
111,289
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
Prepaid
expenses, long-term |
|
|
147,000
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
Deferred
tax asset, long-term (Note 11) |
|
|
19,817
|
|
|
20,501
|
|
|
|
|
|
|
|
|
|
|
|
Total
other assets |
|
|
278,106
|
|
|
20,501
|
|
| |
|
|
|
|
|
|
|
|
Total
assets |
|
|
8,907,183
|
|
|
1,043,292
|
|
See
accompanying notes to the consolidated financial statements
GuruNet
Corporation (Formerly Atomica Corporation)
and
Subsidiary
(A
Development Stage Enterprise)
Consolidated
Balance Sheets
| |
|
December
31
2004 |
|
December
31
2003 |
|
| |
|
$ |
|
$ |
|
|
Liabilities
and stockholders' equity |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Accounts
payable |
|
|
172,029
|
|
|
215,684
|
|
|
Accrued
expenses |
|
|
422,465
|
|
|
326,186
|
|
|
Accrued
compensation |
|
|
259,872
|
|
|
293,113
|
|
|
Advances
on account of shares and stock warrants (Note 8) |
|
|
-
|
|
|
200,000
|
|
|
Deferred
revenues, short-term (Note 2 g) |
|
|
150,147
|
|
|
29,234
|
|
| |
|
|
|
|
|
|
|
|
Total
current liabilities |
|
|
1,004,513
|
|
|
1,064,217
|
|
| |
|
|
|
|
|
|
|
|
Long-term
liabilities: |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Liability
in respect of employee severance obligations (Note 9) |
|
|
531,224
|
|
|
431,025
|
|
|
Deferred
tax liability, long-term (Note 11) |
|
|
94,965
|
|
|
55,092
|
|
|
Deferred
revenues, long-term (Note 2 g) |
|
|
452,359
|
|
|
537,404
|
|
| |
|
|
|
|
|
|
|
|
Total
long-term liabilities |
|
|
1,078,548 |
|
|
1,023,521
|
|
| |
|
|
|
|
|
|
|
|
Commitments
and contingencies
(Note 12) |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Stockholders'
equity (deficit) (Note
10): |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Convertible
preferred stock: |
|
|
|
|
|
|
|
|
Series
A; $0.01 par value; 0 shares authorized, issued and outstanding as of
December 31, 2004; 130,325 shares authorized, issued, and outstanding as
of December 31, 2003; aggregate liquidation preference of $300,000
|
|
|
-
|
|
|
1,303
|
|
| |
|
|
|
|
|
|
|
|
Series
B; $0.01 par value; 0 shares authorized, issued and outstanding as of
December 31, 2004; 217,203 shares authorized; 181,112 shares issued and
outstanding as of December 31, 2003; aggregate liquidation preference of
$1,350,000 |
|
|
-
|
|
|
1,811
|
|
| |
|
|
|
|
|
|
|
|
Series
C; $0.01 par value; 0 shares authorized, issued and outstanding as of
December 31, 2004; 260,643 shares authorized; 238,119 shares issued and
outstanding as of December 31, 2003; aggregate liquidation preference of
$2,750,000 |
|
|
-
|
|
|
2,381
|
|
| |
|
|
|
|
|
|
|
|
Series
D; $0.01 par value; 0 shares authorized, issued and outstanding as of
December 31, 2004; 824,646 shares authorized as voting stock and 21,721
shares authorized as non-voting stock; 807,468 shares of voting stock and
15,024 shares of non-voting stock issued and outstanding as of December
31, 2003; aggregate liquidation preference of $28,400,000 |
|
|
-
|
|
|
8,225
|
|
| |
|
|
|
|
|
|
|
|
Common
stock; $0.001 par value; 30,000,000 and 2,856,937 shares authorized as of
December
31, 2004 and 2003, 4,920,551 and 355,325 shares issued and outstanding as
of
December
31, 2004 and 2003, respectively |
|
|
4,921
|
|
|
355
|
|
| |
|
|
|
|
|
|
|
|
Additional
paid-in capital |
|
|
47,488,072
|
|
|
33,100,368
|
|
| |
|
|
|
|
|
|
|
|
Deferred
compensation |
|
|
(45,146 |
) |
|
(125,873 |
) |
| |
|
|
|
|
|
|
|
|
Accumulated
other comprehensive loss |
|
|
(27,608 |
) |
|
(27,418 |
) |
| |
|
|
|
|
|
|
|
|
Deficit
accumulated during development stage |
|
|
(40,596,117 |
) |
|
(34,005,598 |
) |
| |
|
|
|
|
|
|
|
|
Total
stockholders' equity (deficit) |
|
|
6,824,122
|
|
|
(1,044,446 |
) |
| |
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity (deficit) |
|
|
8,907,183
|
|
|
1,043,292 |
|
See
accompanying notes to the consolidated financial statements
GuruNet
Corporation (Formerly Atomica Corporation)
and
Subsidiary
(A
Development Stage Enterprise)
Consolidated
Statements of Operations
| |
|
|
Years
ended December 31 |
|
|
Cumulative
from December 22, 1998 (inception) through
|
|
|
|
|
|
2004 |
|
|
2003 |
|
|
December
31, 2004 |
|
| |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Revenue |
|
|
193,283
|
|
|
28,725
|
|
|
1,421,797
|
|
|
Cost
of revenue |
|
|
647,055
|
|
|
723,349
|
|
|
3,551,768
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Gross
margin |
|
|
(453,772 |
) |
|
(694,624 |
) |
|
(2,129,971 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses: |
|
|
|
|
|
|
|
|
|
|
|
Research
and development |
|
|
1,033,521
|
|
|
910,114
|
|
|
18,579,110
|
|
|
Sales
and marketing |
|
|
932,455
|
|
|
478,942
|
|
|
9,581,042
|
|
|
General
and administrative |
|
|
1,125,064
|
|
|
678,645
|
|
|
7,514,785
|
|
|
Loss
in connection with shut-down of operations |
|
|
-
|
|
|
-
|
|
|
1,048,446
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses |
|
|
3,091,040
|
|
|
2,067,701
|
|
|
36,723,383
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Operating
loss |
|
|
(3,544,812 |
) |
|
(2,762,325 |
) |
|
(38,853,354 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net |
|
|
(4,382,583 |
) |
|
719
|
|
|
(2,574,865 |
) |
|
Gain
on extinguishment of debt |
|
|
1,493,445
|
|
|
-
|
|
|
1,493,445
|
|
|
Other
expense, net (Note 14) |
|
|
(116,012 |
) |
|
(12,586 |
) |
|
(586,195 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes |
|
|
(6,549,962 |
) |
|
(2,774,192 |
) |
|
(40,520,969 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Income
taxes (Note 11) |
|
|
(40,557 |
) |
|
(34,591 |
) |
|
(75,148 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
(6,590,519 |
) |
|
(2,808,783 |
) |
|
(40,596,117 |
) |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per common share |
|
|
(2.90 |
) |
|
(7.93 |
) |
|
(53.81 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in computing basic and diluted net loss per common
share |
|
|
2,273,675
|
|
|
354,112
|
|
|
754,378
|
|
| |
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to the consolidated financial statements
GuruNet
Corporation (Formerly Atomica Corporation)
and
Subsidiary
(A
Development Stage Enterprise)
Consolidated
Statement of Changes in Stockholders' Equity (Deficit) and Comprehensive Income
(Loss)
| |
|
|
Convertible
preferred stock |
|
|
Common
stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
(loss) |
|
| |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Balance
as of January 1, 2003 |
|
|
1,372,048
|
|
$ |
13,720 |
|
|
353,876
|
|
$ |
354 |
|
|
32,958,424
|
|
|
-
|
|
|
(64,047 |
) |
|
(31,196,815 |
) |
|
1,711,636
|
|
|
(31,260,862 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of stock options to a non-employee for services rendered |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,225
|
|
|
(1,225 |
) |
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Issuance
of stock options to employees |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
139,720
|
|
|
(139,720 |
) |
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Amortization
of deferred compensation |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
15,072
|
|
|
-
|
|
|
-
|
|
|
15,072
|
|
|
-
|
|
Exercise
of common stock options |
|
|
-
|
|
|
-
|
|
|
1,449
|
|
|
1
|
|
|
999
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,000
|
|
|
-
|
|
Loss
on foreign currency translation |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
36,629
|
|
|
-
|
|
|
36,629
|
|
|
36,629
|
|
|
Net
loss for year |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,808,783 |
) |
|
(2,808,783 |
) |
|
(2,808,783 |
) |
Balance
as of December 31, 2003 |
|
|
1,372,048
|
|
|
13,720
|
|
|
355,325
|
|
|
355
|
|
|
33,100,368
|
|
|
(125,873 |
) |
|
(27,418 |
) |
|
(34,005,598 |
) |
|
(1,044,446 |
) |
|
(34,033,016 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of preferred stock into common stock |
|
|
(1,372,048 |
) |
|
(13,720 |
) |
|
1,372,048
|
|
|
1,372
|
|
|
12,348
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Discounts
on convertible promissory notes and warrants |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,577,373
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,577,373 |
|
|
-
|
|
Issuance
expenses in private placement relating to warrants |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(147,080 |
) |
|
-
|
|
|
-
|
|
|
-
|
|
|
(147,080 |
) |
|
-
|
|
Warrants
of common stock issued as finder's fee in private placement
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
232,202
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
232,202
|
|
|
-
|
|
Warrants
of common stock issued to holders of convertible promissory
notes |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
