UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB/A
(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, 200
7
o
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
Commission
file number
333-97385
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InfoSearch
Media, Inc.
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(Name
of small business issuer in its
charter)
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Delaware
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90-0002618
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(State
or other jurisdiction
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(I.R.S.
Employer
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of
incorporation or organization)
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Identification
No.)
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4086
Del Rey Avenue, Marina Del Rey, California
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90292
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(Address
of principal executive offices)
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(Zip
Code)
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(310)
437-7380
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(Registrant's
telephone number, including area
code)
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(Former
name, former address and former fiscal year,
if
changed since last report)
Securities
Registered Pursuant to Section 12(b) of the Act: None.
Securities
Registered Pursuant to Section 12(g) of the Act: None.
Check
whether the issuer is not required to file reports pursuant to Section
13
or
15(d)
of the Exchange Act.
o
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.
x
Yes
o
No
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained,
to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
o
Yes
x
No
Issuer's
revenues for the fiscal year ended December 31, 2007 were approximately
$4,910,304.
The
aggregate market value of the voting and non-voting common equity stock held
by
non-affiliates of the issuer
,
based on
the average bid and asked prices on the Over the Counter Bulletin Board on
April
11, 2008 was approximately $3,805,785.
The
number of shares outstanding of the issuer's common stock, $0.001 par value,
as
of the latest practicable date: 52,493,592 shares as of April 11,
2008.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
Transitional
Small Business Disclosure Format (Check one):
o
Yes
x
No
TABLE
OF CONTENTS
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PART
I
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ITEM
1.
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DESCRIPTION
OF BUSINESS
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3
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ITEM
1A.
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RISK
FACTORS
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11
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ITEM
2.
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DESCRIPTION
OF PROPERTY
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19
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ITEM
3.
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LEGAL
PROCEEDINGS
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19
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ITEM
4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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19
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PART
II
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ITEM
5.
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MMARKET
FOR COMMON EQUITY
,
RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF
EQUITY
SECURITIES
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20
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ITEM
6.
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MMANAGEMENT'S
DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
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20
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ITEM
7.
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FINANCIAL
STATEMENTS
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28
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ITEM
8.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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28
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ITEM
8A.
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CONTROLS
AND PROCEDURES
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28
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ITEM
8B.
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OTHER
INFORMATION
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29
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PART
III
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ITEM
9.
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DIRECTORS
AND EXECUTIVE OFFICERS
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29
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ITEM
10.
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EXECUTIVE
COMPENSATION
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32
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ITEM
11.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND
RELATED STOCKHOLDER MATTERS
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39
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ITEM
12.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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41
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ITEM
13.
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EXHIBITS
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41
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ITEM
14.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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44
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EXHIBIT
INDEX
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46
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FINANCIAL
STATEMENTS
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F-1
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Forward-Looking
Statements
This
Annual Report on Form 10-KSB includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”),
and
Section 21E of the Securities Exchange Act of
1934,
as
amended (the “Exchange Act”). These statements relate to future events or our
future financial performance and are not statements of historical fact. In
some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "expect," "plan," "anticipate," "believe," "estimate,"
"predict," "potential," "objective," "forecast," "goal" or "continue," the
negative of such terms, or other comparable terminology. These statements are
only predictions, and actual events or results may differ materially. Although
we believe that the expectations reflected in the forward-looking statements
are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements; and in all cases, such statements are subject to our ability
to
secure sufficient financing or to increase revenues to support our operations.
In this regard, our business and operations are subject to substantial risks
that increase the uncertainty inherent in the forward-looking statements
contained in this Form 10-KSB. In evaluating our business, you should give
careful consideration to the information set forth herein, including the risks,
uncertainties and assumptions that are more fully discussed in “Item 1.A Risk
Factors.”
The
inclusion of the forward-looking statements should not be regarded as a
representation by us, or any other person, that such forward-looking statements
will be achieved. We undertake no duty to update any of the forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of the foregoing, readers are cautioned not to place undue reliance
on
the forward-looking statements contained in this report.
Item
1. Description of Business
Business
Overview
Overview
InfoSearch
is a Los Angeles-based provider of search-targeted text and video content for
the Internet, designed to provide increased search engine traffic, obtain higher
rankings, brand recognition and better website performance for electronic
commerce, media and publishing clients. InfoSearch's network of hundreds of
professional writers, editors, other technical specialists help businesses
succeed on the Web by implementing text and video content-based Internet
marketing solutions. InfoSearch’s search marketing solutions involve online
content that supports the non-paid search marketing initiatives of its clients.