262,488
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
262,488
|
|
|
-
|
|
Issuance
of common stock, net of issuance costs of $2,726,209 |
|
|
-
|
|
|
-
|
|
|
2,702,500
|
|
|
2,703
|
|
|
10,713,214
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
10,715,917
|
|
|
-
|
|
Conversion
of convertible promissory notes into common stock, net of issuance costs
of $134,255 |
|
|
-
|
|
|
-
|
|
|
490,678
|
|
|
491
|
|
|
1,705,254
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,705,745
|
|
|
-
|
|
Issuance
of stock options to underwriters |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
70,374
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
70,374
|
|
|
-
|
|
Issuance
of stock options to non-employees for services rendered |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
16,571
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
16,571
|
|
|
-
|
|
Amortization
of deferred compensation |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
25,687
|
|
|
-
|
|
|
-
|
|
|
25,687
|
|
|
-
|
|
Forfeiture
of stock options granted to an employee |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(55,040 |
) |
|
55,040
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Unrealized
loss on securities |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(190 |
) |
|
-
|
|
|
(190 |
) |
|
(190 |
) |
|
Net
loss for year |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(6,590,519 |
) |
|
(6,590,519 |
) |
|
(6,590,519 |
) |
|
Balance
as of December 31, 2004 |
|
|
-
|
|
|
-
|
|
|
4,920,551
|
|
|
4,921
|
|
|
47,488,072
|
|
|
(45,146 |
) |
|
(27,608 |
) |
|
(40,596,117 |
) |
|
6,824,122
|
|
|
(40,623,725 |
) |
See
accompanying notes to the consolidated financial statements
GuruNet
Corporation (Formerly Atomica Corporation)
and
Subsidiary
(A
Development Stage Enterprise)
Consolidated
Statement of Changes in Stockholders' Equity (Deficit) and Comprehensive Income
(Loss) (cont’d)
| |
|
|
Convertible
preferred stock |
|
|
Common
stock |
|
|
|
|
|
|
|
|
Stockholders'
notes
receivable |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
(loss) |
|
| |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
December
1998 - Issuance
of common stock to founders at $0.023 per share, upon
the Company’s inception (no issuance costs) |
|
|
-
|
|
$ |
- |
|
|
325,805
|
|
$ |
326 |
|
|
7,174
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
7,500
|
|
|
-
|
|
April
1999 - Issuance
of common stock in lieu of loan repayment |
|
|
-
|
|
|
-
|
|
|
5,649
|
|
|
5
|
|
|
6,495
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
6,500
|
|
|
-
|
|
August
1999 - Issuance
of common stock upon exercise of stock options |
|
|
-
|
|
|
-
|
|
|
21,721
|
|
|
22
|
|
|
49,978
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
50,000
|
|
|
-
|
|
August
1999 - Issuance
of common stock at $2.30 per share, for acquisition of domain
name |
|
|
-
|
|
|
-
|
|
|
652
|
|
|
1
|
|
|
1,499
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,500
|
|
|
-
|
|
December
1998 and January 1999 - Issuance
of Series A convertible preferred stock
at $2.30 per share, net of issuance costs of $7,982 |
|
|
130,325
|
|
|
1,303
|
|
|
-
|
|
|
-
|
|
|
290,715
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
292,018
|
|
|
-
|
|
April
1999 - Issuance
of Series B convertible preferred stock at $7.45 per share, net
of issuance costs of $38,678 |
|
|
181,112
|
|
|
1,811
|
|
|
-
|
|
|
-
|
|
|
1,309,511
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,311,322
|
|
|
-
|
|
September
1999 - Issuance
of series C convertible preferred stock at $11.55 per share,
net of issuance costs of $79,678 |
|
|
238,119
|
|
|
2,381
|
|
|
-
|
|
|
-
|
|
|
2,667,941
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,670,322
|
|
|
-
|
|
February
2000 and June 2000 - Issuance
of Series D convertible preferred stock
at $34.53 per share, net of issuance costs of $4,359 |
|
|
822,492
|
|
|
8,225
|
|
|
-
|
|
|
-
|
|
|
28,387,416
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
28,395,641
|
|
|
-
|
|
Exercise
of common stock options from inception through December 31,
2004 |
|
|
-
|
|
|
-
|
|
|
268,353
|
|
|
268
|
|
|
1,843,633
|
|
|
-
|
|
|
(1,842,900 |
) |
|
-
|
|
|
-
|
|
|
1,001
|
|
|
-
|
|
Repurchase
of stockholders’ common stock and cancellation of note receivable
from
inception through December 31, 2004 |
|
|
-
|
|
|
-
|
|
|
(266,855 |
) |
|
(267 |
) |
|
(1,842,633 |
) |
|
-
|
|
|
1,842,900
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Issuance
of stock options and warrants to non-employees for services rendered
from
inception through December 31, 2004 |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
683,448
|
|
|
(228,642 |
) |
|
-
|
|
|
-
|
|
|
-
|
|
|
454,806
|
|
|
-
|
|
Revaluation
of options issued to non-employees for services rendered from inception
through December 31, 2004 |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(126,885 |
) |
|
84,096
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(42,789 |
) |
|
-
|
|
Forfeiture
of stock options granted for services rendered from inception through
December
31, 2004 |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(68,871 |
) |
|
68,871
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Issuance
of stock options to employees from inception through December 31,
2004 |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
139,720
|
|
|
(139,720 |
) |
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Amortization
of deferred compensation from inception through December 31, 2004 |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
115,209
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
115,209 |
|
|
-
|
|
Loss
on foreign currency translation from inception through December 31,
2004 |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(27,418 |
) |
|
-
|
|
|
(27,418 |
) |
|
(27,418 |
) |
January
2004 - Conversion
of preferred stock into common stock |
|
|
(1,372,048 |
) |
|
(13,720 |
) |
|
1,372,048
|
|
|
1,372
|
|
|
12,348
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Issuance
of warrants of common stock to holders of convertible promissory
notes |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
262,488
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
262,488
|
|
|
-
|
|
Discounts
on convertible promissory notes and warrants |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,577,373
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,577,373 |
|
|
-
|
|
Issuance
expenses in private placement relating to warrants |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(147,080 |
) |
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(147,080 |
) |
|
-
|
|
October
2004
- Issuance of common stock, net of issuance costs of $2,726,209
|
|
|
-
|
|
|
-
|
|
|
2,702,500
|
|
|
2,703
|
|
|
10,713,214
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
10,715,917
|
|
|
-
|
|
October
2004
- Conversion of convertible promissory notes into common stock, net of
issuance costs of $134,255 |
|
|
|
|
|
|
|
|
490,678
|
|
|
491
|
|
|
1,705,254
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,705,745
|
|
|
-
|
|
Issuance
of stock options to underwriters |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
70,374
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
70,374
|
|
|
-
|
|
Forfeiture
of stock options granted to employees |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(55,040 |
) |
|
55,040
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Unrealized
loss on securities |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(190 |
) |
|
-
|
|
|
(190 |
) |
|
(190 |
) |
|
Net
loss from inception through December 31, 2004 |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(40,596,117 |
) |
|
(40,596,117 |
) |
|
(40,596,117 |
) |
|
Balance
as of December 31, 2004 |
|
|
-
|
|
|
-
|
|
|
4,920,551
|
|
|
4,921
|
|
|
47,488,072
|
|
|
(45,146 |
) |
|
-
|
|
|
(27,608 |
) |
|
(40,596,117 |
) |
|
6,824,122 |
|
|
(40,623,725 |
) |
See
accompanying notes to the consolidated financial statements
GuruNet
Corporation (Formerly Atomica Corporation)
and
Subsidiary
(A
Development Stage Enterprise)
Consolidated
Statements of Cash Flows
| |
|
|
Years
ended December 31 |
|
|
Cumulative
from December 22, 1998
(inception)
through December 31 |
|
| |
|
|
2004 |
|
|
2003 |
|
|
2004 |
|
| |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Cash
flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
(6,590,519 |
) |
|
(2,808,783 |
) |
|
(40,596,117 |
) |
|
Adjustments
to reconcile net loss to net cash used in operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
119,126 |
|
|
268,026
|
|
|
2,212,055
|
|
|
Deposits
in respect of employee severance obligations |
|
|
(123,084 |
) |
|
(107,871 |
) |
|
(462,735 |
) |
|
Loss
on sale and write off of property and equipment in connection with
shut-down
of operations |
|
|
-
|
|
|
-
|
|
|
780,475
|
|
|
Other
loss on sale and write off of property and equipment |
|
|
-
|
|
|
-
|
|
|
549,802
|
|
|
Settlement
of obligations for other than cash |
|
|
-
|
|
|
-
|
|
|
225,589
|
|
|
Increase
in liability in respect of employee severance obligations |
|
|
100,199 |
|
|
101,380
|
|
|
531,224
|
|
|
Deferred
income taxes |
|
|
40,557 |
|
|
34,591
|
|
|
75,148
|
|
|
Stock
issued for domain name |
|
|
-
|
|
|
-
|
|
|
1,500
|
|
|
Issuance
of stock options and warrants to non-employees for services
rendered |
|
|
16,571 |
|
|
-
|
|
|
222,604
|
|
|
Revaluation
of options issued to non-employees for services rendered |
|
|
-
|
|
|
-
|
|
|
(42,789 |
) |
|
Amortization
of deferred compensation |
|
|
25,687 |
|
|
15,072
|
|
|
115,209
|
|
|
Amortization
of deferred charges relating to convertible promissory
notes |
|
|
889,983 |
|
|
-
|
|
|
889,983
|
|
|
Amortization
of discounts on promissory notes |
|
|
1,577,373 |
|
|
-
|
|
|
1,577,373
|
|
|
Exchange
rate differences |
|
|
11,746
|
|
|
-
|
|
|
11,746
|
|
|
Changes
in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
(Increase)
decrease in accounts receivable and other current assets |
|
|
(245,404 |
) |
|
372,657
|
|
|
(276,263 |
) |
|
(Increase)
in long-term prepaid expenses |
|
|
(147,000 |
) |
|
-
|
|
|
(147,000 |
) |
|
(Decrease)
increase in accounts payable |
|
|
(43,655 |
) |
|
180,413
|
|
|
172,029
|
|
|
Increase
in accrued expenses and other current liabilities |
|
|
63,038
|
|
|
28,849
|
|
|
694,021
|
|
|
Increase
in short-term deferred revenues |
|
|
64,985
|
|
|
17,234
|
|
|
94,219
|
|
|
(Decrease)
increase in long-term deferred revenues |
|
|
(29,117 |
) |
|
537,404
|
|
|
508,287
|
|
|
Net
cash used in operating activities |
|
|
(4,269,514 |
) |
|
(1,361,028 |
) |
|
(32,863,640 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures |
|
|
(209,875 |
) |
|
(48,454 |
) |
|
(4,112,901 |
) |
|
Proceeds
from sale of property and equipment |
|
|
-
|
|
|
-
|
|
|
54,415
|
|
|
Purchase
of intangible assets |
|
|
(119,936 |
) |
|
-
|
|
|
(119,936 |
) |
|
Decrease
(increase) in long-term deposits |
|
|
(1,855 |
) |
|
12,541
|
|
|
(160,437 |
) |
|
Purchases
of investment securities |
|
|
(5,850,000 |
) |
|
-
|
|
|
(5,850,000 |
) |
|
Other |
|
|
(190 |
) |
|
-
|
|
|
(190 |
) |
|
Net
cash used in investing activities |
|
|
(6,181,856 |
) |
|
(35,913 |
) |
|
(10,189,049 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
Repayment
of loan |
|
|
-
|
|
|
-
|
|
|
(20,000 |
) |
|
Proceeds
from loan |
|
|
-
|
|
|
-
|
|
|
6,500
|
|
|
Proceeds
from issuance of convertible preferred stock, net of $130,697
issuance
costs |
|
|
-
|
|
|
-
|
|
|
32,669,303
|
|
|
Proceeds
from issuance of common stock, net of $2,726,210 issuance
costs |
|
|
10,786,290
|
|
|
-
|
|
|
10,843,790
|
|
|
Proceeds
from issuance of promissory notes, net of issuance costs in the
amount
of $521,511 and $155,116 in 2004 and 2003, respectively |
|
|
4,278,489
|
|
|
44,884
|
|
|
4,323,373
|
|
|
Repayment
of convertible promissory notes |
|
|
(3,160,000 |
) |
|
-
|
|
|
(3,160,000 |
) |
|
Exercise
of common stock options |
|
|
-
|
|
|
1,000
|
|
|
1,000
|
|
|
Net
cash provided by financing activities |
|
|
11,904,779
|
|
|
45,884
|
|
|
44,663,966
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents |
|
|
(11,746 |
) |
|
36,629
|
|
|
(45,862 |
) |
|
Net
increase (decrease) in cash and cash equivalents |
|
|
1,441,663
|
|
|
(1,314,428 |
) |
|
1,565,415
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period |
|
|
123,752
|
|
|
1,438,180
|
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period |
|
|
1,565,415
|
|
|
123,752
|
|
|
1,565,415
|
|
See
accompanying notes to the consolidated financial statements
GuruNet
Corporation (Formerly Atomica Corporation)
and
Subsidiary
(A
Development Stage Enterprise)
Consolidated
Statements of Cash Flows
| |
|
|
Years
ended December 31 |
|
|
Cumulative
from December 22, 1998(inception)
through |
|
| |
|
|
2004 |
|
|
2003 |
|
|
|
|
| |
|
|
$ |
|
|
$ |
|
|
$ |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
Income
taxes paid |
|
|
42,859 |
|
|
7,661
|
|
|
91,591
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
Stock
issued for domain name |
|
|
-
|
|
|
-
|
|
|
1,500
|
|
|
Issuance
of common stock in lieu of loan repayments |
|
|
-
|
|
|
-
|
|
|
6,500
|
|
|
Common
stock issued in exchange for notes receivable |
|
|
-
|
|
|
-
|
|
|
1,842,900
|
|
|
Repurchase
of stockholders’ common stock and cancellation of notes
receivable
|
|
|
-
|
|
|
-
|
|
|
(1,842,900 |
) |
|
Issuance
of warrants and stock options to non-employees |
|
|
565,065
|
|
|
-
|
|
|
565,065
|
|
|
Amortization
of deferred charges relating to warrants |
|
|
147,080
|
|
|
-
|
|
|
147,080
|
|
|
Discount
on convertible promissory notes |
|
|
1,577,373
|
|
|
|
|
|
1,577,373
|
|
|
Conversion
of convertible promissory notes into common stock |
|
|
1,840,000
|
|
|
|
|
|
1,840,000
|
|
|
Issuance
costs related to the converted promissory notes |
|
|
134,255
|
|
|
|
|
|
134,255
|
|
|
Unrealized
loss from securities |
|
|
190
|
|
|
-
|
|
|
190
|
|
See
accompanying notes to the consolidated financial statements
Note
1
- Business
GuruNet
Corporation (“the Parent”), formerly Atomica Corporation (a Development Stage
Enterprise), was founded as a Texas
corporation on December 22, 1998, and reorganized as a Delaware corporation in
April 1999. On
December 27, 1998 the Parent formed a subsidiary (“the Subsidiary”) based in
Israel, primarily for the purpose of providing research and development services
to the Parent. GuruNet Corporation and the Subsidiary are collectively referred
to as “the Company”. The
Company develops, markets and sells technology that intelligently and
automatically integrates and retrieves information from disparate sources and
delivers the result in a single consolidated view.
Prior to
2003, the Company focused primarily on enterprise systems for corporate
customers and large organizations. Beginning in 2003, the Company’s primary
product has been its consumer product, which, in 2003 and 2004, was sold to
subscribers who paid the Company on a lifetime or annual basis. In January 2005,
the Company introduced a free-to-customer product, containing practically all
the content that it used to sell via subscriptions and ceased selling
subscriptions to individual consumers. The Company plans to generate advertising
revenue from the free-to-customer product. Notwithstanding, customers who
purchased subscriptions prior to January 2005, will continue to be fully
supported through the subscription periods.
As the
Company has not yet earned significant revenue from its operations, it considers
itself a development stage enterprise, as defined under Statement of Financial
Accounting Standards No. 7, “Accounting
and Reporting by Development Stage Enterprises”.
Note
2 - Summary of Significant Accounting Policies
(a) Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of GuruNet
Corporation and the Subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
(b) Foreign
Currency Translation
Prior to
January 2004, the financial statements for the Subsidiary were measured using
the local currency as the functional currency. Assets and liabilities of foreign
operations were translated at the rate of exchange as of the balance sheet date.
Expenses were translated using average exchange rates for the year.
Stockholders’ equity was translated using the historical exchange rates
applicable for each line item. Foreign currency translation gains and losses
were included as a component of other comprehensive income or loss.
Beginning
in the first quarter of 2004, due to significant changes in economic facts and
circumstances, the financial statements of the Subsidiary are measured using the
U.S. dollar as its functional currency. Transactions in foreign currency
(primarily in New Israeli Shekels - “NIS”) are recorded at the representative
exchange rate as of the transaction date, except for activities relating to
balance sheet items, which are recorded at the appropriate exchange rate of the
corresponding balance sheet item. Monetary assets and liabilities in foreign
currency are stated on the basis of the representative rate of exchange at the
balance sheet date. Non-monetary assets and liabilities in foreign currency are
stated at historical exchange rates. All exchange gains and losses from
remeasurement of monetary balance sheet items denominated in non-dollar
currencies are reflected in the statement of operations as they arise.