Non-paid search results, otherwise known as organic, are the search results
that
the search engines find on the World Wide Web as opposed to those listings
for
which companies pay for placement.
The
Company was created on December 31, 2004, when Trafficlogic, Inc., a California
corporation (“Trafficlogic”) merged with MAC Worldwide, Inc., a Delaware
corporation incorporated on December 14, 2000 (“MAC”). MAC, the surviving
company in the merger, changed its name to “InfoSearch Media, Inc.” on December
31, 2004.
During
fiscal 2007, the Company derived revenue from our two primary operating groups,
TrafficBuilder and Web Properties.
Content
Through
our Content operating group, we deliver, through sale or license agreements,
branded original content for use by our clients on their websites. Utilizing
sophisticated content and keywords analytics, content developed in the
TrafficBuilder program drives traffic to the client’s website through improved
search engine rankings. The TrafficBuilder content provides an environment
engineered to stimulate a sale through the use of content focused on the
client’s products and services. We derive revenue from this program through
either the sale or license of the content. While many of our small to medium
sized business clients prefer the leasing option over the purchase alternative
because it provides a lower upfront cost without a long term commitment, larger
firms generally prefer the outright purchase of the content. We are actively
pursuing both methods and have created a dedicated team to focus on the larger
clients. In addition, we have introduced related products, including Web
analytics through our partnership with Load and links through our partnership
with LinkWorth. For both Load and LinkWorth, InfoSearch acts as a reseller
of
their respective products.
Publishers
In
the
first quarter of 2007, the Company initiated an effort to target large, online
publishers who are becoming increasingly aware of the monetization and brand
value of driving traffic to their online properties, but understand that the
content they write for their offline publications frequently does not drive
search rankings and traffic. Our platform addresses this need through the
development of content that meets the editorial standards and underlying themes
of these clients and layers on the search optimization techniques we have
learned through the deployment of our TrafficBuilder product. While this
product, due principally to initial resistance of the established editorial
groups within publisher organizations concerned over job security, while the
Company did not generate significant revenue during 2007 it believes this to
be
a strong product opportunity as publishers are under increased pressure to
reduce costs and outsource services. Spurred by declining advertising revenues,
there have been recent organizational changes at several of the leading national
publications, including The Washington Post, The Lost Angeles Times and the
New
York Times, and it now appears the business and editorial groups are more
aligned and receptive to innovative methods to produce content.
Video
In
February 2007, the Company launched a new search-targeted online video product
to provide the same customer benefits as the Company’s written, text-based
product line, TrafficBuilder, including improved organic search engine rankings,
increased quality site traffic and brand recognition.
TrafficBuilder
Video,
the
search-targeted online video product. The Company has recently engaged a
new partner to help produce our video products. This new partner allows us
to offer a wider more competitive range of video products to our
customers.
Web
Properties
Through
our Web Properties operating group,
we
currently operate ArticleInsider and Popdex, from which we receive online
advertising revenue. These websites are a collection of thousands of general
information articles focused on various business topics and we continue to
monetize traffic to these websites through the use of Google’s AdSense program,
as well as Kontera’s advertising program more recently. In March
2006,
we
purchased Answerbag
,
Inc.
(“Answerbag”), a consumer information website built through content generated
from its users. In October 2006, we entered into a multi-year alliance which
extended through the First Quarter of 2008 with Demand Media, Inc. (“Demand
Media”), a next generation media company, pursuant to which we sold all of the
assets of Answerbag, and Demand Media agreed to purchase our products and
services. During the period of our operation of Answerbag, the site generated
revenue through the use of Google’s AdSense program.
Industry
Overview
Internet
search and online advertising are experiencing significant growth. Internet
search is the second most popular activity on the Web, behind only email, with
more than 550 million searches performed daily worldwide and 245 million
searches performed in the United States alone. According to JP Morgan North
America Equity Research’s January 2008 estimate, the global search market for
performance-based advertising and search marketing, such as pay-per-click
listings and paid inclusion, is expected to grow at a CAGR of 28% over the
next
four years to $60 billion by 2011. This growth in Search has led many
advertisers to dramatically increase their level of advertising investment
in
search-based promotional methods. In addition, U.S. Bancorp Piper Jaffray
predicts that online advertising in the United States will represent
approximately 6% of total advertising spending in 2008 compared to approximately
2% of total advertising spending in 2003.