Note
2 - Summary of Significant Accounting Policies (cont’d)
(c) Use
of Estimates
The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported results of operations during the reporting periods. Actual results
could differ from those estimates.
(d) Cash,
Cash Equivalents and Investment Securities
All
highly liquid investments with an original maturity of three months or less are
considered cash equivalents.
Investment
securities consist of auction rate securities with auction reset periods less
than 12 months, classified as available-for-sale securities and stated at fair
value.
Investment
securities and marketable securities that are deemed cash and cash equivalents,
are classified as available-for-sale, in accordance with SFAS No.
115,
“Accounting for Certain Investments in Debt and Equity
Securities”, and are
reported at fair value, with unrealized gains and losses, net of tax, recorded
in other comprehensive income (loss). Realized gains or losses and declines in
value judged to be other than temporary, if any, on available-for-sale
securities are reported in other income, net.
(e) Accounts
Receivable
Accounts
receivable are recorded at the invoiced amount and do not bear interest. If
necessary, the Company records an allowance for doubtful accounts to reflect the
Company's best estimate of the amount of probable credit losses in the Company's
existing accounts receivable, computed on a specific basis. No such allowance
was deemed necessary as of the balance sheet dates. The Company does not have
any off-balance-sheet credit exposure related to its customers.
(f) Property
and Equipment
Property
and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets. Annual depreciation rates are as follows:
| |
|
|
|
% |
|
|
Computer
equipment |
|
|
|
|
|
33 |
|
|
Furniture
and fixtures |
|
|
|
|
|
7 -
15 |
|
Leasehold
improvements are amortized over the shorter of the estimated useful life or the
expected life of the lease.
Note
2 - Summary of Significant Accounting Policies (cont’d)
(g) Revenue
Recognition
Revenues
from subscription services are recognized over the life of the subscription,
which is generally one year, in accordance with Statement of Position (SOP) No.
97-2, “Software
Revenue Recognition”, issued
by the American Institute of Certified Public Accountants (AICPA). Sales that do
not yet meet the criteria for revenue recognition, are classified as “Deferred
Revenues” on the balance sheet.
In 2003,
the Company sold lifetime subscriptions to its consumer product and did not
recognize revenue from those sales since the obligation to continue serving such
content had no defined termination date and adequate history to estimate the
life of the customer relationship was not available. Cash received from such
lifetime licenses is reflected as long-term deferred revenues on the
accompanying balance sheets.
Beginning
April 2004, certain users who purchased lifetime subscriptions in 2003,
exchanged their lifetime subscriptions for free two-year subscriptions to a
newer enhanced version of the GuruNet product. The cash previously received from
such users will be recognized over the new two-year subscription. During
the year 2004, the Company recognized approximately $30,000 of such
revenues.
The
Company’s cancellation and refund policies allow a full refund during the first
month after purchase, under certain circumstances. However, past history has
shown that the amounts actually refunded have been immaterial, as are the
current estimated returns, and therefore have no significant effect on revenue
recognition.
The
Company generates advertising revenues through pay-per-click keyword
advertising. When a user searches sponsored keywords, an advertiser’s Website is
displayed in a premium position and identified as a sponsored result to the
search. Generally, the Company does not contract directly with advertisers, but
rather, obtains those advertisers through the efforts of a third party that
locates advertisers seeking to display sponsored links in our product. The third
party is obligated to pay the Company a portion of the revenue it receives from
advertisers, as compensation for the Company’s sale of promotional space on its
Internet properties. Amounts received from such third parties are reflected as
revenue on the accompanying statement of operations in the period in which such
advertising services were provided.
(h) Research
and Development
Statement
of Financial Accounting Standards (SFAS) No. 86, "Accounting
for the Cost of Computer Software to Be Sold, Leased, or Otherwise
Marketed",
requires capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion of
a working model. The Company does not incur material costs between the
establishment of technological feasibility of its products and the point at
which the products are ready for general release. Therefore, research and
development costs are charged to the statement of operations as
incurred.
Additionally,
the Company capitalizes certain internal use software and Website development in
accordance with Statement of Position (SOP) 98-1, “Accounting
for the Cost of Computer Software Developed or Obtained for Internal Use”,
and EITF
00-2, “Accounting
for Web Site Development Costs”. The
capitalized costs are amortized over their estimated useful lives, which varies
between six months and four years.
Note
2 - Summary of Significant Accounting Policies (cont’d)
(i) Accounting
for Stock-Based Compensation
As
allowed by Statement of Financial Accounting Standards (SFAS) No. 123,
“Accounting
for Stock-based Compensation”, the
Company utilizes the intrinsic-value method of accounting prescribed by the
Accounting Principles Board (APB) Opinion No. 25, “Accounting
for Stock Issued to Employees”, and
related interpretations, to account for stock option plans for employees and
directors. Compensation
cost for stock options, if any, would be measured as the excess of the estimated
market price of the Company’s stock at the date of grant over the amount an
employee must pay to acquire the stock.
The fair
value of options and warrants granted to non-employees, are measured according
to the Black-Scholes option-pricing model with the following weighted average
assumptions: . no dividend yield; risk-free interest rates of 1.69% to 4.00%;
volatility between 38.00% and 66.76%; and an expected life between one and seven
years.
The
Company has adopted the disclosure requirements of SFAS No. 123 and SFAS No.
148, “Accounting
for Stock-Based Compensation—Transition and Disclosure”, for
awards to its directors and employees. For
disclosure purposes only, the fair value of options granted to employees and
directors prior to May 12, 2004, the date of the Company’s first filing with the
U.S. Securities and Exchange Commission, in connection with it’s IPO, was
estimated on the date of grant using the minimum-value method with the following
weighted average assumptions: no dividend yield; risk-free interest rates of
2.18% to 6.68%; and an expected life of three to five years. The fair value of
options granted to employees and directors subsequent to May 12, 2004, are
measured, for disclosure purposes only, according to the Black-Scholes
option-pricing model with the following weighted average assumptions: . no
dividend yield; risk-free interest rates of 2.17% to 3.78%; volatility between
61.57% and 66.76%; and an expected life of four years.
The
following illustrates the effect on net loss and net loss per share if the
Company had applied the fair value methods of SFAS No.
123 for
accounting purposes:
| |
|
Years
ended December 31 |
|
Cumulative
from inception through December 31, |
|
|
|
|
2004 |
|
2003 |
|
2004 |
|
|
|
|
$ |
|
$ |
|
$ |
|
|
Net
loss, as reported |
|
|
(6,590,519 |
) |
|
(2,808,783 |
) |
|
(40,596,117 |
) |
|
Add: |
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense to employees and
directors
included in reported net loss, net of related tax
effects |
|
|
25,382
|
|
|
14,995
|
|
|
40,377
|
|
|
Deduct: |
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense to employees and
directors
determined under fair value based method for
all
awards, net of related tax effects |
|
|
(75,363 |
) |
|
(34,407 |
) |
|
(225,717 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Pro-Forma
net loss |
|
|
(6,640,500 |
) |
|
(2,828,195 |
) |
|
(40,781,457 |
) |
|
Net
loss per common share, basic and diluted: |
|
|
|
|
|
|
|
|
|
|
|
As
reported |
|
|
(2.90 |
) |
|
(7.93 |
) |
|
(53.81 |
) |
|
Pro-forma |
|
|
(2.92 |
) |
|
(7.99 |
) |
|
(54.06 |
) |
Note
2 - Summary of Significant Accounting Policies (cont’d)
(j) Income
Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. 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. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. A
valuation allowance is provided for the amount of deferred tax assets that,
based on available evidence, are not more likely than not to be
realized.
(k) Impairment
of Long-Lived Assets and Intangible Assets
The
Company evaluates its long-lived tangible and intangible assets for impairment
in accordance with SFAS No.144, “Accounting
for the Impairment or Disposal of Long-Lived Assets”,
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of the asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets.
(l) Net
Loss Per Share Data
Basic and
diluted net loss per common share are presented in conformity with the SFAS No.
128, "Earnings
Per Share". Diluted
net loss per share is the same as basic net loss per share as the inclusion of
3,376,310 common stock equivalents would be anti-dilutive. Share and per-share
data presented throughout the financial statements and notes reflect a 1-for-23
reverse stock split that the Company declared in January 2004.
(m) Comprehensive
Income (Loss)
Comprehensive
income (loss) as defined, includes all changes in equity during a period from
non-owner sources. Accumulated other comprehensive income (loss), consists of
net unrealized gains and losses on available-for-sale securities, net of tax,
and the cumulative foreign currency translation adjustment.
(n) Recently
Issued Accounting Standards
In March
2004, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No.
03-01, “The
Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments” (“EITF
03-1”). EITF 03-1 provides guidance on other-than-temporary impairment models
for marketable debt and equity securities accounted for under SFAS No. 115,
“Accounting
for Certain Investments in Debt and Equity Securities” (“SFAS
No. 115”), and non-marketable equity securities accounted for under the cost
method. The EITF developed a basic three-step model to evaluate whether an
investment is other-than-temporarily impaired. On September 30, 2004, the FASB
issued FSP 03-1-1, “Effective Date of Paragraphs 10-20 of EITF Issue 03-1, ’The
Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments’,” delaying the effective date for the recognition and measurement
guidance of EITF 03-1, as contained in paragraphs 10-20, until certain
implementation issues are addressed and a final FSP providing implementation
guidance is issued. Until new guidance is issued, companies must continue to
comply with the disclosure requirements of EITF 03-1 and all relevant
measurement and recognition requirements in other accounting literature. The
Company does not expect the adoption of EITF 03-1 to have a material effect on
it’s financial statements.
Note
2 - Summary of Significant Accounting Policies (cont’d)
(n) Recently
Issued Accounting Standards (cont’d)
In
December 2004, the FASB issued SFAS No. 153, "Exchanges
of Nonmonetary Assets - an amendment to APB No. 29." This
Statement amends Opinion No. 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception
for exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange.
Adoption of this statement is not expected to have a material impact on the
results of operations and financial condition of the Company.
In
December 2004, the Financial Accounting Standards Board issued SFAS No. 123
(revised 2004), “Share-Based
Payment”(SFAS No.
123R). This Statement is a revision of SFAS No. 123, “Accounting
for Stock-Based Compensation”, and it
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. This Statement
eliminates the option to use Opinion 25’s intrinsic value method of accounting
that was provided in SFAS No. 123 as originally issued and it requires a public
entity to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award.
That cost will be recognized over the period during which an employee is
required to provide service in exchange for the award which is usually the
vesting period. No compensation cost is recognized for equity instruments for
which employees do not render the requisite service. As determined in SFAS No.
123R, the Company will apply its rules as of the beginning of the first interim
or annual reporting period that begins after December 15, 2005. SFAS 123R
provides two alternative adoption methods. The first method is a modified
prospective method whereby a company would recognize share-based employee costs
from the beginning of the fiscal period in which the recognition provisions are
first applied as if the fair-value-based accounting method had been used to
account for all employee awards granted, modified, or settled after the
effective date and to any awards that were not fully vested as of the effective
date. Measurement and attribution of compensation cost for awards that are
unvested as of the effective date of SFAS 123R would be based on the same
estimate of the grant-date fair value and the same attribution method used
previously under SFAS No. 123, “Accounting
for Stock-Based Compensation” (“SFAS
123”). The second adoption method is a modified retrospective transition method
whereby a company would recognize employee compensation cost for periods
presented prior to the adoption of SFAS 123R in accordance with the original
provisions of SFAS 123; that is, an entity would recognize employee compensation
costs in the amounts reported in the pro forma disclosures provided in
accordance with SFAS 123. A company would not be permitted to make any changes
to those amounts upon adoption of SFAS 123R unless those changes represent a
correction of an error. The Company is currently considering which of the two
methods it will adopt, and the effect that the adoption of SFAS 123R will have
on its financial statements.
(o) Reclassifications
Certain
prior year balances have been reclassified in order to conform to the current
year presentation.
Note
3 - Cash and Cash Equivalents and Investment Securities
Cash and
cash equivalents consist of the following:
| |
|
2004 |
|
2003 |
|
|
In
US dollars |
|
$ |
|
$ |
|
| |
|
|
|
|
|
|
Cash |
|
|
340,762
|
|
|
68,045
|
|
|
Cash
equivalents |
|
|
1,107,638
|
|
|
-
|
|
|
In
New Israeli Shekels (Cash only) |
|
|
117,015
|
|
|
55,707
|
|
| |
|
|
|
|
|
|
|
| |
|
|
1,565,415
|
|
|
123,752
|
|
The
Company’s investment
securities consist of investments in auction rate, investment grade, corporate
and municipal debt instruments, and auction rate preferred shares of closed-end
investment funds that invest in long-term fixed income securities, with auction
reset periods of 28 days, classified as available-for-sale securities and stated
at fair value.
Note
4 - Deferred Charges
In
connection with obtaining the promissory notes and warrants that were issued in
January and February, 2004 (see Note 8), the Company incurred, $521,511 and
$494,691 of cash and non-cash issuance costs, respectively, in 2004, and
$155,116 of cash issuance costs in 2003. The costs incurred in 2003 were
recorded as deferred charges on the accompanying balance sheet as of December
31, 2003. The portion of the issuance costs ascribed to the promissory notes was
amortized over the life of the notes. On October 13, 2004, upon completion of
the IPO, approximately $134,000 of the unamortized balance of the deferred
charges relating to the promissory notes that were converted into equity, was
deducted from additional paid-in capital. The portion of the charges ascribed to
the warrants in the amount of approximately $147,000, was deducted from
additional paid-in capital upon issuance of the warrants.
Note
5 - Long-term Deposits
Long-term
deposits are comprised of restricted deposits with banks to secure a bank
guarantee and credit card debt, and restricted deposits with the Company's
merchant bank. The aforesaid deposits with banks are comprised of a deposit
which bears interest at a rate of the London Inter-Bank Bid Rate (LIBID) less
0.69% and is automatically renewed on a monthly basis, and a money market
account. The merchant bank deposit is non-interest bearing and may be held until
such time that the Company terminates its relationship with the merchant
bank.
Note
6 - Property and Equipment, Net
Property
and equipment as of December 31, 2004 and 2003 consisted of the
following:
| |
|
2004 |
|
2003 |
|
| |
|
$ |
|
$ |
|
|
Computer
equipment |
|
|
1,142,406
|
|
|
945,831
|
|
|
Furniture
and fixtures |
|
|
228,646
|
|
|
216,689
|
|
|
Leasehold
improvements |
|
|
56,355
|
|
|
53,162
|
|
| |
|
|
|
|
|
|
|
| |
|
|
1,427,407
|
|
|
1,215,682
|
|
| |
|
|
|
|
|
|
|
|
Less:
accumulated depreciation and amortization |
|
|
(1,121,603 |
) |
|
(1,009,274 |
) |
| |
|
|
|
|
|
|
|
| |
|
|
305,804
|
|
|
206,408
|
|
The
balances of property and equipment include the effect of foreign currency
translation. During the years 2004 and 2003 the Company recorded $110,479 and
$268,026 of depreciation expense, respectively.
Note
7 - Intangible Assets, Net
The
following table summarizes the Company’s intangible assets as of December 31,
2004:
| |
|
Gross
carrying |
|
Accumulated |
|
|
|
| |
|
amount |
|
amortization |
|
Net |
|
| |
|
$ |
|
$ |
|
$ |
|
|
Domain
name |
|
|
80,200
|
|
|
(4,010 |
) |
|
76,190
|
|
|
Capitalized
software development costs |
|
|
39,736
|
|
|
(4,637 |
) |
|
35,099
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
119,936
|
|
|
(8,647 |
) |
|
111,289
|
|
The
intangible assets are all amortizable and have original estimated useful lives
as follows: Domain name - ten years; Capitalized software development costs -
six months to four years. There were no intangible assets as of December 31,
2003. Based on the current amount of intangibles subject to amortization, the
estimated amortization expense for each of the succeeding five years is as
follows: 2005 - $25,000; 2006 - $16,000; 2007 - $14,000; 2008 - $12,000; 2009 -
$8,000.
Note
8 - Convertible Promissory Notes
On
January 30, 2004, and February 17, 2004, the Company issued, in aggregate, $5
million of 8% Convertible Promissory Notes (the “Notes”). The aggregate
principal amount of the Notes included $200,000 previously advanced to the
Company by investors in 2003 that was converted into Notes in conjunction with
the transaction. The Notes were due on the earlier of one year after their
issuance or the consummation of an IPO. Upon consummation of an IPO, a minimum
of 50% (and up to 100% at the election of each note holder) of the principal
amount of the Notes were to be converted into shares of Common Stock at a
conversion price equal to 75% of the offering price of the IPO (the “Offering
Price”).
In
connection with the issuance of the Notes, the Company also issued warrants to
acquire an aggregate of 1,700,013 shares of Common Stock at an exercise price
per share equal to 120% multiplied by the greater of (1) $6.00, and (2) the
Offering Price (the “Warrants”). Each note holder received one warrant for every
$3 funded through the Notes, with the exception of the note holders who advanced
the Company $200,000 in 2003, who received one warrant for every $2 funded. The
Company also issued a warrant to the lead purchaser in the financing, to
purchase 265,837 shares of common stock at an exercise price equal to 75% of the
Offering Price per share. Further, in July 2004, the Company decided to grant
each holder of the Convertible Promissory Notes and Warrants 0.44 warrants for
each bridge warrant previously held. Following that decision an aggregate of
750,002 additional warrants were issued (see Note 10(f)).
In
October 2004, prior to the IPO Effective Date, the National Association of
Securities Dealers, Inc. (the NASD) deemed that $1,350,000 of the Convertible
Promissory Notes and 648,534 Warrants, received by certain Purchasers, were
underwriter’s compensation, because of the relationship between those note
holders and one of the Company’s underwriters. As a result of this finding, such
note holders were contractually obligated to surrender such warrants to the
Company without consideration, and to surrender their Notes to the Company for
repayment.