This
growth is fueled by the increased acceptance of the Internet as a
commerce/marketing medium, the rapid expansion of early stage international
markets, the growth of overall Internet usage and broadband Internet access,
and
by the advertiser’s realization of the cost-effectiveness of Internet search
advertising. This growth may create future opportunities to generate revenues
and profits through the introduction of new search engine-related marketing
products.
Key
Growth Drivers
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Increased
E-Commerce - The growth in Internet search revenues has been proportional
to growth in e-commerce. As consumers migrate to Internet-based
purchasing, advertisers seek to promote their products or services
using
Internet methods, the most effective of which has proven to be
Internet
search. If Internet sellers dedicate even 10% of revenues toward
Internet
marketing and advertising, as is typical of traditional merchants,
search
advertising opportunities should expand tremendously. In fact, U.S.
Bancorp Piper Jaffray projects total e-commerce spending topped $150
billion in 2007.
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Growth
of the Internet and Broadband Access -
The organic growth of the Internet has created a domestic audience
rivaling the use of television. This large audience provides a source
of
potential customers for merchants and a massive source of advertising
and
marketing dollars for those firms interested in search engine marketing.
This audience is not only growing in size but increasing its time
spent on
the Internet due to the increased usage of broadband Internet access.
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Increased
Acceptance of Internet Search as a Powerful Marketing Channel - Although
Internet search was once considered only a method for Internet users
to
locate information, its potential as a marketing tool has now been
established. The growth of those companies offering search engine
marketing services reflects the realization among advertisers of
the power
of Internet search as a business acquisition medium. However, Internet
search marketing still represents a very small portion of most advertising
budgets and has a very strong growth
potential.
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International
Market Expansion - Most international Internet markets are still
in the
early stages of development but growing rapidly, in fact JP Morgan’s
January 2008 report estimates that markets outside the United States
will
account for slightly more than half the $60 billion in search marketing
in
2011 . As the international market begins to approach the domestic
market
in terms of penetration, monetization opportunities are expected
to be
created, including strong e-commerce and search engine marketing
opportunities.
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Cost
Effectiveness/High Return on Investment - Due to its relatively low
cost
and high conversion rates, Internet search based marketing offers
advertisers a high return on investment compared to traditional offline
marketing vehicles. Forms of advertising such as the yellow pages
can cost
more than $1 per customer lead compared to $.35 per customer lead
for
Yahoo/Overture’s paid listings.
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Opportunity
Despite
the massive growth in Internet search, several problems in the industry have
not
been addressed adequately by the majority of search engine marketing companies
including:
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Placement
competition due to the concentration of Internet search traffic has
lead
to higher costs of effective paid listing keywords, limiting smaller
businesses access to paid listings;
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Difficulty
maintaining high rankings in unpaid listings, which represent a large
portion of Internet search traffic;
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Low
return on investment due to excessive cost-per-click (“CPC”)
charges
from uninterested searchers; and
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Poor
conversion/low close rates due to low quality
traffic.
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Our
unique content-based products delivered through our TrafficBuilder and Web
Properties programs, provide a solution to these problems by leveraging our
content development expertise to deliver to businesses sustainable access to
the
unpaid portion of Internet search listings with screened leads, above average
click-through rates and a price point that is below the current market
average.
Future
Market Trends
We
continue to be in a position to benefit from major audience trends and the
shift
of advertising dollars from off-line to on-line. The success of Yahoo! /
Overture and Google has proven that search listings can be translated into
significant revenue streams generating high levels of advertising satisfaction
and return on investment for customers.
Most
engines only display three to five paid listings out of 20 or more per page
of
search results, leaving a large amount of room for the expansion of paid
listings. Furthermore, search rates, which average approximately $.35 per lead,
remain significantly less than other forms of advertising such as Yellow Pages,
which currently average approximately $1.00 per lead.
In
addition, less than 1% of the more than 12 million small businesses in the
United States currently use Internet search as method of customer acquisition,
presenting another opportunity to expand the size of the paid listings and
paid
inclusion markets.