On
October 13, 2004, the Company completed its IPO and $1,840,000 of the Notes
converted into 490,678 shares of common stock. The remaining $3,160,000 of the
Notes, including the $1,350,000 of the Notes, mentioned above, were repaid
subsequent to the IPO closing date. In the
Company’s
estimation,
Note
8 - Convertible Promissory Notes (cont’d)
approximately
$809,000 of the Notes related to the value of the warrants that were issued on
the same date,
resulting in a note discount of $809,000. Following the NASD finding as
mentioned above, the Company cancelled warrants valued at approximately $214,000
and adjusted paid-in capital accordingly. The Company also recorded an
additional note discount, with a corresponding increase in paid-in capital, of
approximately $2,476,000, to account for the beneficial conversion terms that
the promissory note holders received, in comparison to the expected IPO offering
price.
In
accordance with EITF 00-27, the aforesaid note discounts were to be amortized to
interest expense over the life of the promissory notes, which was one year.
However, upon the IPO, on October 13, 2004, the unamortized discount relating to
the portion of the Notes that converted into shares was immediately recognized
as interest expense. Upon repayment of approximately 63% of the Notes, the same
percentage of the intrinsic value of the beneficial conversion feature at the
date of extinguishment was reversed in APIC in the amount of approximately
$1,493,000, and interest in the same amount, previously recorded relating to the
beneficial conversion feature that was reversed in paid-in capital, was
functionally reversed by the recording of a gain on extinguishment of
debt.
In
connection with the issuance of the Notes and warrants, the Company incurred,
$521,511 and $494,691 of cash and non-cash issuance costs, respectively, in
2004, and $155,116 of cash issuance costs in 2003. The amortization of such
issuance costs resulted in $889,983 of interest expense and a net decrease of
$281,335 to additional paid-in capital, and additional paid-in capital was also
increased by $262,489 upon issuance of the 750,002 additional warrants, as
described. During 2004, the Company also recorded approximately $2,750,000
of interest expense, in conjunction with the amortization of the Note discounts,
and $448,260
of interest expense relating to the face amount of interest of the
Notes.
Subsequent
to the balance sheet date, 1,941,215 warrants, that were issued in connection
with the issuance of the Notes, were exercised (see Note 16).
Note
9 - Deposits and Liability in Respect of Employee Severance
Obligations
Under
Israeli law, employers are required to make severance payments to dismissed
employees and employees leaving employment in certain other circumstances, on
the basis of the latest monthly salary for each year of service. This liability
is provided for by payments of premiums to insurance companies under approved
plans and by a provision in these financial statements.
The
Company’s employees are entitled to notice periods generally ranging from thirty
to ninety days in the event they are terminated. The above liability does not
include a provision for such notice periods.
Note
10 - Stockholders’ Equity (Deficit)
On
October 13, 2004, the Company completed an IPO of 2.35 million shares of its
common stock at $5 per share pursuant to a Registration Statement on Form SB-2
(Registration no. 333-115424). Additionally, the underwriters exercised a
portion of their over-allotment option and purchased an additional 352,500
shares of the Company’s common stock, at $5 per share, on November 18, 2004.
Total proceeds of this offering, including the exercise of the over-allotment
option, were approximately $10,716,000, net of underwriting fees and offering
expenses of approximately $2,796,000. As a result of the offering, $1,840,000 of
the promissory notes converted into 490,678 shares of common stock and the
remaining $3,160,000 was repaid.
As of
December 31, 2003, the Company’s share capital was comprised of common stock and
four separate classes of convertible preferred stock. In January 2004, the
preferred stockholders, as a class, agreed to convert all of the 1,372,048
shares of the Company’s issued and outstanding preferred stock into common
stock. The amounts as of December 31, 2003 included in this note, describe the
composition of the preferred stock, and the rights and preferences of such
shares prior to such conversion.
(a) General
The
Company’s share capital at December 31, 2004 and 2003 is comprised as
follows:
| |
|
|
|
Issued |
|
|
|
Issued |
|
| |
|
Authorized |
|
and
fully paid |
|
Authorized |
|
and
fully paid |
|
| |
|
December
31, 2004 |
|
December
31, 2003 |
|
| |
|
Number
of shares |
|
Number
of shares |
|
Series
A convertible preferred stock |
|
|
|
|
|
|
|
|
|
|
of
$0.01 par value |
|
|
-
|
|
|
-
|
|
|
130,325
|
|
|
130,325
|
|
|
Series
B convertible preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
$0.01 par value |
|
|
-
|
|
|
-
|
|
|
217,203
|
|
|
181,112
|
|
|
Series
C convertible preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
$0.01 par value |
|
|
-
|
|
|
-
|
|
|
260,643
|
|
|
238,119
|
|
|
Series
D convertible preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
$0.01 par value |
|
|
-
|
|
|
-
|
|
|
824,646
|
|
|
807,468
|
|
|
Series
D convertible preferred non-voting stock of $0.01 par
value |
|
|
-
|
|
|
-
|
|
|
21,721
|
|
|
15,024
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock of $0.01 par value |
|
|
1,000,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Common
stock of $0.001 par value |
|
|
30,000,000
|
|
|
4,920,551
|
|
|
2,856,937
|
|
|
355,325
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
31,000,000
|
|
|
4,920,551
|
|
|
4,311,475
|
|
|
1,727,373
|
|
The
outstanding Series D convertible preferred non-voting shares were identical in
all other respects to Series D convertible preferred voting shares.
Note
10 - Stockholders’ Equity (Deficit) (cont’d)
(b) Stock
Option Plans
The
Company provides for direct grants or sales of common stock, and common stock
options to employees and non-employees through the following: the 1999 Stock
Option Plan (the 1999 Plan), the 2000 Stock Option Plan (the 2000 Plan), the
2003 Stock Option Plan (the 2003 Plan) (thereafter collectively “Prior Option
Plans”) and the 2004 Stock Option Plan (the 2004 Plan).
In January
2004, the Company adopted the 2004 Stock Option Plan (the 2004 Plan),
authorizing 866,000 options for future grants. As of
December 31, 2004, 471,304 options were available for grant under the 2004 plan
and the Prior Option Plans were closed for future grants. The
exercise or purchase price for common stock granted or sold to employees under
the Prior Option Plans was equal to or greater than the fair market value per
share on the date of grant.
Under all
option plans, options generally vest 25%, with respect to the number granted,
upon the first anniversary date of the option grant, and the remainder vest in
equal monthly installments over the 36 months thereafter. When vested, options
are exercisable immediately.
The
options generally expire ten years after grant date and are forfeited if not
exercised within three months of termination of employment by
employees.
(c) Other
Stock Options
On
October 13, 2004, the Company issued to its underwriters 117,500 options for a
total purchase price of $100. These options were issued outside of the Company’s
stock option plans as compensation for services rendered in connection with the
IPO. The options will be exercisable on October 13, 2005, expire 5 years from
the date of issuance and have an exercise price of $6.25 per share. The fair
value of the options granted to the underwriters was estimated using the
Black-Scholes option-pricing model with the following weighted average
assumptions: no dividend yield; volatility of 49%; risk-free interest rates of
2.17%; and an expected life of one year. The fair value of the underwriters’
options was determined to be $70,374 and was recorded
as part of additional paid-capital.
As of
December 31, 2004, 153,151 options were issued and outstanding outside of the
Company’s stock option plans.