Our
search engine marketing services can benefit significantly from future increases
in volume and prices of search advertising, particularly in the small business
segment.
The
Rise of Relevance
It
was
once thought that as users became increasingly knowledgeable about the location
of information throughout the Internet, search engines would become obsolete
with users accessing the Web through specific websites or through the channels
of an Internet portal. However, users have become more focused on quick and
relevant search results and search engines have evolved to meet this demand,
creating listing parameters that produce only the targeted information the
user
desires.
Our
content-based services align perfectly with this trend. Our content may appeal
to search engines looking for fresh, highly relevant information because the
primary purpose of a search engine is to deliver the most relevant, informative
and useful information to their users. Such search engines therefore have an
incentive to place the best content at the top of their indexes and it is our
belief that as our writer talent increases, and as the quality of our content
improves, our goals become more and more aligned with those of the search
engines. The result of this synergy is that users, advertisers, search engines
and our company all receive equal benefit from our model.
International
Market Development
International
Internet traffic is already significantly larger in volume than domestic
Internet traffic, with approximately 400 million Internet users abroad compared
to close to 160 million in the United States. In addition, currently there
are
approximately 305 million searches occurring outside of the United States daily,
growing at an annual rate of 20%.
At
this
pace, the international market for search marketing services may soon eclipse
the size of the domestic opportunity. This trend is amplified by the major
portals and Internet companies adopting international models offering increased
search and Internet services abroad.
Although
this market does not currently have the monetization potential of the domestic
opportunity, the growth rate of monetization in the international markets is
much faster than in the United States. Currently the largest international
Internet markets are Japan, Germany, Korea, United Kingdom, France, Italy and
Spain. However, it is likely that within the next decade China, India and Latin
America also
will
provide significant opportunities.
Our
services are easily expandable to an international customer base and would
benefit from increased use of search engines and e-commerce at a multinational
level.
Business
Strategy
Our
business strategy focuses on building our client base for TrafficBuilder and
doing so with a shift in customer focus toward higher performing clients. Based
on research conducted in early 2007, the Company made the decision to eliminate
sales to customers with immature websites and/or those whose advertising is
directed toward less competitive and therefore less expensive keywords. Our
findings have shown that such customers were not receiving the same high return
on investment on our content based products as more established websites that
were competing for higher priced keywords. Accordingly, our products, marketing
and sales efforts have been re-focused on these higher performing
clients.
For
our
TrafficBuilder program, we derive revenue through the licensing and sale of
content to our customers. We intend to concentrate on building our base of
licensing agreements and sales of content to both the small to medium business
market and the large industry players.
We
currently operate numerous content-based websites, including ArticleInsider
and
Popdex, as part of our Web Properties group. We are no longer seeking or
engaging new customers nor creating new articles for these websites and are
generating revenue through the use of Google’s AdSense program.
In
February 2007 we
expanded
our core product line to include searchable online video content production
services.
TrafficBuilder
Video
,
the
Company’s new search-targeted online video product provides the same customer
benefits as the Company’s written, text-based product line, including improved
organic search engine rankings, increased, quality site traffic and brand
recognition. The Video product initially had been informational videos from
thirty seconds to five minutes in length tagged with search optimized metadata
and marketed to large businesses however the Company has begun to also market
other video products gaining in popularity, including on screen “pop-up”
spokespersons produced by partners.
Uniqueness
of Service
Several
factors make our services relatively unique in the search engine advertising
space.
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Content
Based Model - Our model is unique in the search engine marketing
space.
Instead of simply including our clients’ sites in highly trafficked search
engines through partnering with the major engines or by using deceptive
search engine optimization techniques, we focus on developing unique,
relevant and high-quality online content which improves search engine
ranking and traffic.
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Conversion
Rates - Internal research indicates that the Internet traffic that
we
drive to our clients’ sites through our developed content has a
demonstrably higher conversion rate than existing practices or services.
This results because searchers visiting our clients’ websites utilizing
content developed for them by us view highly targeted keyword-based
content tailored to the client’s underlying business. As a result, those
visitors arriving on the client’s site are more likely to make a
purchase.
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Solution
for Dynamically Generated Sites - Many companies offering their products
and services on the Internet maintain websites with large amounts
of
dynamic content which is difficult for major search engines to find
due to
the low visibility of such content to many of the popular search
engines’
search listing parameters. Because our keyword-based content model
provides a solution easily found by the search engine spiders, major
search engines are far more likely to find and index the client’s
websites.
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·
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Major
Engine Coverage - Our clients typically receive a large portion of
their
traffic from Google, Yahoo!, MSN and AOL. These four sites account
for a
large majority of all searches performed on the Internet. Our ability
to
develop content that ranks highly with all four major search engines
represents a beneficial approach to generating qualified traffic
for our
customers. Rather than using deceptive techniques, like doorway pages
(a
page designed to trick search engines into thinking that the site
is
focused on a topic other than the actual topic in an effort to trick
people into visiting their websites) and link farms (a technique
to
artificially create links to a particular website, which is one of
the key
determinants to ranking in the search engines) which have become
standard
with other search engine optimization companies, we produce content
which
clients utilize on their websites to dramatically improve their search
engine ranking and drive high volumes of relevant Internet
traffic.
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Target
Markets
We
have
developed five major target markets that we are either currently focusing on
or
that we intend to focus on in the future.
|
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·
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Current
Paid Listings Customers - Our largest source of potential clients
are
those companies currently using other methods of online advertising,
specifically those who are using search engine marketing techniques
that
are similar to those provided by us. This market group is familiar
with
search engine marketing and its benefits, making them amenable to
our
services especially at our discounted price. This group is expected
to
continue to be important to our customer acquisition strategy going
forward.
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·
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Small
to Medium Businesses - Of the 12 million small to medium businesses
in the
United States, less than 1% currently use search as method of customer
acquisition. These small to medium businesses present a customer
acquisition opportunity for us. Such small to medium businesses are
massive in numbers, largely ignored by the larger providers of search
engine marketing services and often overshadowed by the larger competitors
in their space when they must compete in an auction format. Because
we
specifically target the small to medium business market, we feel
we are
positioned to offer this market a higher level of customer service
and
personalized attention than larger online advertising services. These
potential clients are also ideal for our TrafficBuilder service,
because
small to medium sized businesses often do not have the resources
to hire
internal copywriters and website developers to drive traffic to their
sites.
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·
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Niche
Business Sectors - Niche business sectors are those sectors that
offer a
unique product or service that is not readily available to consumers
and
often can only be found by consumers online. Although these products
and
services are often difficult to find and are not typical consumer
offerings, a strong demand for such products and services exists
making
these specialty businesses ideal candidates for search engine marketing.
Similar to the small to medium size businesses, the niche sector
is
largely ignored by the large search engine marketing
companies.
|
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·
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Large
Scale Content Opportunities - Large established firms are increasingly
realizing the importance of online marketing. While they frequently
have
the resources to provide our services in-house, they understand that
it is
not their core competence and are open to outside service providers.
We
are pursuing these large firms to provide content on a large-scale,
contractual basis. We plan to actively target this sector going forward,
as we believe it will provide an additional method to leverage the
strength of our team of copywriters and will potentially constitute
a
significant revenue opportunity.
|
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|
·
|
Publisher
and Editorial Content Opportunities - Publishers and other companies
who
have regular needs for editorial content have historically relied
on a
combination of staff and contract writers. With the decline in advertising
revenues, existing editorial departments have experienced significant
reductions in staff and as a consequence, these firms are now increasingly
open to outsourcing the development of that editorial content. In
addition, many publishers are focusing on growing their online activities
and websites already understand the benefit of receiving additional
traffic to their websites as a result of search optimized content.
We are
pursuing these editorial content opportunities to provide content
on a
large-scale, contractual basis. We plan to continue actively targeting
this sector, as we believe it will provide an additional method to
leverage the strength of our team of copywriters and has the potential
to
constitute a large portion of revenue.
|
Sales,
Marketing, Advertising and Promotion
As
of
December 31, 2007, we had 17 full-time employees in our sales department. Our
sales department currently focuses on adding new clients to our TrafficBuilder
program. Advertising and promotion of our services is broken into three main
categories: direct sales, online promotion
and
value
added resellers.
|
|
·
|
Direct
Sales: Our sales staff targets new client relationships through telesales
efforts, direct marketing, and attendance and sponsorship at various
trade
shows and conferences.
|
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·
|
Online
Promotion: We engage in certain advertising and direct marketing
focused
on acquiring new merchant advertisers and new distribution partners
through online promotional methods.
|
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·
|
Value
Added Resellers: We signed WSI, Inc.