Note
10 - Stockholders’ Equity (Deficit) (cont’d)
(d) Option
Grant Information
A summary
of the status of the 1999, 2000, 2003 and 2004 plans, and of the other options,
follows:
| |
|
Options
|
|
|
|
Weighted |
|
| |
|
available
for |
|
Options |
|
average
exercise |
|
| |
|
|
grant |
|
|
outstanding |
|
|
price |
|
| |
|
|
|
|
|
|
|
|
$ |
|
|
Balance
as of December 31, 2002 |
|
|
273,562
|
|
|
251,119
|
|
|
9.90
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
(244,367 |
) |
|
244,367
|
|
|
1.84
|
|
|
Exercised |
|
|
-
|
|
|
(1,449 |
) |
|
0.69
|
|
|
Cancelled
* |
|
|
56,190
|
|
|
(66,801 |
) |
|
10.13
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2003 |
|
|
85,385
|
|
|
427,236
|
|
|
4.37
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Additional
options authorized (2003 Plan) |
|
|
299,305
|
|
|
-
|
|
|
-
|
|
|
Additional
options authorized (2004 Plan) |
|
|
866,000
|
|
|
-
|
|
|
-
|
|
|
Cancelled
(closing of the 2003 Plan) |
|
|
(77,126 |
) |
|
-
|
|
|
-
|
|
|
Granted
(2004 and 2003 Plans) |
|
|
(702,260 |
) |
|
702,260
|
|
|
5.16
|
|
|
Granted
(other options) |
|
|
-
|
|
|
117,500
|
|
|
6.25
|
|
|
Exercised |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Expired |
|
|
-
|
|
|
(43,441 |
) |
|
2.76
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Balance
as of December 31, 2004 |
|
|
471,304
|
|
|
1,203,555 |
|
|
5.06
|
|
*
Includes cancelled options from closed stock option
plans
The
following table summarizes information about stock options outstanding as of
December 31, 2004:
| |
|
Options
Outstanding |
|
Options
Vested |
|
|
Range
of exercise prices |
|
Number
outstanding |
|
Weighted
average remaining contractual life (years) |
|
Weighted
average exercise price |
|
Number
outstanding |
|
Weighted
Average Exercise Price |
|
|
$0.69-1.15 |
|
|
169,576
|
|
|
7.71
|
|
$ |
0.75 |
|
|
146,380
|
|
$ |
0.76 |
|
|
2.30-2.76 |
|
|
87,135
|
|
|
6.39
|
|
|
2.59
|
|
|
61,895
|
|
|
2.51
|
|
|
4.60-6.91 |
|
|
828,888
|
|
|
9.43
|
|
|
5.33
|
|
|
39,475
|
|
|
5.58
|
|
|
9.21-11.51 |
|
|
117,956
|
|
|
6.52
|
|
|
11.21
|
|
|
108,634
|
|
|
11.18
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.69-11.51 |
|
|
1,203,555
|
|
|
8.68
|
|
|
5.06
|
|
|
356,384
|
|
|
4.78
|
|
Note
10 - Stockholders’ Equity (Deficit) (cont’d)
(e) Stock
Based Compensation
The
Company measures compensation expense for its stock-based employee compensation
plans using the intrinsic value method. As a result of the stock-based employee
compensation, the Company recorded compensation expense in the amount of $25,382
and $14,995, in 2004 and 2003, respectively. As of December 31, 2004,
approximately $99,000 remains to be amortized over the remaining vesting periods
of the options. If the fair value based method had been applied in measuring
stock compensation expense, the pro forma effect on net loss and net loss per
share would have been as follows:
| |
|
Years
ended December 31 |
|
Cumulative
from inception through December 31, |
|
| |
|
2004 |
|
2003 |
|
2004 |
|
| |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Net
loss, as reported |
|
|
(6,590,519 |
) |
|
(2,808,783 |
) |
|
(40,596,117 |
) |
|
Add: |
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense to employees and
directors
included in reported net loss, net of related tax
effects |
|
|
25,382
|
|
|
14,995
|
|
|
40,377
|
|
|
Deduct: |
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense to employees and
directors
determined under fair value based method for
all
awards, net of related tax effects |
|
|
(75,363 |
) |
|
(34,407 |
) |
|
(225,717 |
) |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
(6,640,500 |
) |
|
(2,828,195 |
) |
|
(40,781,457 |
) |
|
Net
loss per common share, basic and diluted: |
|
|
|
|
|
|
|
|
|
|
|
As
reported |
|
|
(2.90 |
) |
|
(7.93 |
) |
|
(53.81 |
) |
|
Pro-forma |
|
|
(2.92 |
) |
|
(7.99 |
) |
|
(54.06 |
) |
The
weighted average fair value of options where the exercise price equaled the
market price on grant date was $2.69 for grants in the year ended December 31,
2004. No such options were granted in 2003. The weighted average fair value of
options where the exercise price exceeded the market price on grant date was $0
for grants in the years ended December 31, 2004 and 2003. The weighted average
fair value of options where the exercise price was less than the market price on
grant date was $1.92 for grants in the year ended December 31, 2003. No such
options were granted in 2004.
Note
10 - Stockholders’ Equity (Deficit) (cont’d)
(f) Stock
Warrants
| |
(i) |
In
connection with obtaining a line of credit from a bank in 2002, the
Company issued warrants to the bank to purchase 2,173 shares of Series D
preferred stock for $34.53 per share. The warrants are exercisable
immediately and expire in April 2009. In January 2004, these warrants
converted to common stock warrants. |
| |
|
|
| |
(ii) |
In
connection with the issuance of the Notes (see Note 8), the Company issued
warrants to acquire an aggregate 1,700,013 shares of common stock at an
exercise price per share equal to 120% multiplied by the greater of (1)
$6.00, and (2) the Offering Price (the “Bridge Warrants”). Each note
holder received one bridge warrant for every $3 funded through the Notes,
with the exception of the note holders who advanced the Company $200,000,
in 2003, who received one Bridge Warrant for every $2 funded. In July
2004, the Company decided to grant the holders of the Convertible
Promissory Notes and Warrants an aggregate of 750,002 additional warrants.
These additional warrants contained terms identical to the Bridge Warrants
except for certain expiration provisions. In
October 2004, following the demand of the NASD, certain note holders were
contractually obligated to surrender 648,534 warrants to the Company
without consideration (see Note 8). |
| |
|
|
| |
|
In
connection with the original issuance of the Bridge Notes and warrants in
January 2004, the Company also issued a warrant to the lead purchaser in
the financing, to purchase 265,837 shares of common stock at an exercise
price equal to 75% of the Offering Price per share. |
| |
|
|
| |
|
The
aggregate fair value of all of the warrants mentioned above was determined
to be approximately $1,090,000 using the Black-Scholes option-pricing
model with the following assumptions: no dividend yield; volatility of
38%; risk free interest rate of 4%; and an expected life of seven
years. |
| |
|
|
| |
|
The
majority of these warrants were exercised subsequent to the balance sheet
date (see Note 16). |
Note
11 - Income Taxes
The
income tax expense for the years ended December 31, 2004 and 2003, differed from
the amounts computed by applying the U.S. federal income tax rate of 34% to
pretax income as a result of the following:
| |
|
Years
ended December 31 |
|
Cumulative
from inception through December 31, |
|
| |
|
2004 |
|
2003 |
|
2004 |
|
| |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Computed
“expected” tax benefit |
|
|
2,226,987
|
|
|
943,225
|
|
|
13,777,129
|
|
|
Effect
of State taxes |
|
|
329,259
|
|
|
260,922
|
|
|
3,493,876
|
|
|
Effect
of foreign income |
|
|
(157,016 |
) |
|
24,739
|
|
|
439,876
|
|
|
Non-deductible
expenses |
|
|
(208 |
) |
|
(55 |
) |
|
(14,002 |
) |
|
Change
in valuation allowance |
|
|
(2,439,579 |
) |
|
(1,263,422 |
) |
|
(17,771,617 |
) |
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
(40,557 |
) |
|
(34,591 |
) |
|
(75,148 |
) |
The types
of temporary differences that give rise to significant portions of the Company’s
deferred tax assets and liabilities are set out below:
| |
|
Years
ended December 31 |
|
| |
|
2004 |
|
2003 |
|
| |
|
|
$ |
|
|
$ |
|
|
Deferred
tax asset: |
|
|
|
|
|
|
Miscellaneous
accrued expenses |
|
|
40,584
|
|
|
29,017
|
|
|
Property
and equipment |
|
|
27,348
|
|
|
419,958
|
|
|
Deferred
compensation |
|
|
328,222 |
|
|
303,803
|
|
|
Capitalized
start-up costs |
|
|
2,418,734 |
|
|
3,535,073
|
|
|
Foreign
deferred tax assets |
|
|
19,817 |
|
|
20,501
|
|
|
Net
operating loss |
|
|
14,956,729
|
|
|
11,044,187
|
|
| |
|
|
|
|
|
|
|
|
Total
gross deferred tax asset |
|
|
17,791,434
|
|
|
15,352,539
|
|
| |
|
|
|
|
|
|
|
|
Less:
Valuation allowance |
|
|
(17,771,617 |
) |
|
(15,332,038 |
) |
| |
|
|
|
|
|
|
|
|
Net
deferred tax asset |
|
|
19,817 |
|
|
20,501
|
|
| |
|
|
|
|
|
|
|
|
Total
gross deferred tax liability |
|
|
(94,965 |
) |
|
(55,092 |
) |
| |
|
|
|
|
|
|
|
|
Net
deferred tax liability |
|
|
(75,148 |
) |
|
(34,591 |
) |
Note
11 - Income Taxes (cont’d)
Because
of the Company's lack of earnings history, as of December 31, 2004 and 2003, the
U.S. deferred tax assets have been fully offset by a valuation allowance. The
net change in the total valuation allowance for the years ended December 31,
2004 and 2003 was an increase of $2,439,579 and $1,263,422, respectively.
As of
December 31, 2004 and 2003, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $35 million and $26
million, respectively. The federal net operating losses will expire if not
utilized on various dates from 2019 through 2024. The California net operating
losses will expire if not utilized on various dates from 2009 through 2013. The
Israeli Subsidiary has capital loss carryforwards of approximately $604,000 that
can be applied to future capital gains for an unlimited period of time under
current tax rules.
The Tax
Reform Act of 1986 imposed substantial restrictions on the utilization of net
operating losses and tax credits in the event of an ownership change of a
corporation. Thus, in accordance with Internal Revenue Code, Section 382, the
Company’s recent IPO and other ownership changes that have transpired, will
significantly limit the Company’s ability to utilize net operating losses and
credit carryforwards although the Company has not yet determined to what
extent..