(“WSI”)
as
our first value added reseller during 2006 and expect to continue
to
expand this program after recently relaunching new “subscription” plan
pricing in January of 2008. WSI operates or franchises
approximately
2,000
Independent Consultants worldwide, and with our new plans we currently
have 120 Independent Consultants who have been qualified to sell
our
TrafficBuilder products through a private label brand WSI
Webwords.
|
We
intend
to continue our strategy of growing our client base through sales and marketing
programs and are reviewing more scalable methods and partnerships, especially
the expansion of our value added reseller programs, with the goal of increasing
our client base. Further, we continually evaluate our marketing and advertising
strategies to maximize the effectiveness of our programs and their return on
investment.
Competition
We
are
one of the few companies exclusively dedicated to providing online content-based
marketing solutions to increase lead generation from unpaid search listings.
Nonetheless, while our content-based solutions are relatively unique, there
are
other companies that use similar techniques in different ways to increase
traffic leads and conversion rates. Yahoo! Answers is an example of a question
and answer content site that leverages a large number of non-paid users to
generate content to drive traffic and ad revenue. It does not, however, sell
content to other companies. In contrast, Introspect provides search engine
optimization services which include Web design and content development. It,
however, does not own its own content network.
We
believe that today’s typical Internet
advertiser
is becoming more sophisticated regarding the increased value of content-based
solutions relative to the different forms of
Internet
advertising. These advertisers are increasingly aware of their return on
investment and are more carefully developing their online marketing programs.
While the significant growth in the industry has increased the competitive
levels, we believe that our unique product offering will continue to provide
an
edge in developing new client relationships.
Intellectual
Property and Proprietary Rights
We
seek
to protect our intellectual property through existing laws and regulations
and
by contractual restrictions. We rely upon trademark, patent and copyright law,
trade secret protection and confidentiality or license agreements with our
employees, customers, partners and others to help us protect our intellectual
property.
Our
policy is to apply for patents or for other appropriate statutory protection
when we develop valuable new or improved technology. We currently do not have
any patents or pending patent applications.
All
of
our copywriters are under contract assigning to us ownership of the content
they
create. In addition, we have copyrighted all content hosted throughout our
network.
Government
Regulation
We
are
subject to governmental regulation much like many other companies. There are
still relatively few laws or regulations specifically addressed to the Internet.
As a result, the manner in which existing laws and regulations should be applied
to the Internet in general, and how they relate to our businesses in particular,
is unclear in many cases. Such uncertainty arises under existing laws regulating
matters, including user privacy, defamation, pricing, advertising, taxation,
gambling, sweepstakes, promotions, content regulation, quality of products
and
services and intellectual property ownership and infringement.
To
resolve some of the current legal uncertainty, we expect new laws and
regulations to be adopted that will be directly applicable to our activities.
Any existing or new legislation applicable to us could expose us to substantial
liability, including significant expenses necessary to comply with such laws
and
regulations, and could dampen the growth in use of the Internet in
general.
Several
federal laws that could have an impact on our business have already been
adopted. The Digital Millennium Copyright Act is intended to reduce the
liability of online service providers for listing or linking to third party
websites that include materials that infringe copyrights or rights of others.
The Children’s Online Protection Act and the Children’s Online Privacy
Protection Act are intended to restrict the distribution of certain materials
deemed harmful to children and impose additional restrictions on the ability
of
online services to collect user information from minors. In addition, the
Protection of Children from Sexual Predators Act requires online services
providers to report evidence of violations of federal child pornography laws
under certain circumstances.
The
foregoing legislation may impose significant additional costs on our business
or
subject us to additional liabilities
,
if we
were not to comply fully with their terms, whether intentionally or not. If
we
did not meet the safe harbor requirements of the Digital Millennium Copyright
Act, we could be exposed to copyright actions, which could be costly and
time-consuming. The Children’s Online Protection Act and the Children’s Online
Privacy Protection Act impose fines and penalties to persons and operators
that
are not fully compliant with their requirements. The federal government could
impose penalties on those parties that do not meet the full compliance practices
of the Protection of Children from Sexual Predators Act. We intend to fully
comply with the laws and regulations that govern our industry, and we intend
to
employ internal resources and incur outside professional fees to establish,
review and maintain policies and procedures to reduce the risk of
noncompliance.