During
the year 2000, the Subsidiary was granted "Approved Enterprise" status under the
Israeli Law for the Encouragement of Capital Investments - 1959 under the
"alternative benefits" path. As an "Approved Enterprise" the Israeli
Subsidiary is entitled to receive future tax benefits, which are
limited to a period of ten years from the first year that taxable income is
generated from the approved assets. In addition, the benefits must be utilized
within: the earlier of 12 years of the year operation (as defined) of the
investment program begins or 14 years of the year that approval is
granted.
Under its
"Approved Enterprise" status, income arising from the subsidiary's approved
activities is subject to zero tax under the "alternative benefit” path for a
period of ten years. In the event of distribution by the subsidiary of a cash
dividend out of retained earnings which were tax exempt due to the “Approved
Enterprise” status, the subsidiary would have to pay a 10% corporate tax on the
amount distributed, and the recipient would have to pay a 15% tax (to be
withheld at source) on the amounts of such distribution received. Should the
subsidiary derive income from sources other than the Approved Enterprise during
the relevant period of benefits, such income would be taxable at the tax rate in
effect at that time (currently 36%). Deferred tax assets and liabilities in the
financial statements result from the tax amounts that would result if the
Subsidiary distributed its retained earnings to its Parent.
During
2003, the Subsidiary filed a final status report on its investment program.
Final approval of the program was received from the Investment Center in March
2004. The approval has yet to be upheld by the Israeli income tax authorities.
In addition, in February 2004, the Subsidiary applied for a second (expansion)
investment program based on terms similar to the first investment program.
Formal approval of the application in respect of the second program was received
from the Investment Center in July 2004.
Under its
Approved Enterprise status, the Subsidiary must maintain certain conditions and
submit periodic reports. Failure to comply with the conditions of the Approved
Enterprise status could cause the Subsidiary to lose previously accumulated tax
benefits. The Subsidiary began claiming benefits in the 2000 tax
year. Cumulative
benefits received under the Subsidiary’s approved enterprise status amount to
approximately $700,000 at December 31, 2004. As of the balance sheet date the
Company believes that it is in compliance with the stipulated
conditions.
Note
12 - Commitments and Contingencies
(a) Future
minimum lease payments under non-cancelable operating leases for office space
and cars, as of December 31, 2004 are as follows:
|
Year ending December 31 |
|
|
$ |
|
|
|
2005 |
|
|
183,421
|
|
|
|
2006 |
|
|
55,644
|
|
|
|
2007 |
|
|
20,210
|
|
|
| |
|
|
|
|
|
| |
|
|
259,275
|
|
|
| |
|
Rental
expense for operating leases for the years ended December 31, 2004
and 2003 was $271,099 and $212,680, respectively. |
| |
|
|
| |
(b) |
As security for future rental commitments the
Subsidiary provided a bank guarantee in the amount of approximately
$113,000. |
| |
|
|
| |
(c) |
All of the Subsidiary’s obligations to its
bank, including the bank guarantee that such bank made to the Subsidiary’s
landlord, are secured by a lien on all of the Subsidiary’s deposits at
such bank. As of December 31, 2004, deposits at such bank amounted to
$364,690 , including a long-term deposit of $101,531 as mentioned in Note
5. |
| |
|
|
| |
(d) |
In the ordinary course of business, the
Company enters into various arrangements with vendors and other business
partners, principally for content, web-hosting, marketing and investor
relations arrangements. During
2004, the Company entered into agreements to license content from two
providers, through December 2006 and August 2007, for an aggregate amount
of $265,000, and entered into an agreement with an investor relations firm
to provide services through December 2005 for $8,000 per month and
7,800
shares of its common stock. Regarding
commitments entered into subsequent to balance sheet date see Note
16. |
| |
|
|
| |
(e) |
In December 2002, the Company implemented a
reorganization (the "December 2002 Reorganization ") which substantially
reduced the Company’s expenditures. The December 2002 Reorganization
included staff reductions of fifteen persons, or approximately 52% of
the Company's work force, including senior management, professional
services, sales and marketing, research and development and administrative
staff. The December 2002 Reorganization also included the shutdown of the
Company’s California office and resulted in a loss on the disposal of
fixed assets. In total, the Company incurred a loss of approximately
$1,048,000 in connection with the December 2002 Reorganization, of which
$780,000 related to the disposal of fixed assets, and $265,000 related to
an accrual for salaries,
benefits and office and equipment lease obligations that the Company
recorded as
of December 31, 2002. Of the amount accrued, $22,000 and $218,000 was paid
during 2004 and 2003, respectively, and $25,000, which relates to a lease
obligation for equipment no longer in use, remains outstanding as of
December 31, 2004. |
Note
13 - Fair Value of Financial Instruments
The
Company's financial instruments at December 31, 2004 and 2003 consisted of cash
and cash equivalents, accounts receivables, prepaid expenses, deposits in
respect of employee severance obligations, security deposits in respect of the
Subsidiary’s office lease and the Company’s merchant bank, accounts payable,
accrued expenses, accrued compensation and related liabilities, liability in
respect of employee severance obligations and deferred revenues.
The
carrying amounts of all the financial instruments noted above, except for
liability in respect of employee severance obligations, approximate fair value
due to the relatively short maturity of these instruments. The carrying amount
of the liability in respect of employee severance obligations reflects the
approximate fair value inclusive of future salary adjustments.
Note
14 - Other Expense, Net
In 2004
the Company incurred approximately $90,000 in costs relating to its plan to be
listed on the Nasdaq SmallCap Market and the Boston Stock Exchange. In October
2004, the Company decided to instead list on the American Stock Exchange, and as
a result the aforesaid costs were written off in the fourth quarter of 2004 and
are included as other expenses in the accompanying statement of operations. The
remaining balance in other expense, net, in 2004 and 2003, is comprised
primarily by foreign exchange gains (losses) and the write-off of tax advances
that are not expected to be realized due to the subsidiary’s “approved
enterprise” status.
Note
15 - Related Parties
In March
2004, one of the members of the Company’s board of directors purchased the
Internet domain name, “www.Answers.com,” from an unrelated third party for
$80,200. Immediately following such purchase, the Internet domain name was
transferred to the Company and the board member was reimbursed $80,200. The
terms of transaction were as favorable to the Company as those generally
available from unaffiliated third parties. However, at the time this transaction
was entered into, the Company lacked sufficient disinterested independent
directors to ratify the transaction.
Note
16 - Subsequent Events
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(a) |
Subsequent to the balance sheet date, 69,432
of the warrants that were issued in connection with the issuance of the
convertible promissory notes (see Note 8) were exercised. As a result, the
Company issued an aggregate of 69,432 shares of its common stock, $0.001
par value (the "Common Stock"), for a total consideration of approximately
$500,000. Additionally, on February 4, 2005 the Company entered into an
agreement (the "Agreement"), with certain holders (the "Holders") of
warrants that were issued by the Company in January, February and July
2004 in connection with the bridge financing transaction (the "Bridge
Warrants") (see Note 8), pursuant to which the Holders exercised an
aggregate of 1,871,783 Bridge Warrants at the stated exercise price
thereof. As a result, the Company issued an aggregate of 1,871,783 shares
of its common stock, $0.001 par value (the "Common Stock"), for aggregate
gross consideration of $12,559,700.Under the terms of the Agreement, in
order to provide incentive to the Holders to exercise their Bridge
Warrants, for every share of Common Stock purchased by the Holders through
the exercise of Bridge Warrants, the Company issued to the Holders new
warrants, dated February 4, 2005, to purchase such number of shares of
Common Stock equal to 55% of the number of shares of Common Stock
underlying their respective Bridge Warrants, at an exercise price of
$17.27 per share (the "New Warrants"). The exercise price of the New
Warrants is equal to 110% of the average of the closing prices of the
Common Stock as reported on the American Stock Exchange for the five
trading days immediately prior to February 4, 2005. The New Warrants are
immediately exercisable and expire on February 4,
2010. |
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The
Company has agreed to file a registration statement with the SEC as
promptly as reasonably practicable to register for resale the shares of
Common Stock underlying the New Warrants. Upon the occurrence of certain
events, including the failure by the Company to file the registration
statement on or prior to April 6, 2005 and the failure of the registration
statement to be declared effective by the SEC on or prior to May 5, 2005,
the Holders will be entitled to certain liquidated damages equal to 1% of
the aggregate exercise price of the exercised warrants, for the first
month, and 1.5% for each month thereafter, prorated for any partial
month. |
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(b) |
Subsequent to the balance sheet date, the
Company entered into agreements with two consulting firms for the
provision of services in the areas of public relations and strategic
planning. The agreements, which are all for one year, the latest of which
terminates in February 2006, are for an aggregate cash amount of $180,000.
In connection with the aforesaid agreements, the Company also agreed to
grant one of the consulting firms 20,000 stock options that vest over the
twelve-month service period. |
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GURUNET
CORPORATION
(Formerly
Atomica Corporation)
AND
SUBSIDIARY
(A
Development Stage Enterprise)
Consolidated
Financial
Statements
December
31, 2004
(With
Registered Public Accounting Firm’s Report Thereon)