We
post
our privacy policy and practices concerning the use and disclosure of any user
data on our websites. Any failure by us to comply with posted privacy policies,
Federal Trade Commission requirements or other domestic or international
privacy-related laws and regulations could result in proceedings by governmental
or regulatory bodies that could potentially harm our businesses, results of
operations and financial condition. In this regard, there are a large number
of
legislative proposals before the United States Congress and various state
legislative bodies regarding privacy issues related to our businesses. It is
not
possible to predict whether or when such legislation may be adopted, and certain
proposals, if adopted, could harm our business through a decrease in user
registrations and revenue. These decreases could be caused by, among other
possible provisions, the required use of disclaimers or other requirements
before users can utilize our services.
Employees
As
of
December 31, 2007, we employed a total of 30 full-time employees and hundreds
of
contracted copywriters. We have never had a work stoppage, and none of our
employees are represented by a labor union. We consider our employee
relationships to be positive. If we are unable to retain our key employees
or we
are unable to maintain adequate staffing of qualified employees, particularly
during peak sales seasons, our business would be adversely
affected.
Geographic
Information
For
the
year ended December 31, 2007, approximately 90% of our revenue was generated
from transactions originating in the United States. All of our fixed assets
are
located in the United States, principally in California at our
headquarters.
Item
1A. Risk Factors.
Our
future revenues will be derived from sales of our search engine marketing
services. There are numerous and varied risks, known and unknown, that may
prevent us from achieving our goals, including those described below. If any
of
these risks actually occurs, our business, financial condition or results of
operation may be materially adversely affected.
RISKS
RELATING TO THE COMPANY
We
incurred losses in 2007, and while we experienced significant improvement
during the third and fourth quarter, our losses may continue for the foreseeable
future, which will adversely affect our ability to achieve
profitability.
We
incurred a net loss of $1,536,309 for the fiscal year ended December 31, 2007,
and a net loss of $4,039,908 for the fiscal year ended December 31, 2006.
We may incur net losses in the future if, among other factors, our revenues
decline, our stock option expenses rise, increases in our sales and marketing
activities, regulatory and compliance costs or changes in fair value of issued
warrants. These issues may prove to be larger than we currently anticipate
which
could further increase our net losses. We cannot predict when, or if, we will
become profitable in the future. Even if we achieve profitability, we may not
be
able to sustain it. Through December 31, 2007 we had an accumulated deficit
of
$11,903,889.
We
may need additional funding to support our operations and capital expenditures,
which may not be available to us and which lack of availability could adversely
affect our business.
We
have
no committed sources of additional capital and no current debt. For the
foreseeable future, we intend to fund our operations and capital expenditures
from limited cash flow from operations and our cash on hand. If our capital
resources are insufficient, we will have to raise additional funds. We may
need
additional funds to continue our operations, pursue business opportunities
(such
as expansion, acquisitions of complementary businesses or the development of
new
products or services), to react to unforeseen difficulties or to respond to
competitive pressures. There can be no assurance that any financing arrangements
will be available in amounts or on terms acceptable to us, if at all.
Furthermore, the sale of additional equity or convertible debt securities may
result in further dilution to existing stockholders. If adequate additional
funds are not available, we may be required to delay, reduce the scope of or
eliminate material parts of the implementation of our business strategy,
including the possibility of additional acquisitions or internally developed
businesses.
Our
limited operating history makes evaluation of our business
difficult.
We
were
incorporated in the State of Delaware on December 14, 2000, and we have limited
historical financial data upon which to base planned operating expenses or
forecast accurately our future operating results. Further, our limited operating
history will make it difficult for investors and securities analysts to evaluate
our business and prospects. You must consider our prospects in light of the
risks, expenses and difficulties we face as an early stage company with a
limited operating history.
We
may make acquisitions, which could divert management’s attention, cause
ownership dilution to our stockholders and be difficult to
integrate.
Our
business strategy depends in part upon our ability to identify, structure and
integrate acquisitions that are complementary with our business model.
Acquisitions, strategic relationships and investments in the technology and
Internet sectors involve a high degree of risk. We may also be unable to find
a
sufficient number of attractive opportunities, if any, to meet our objectives.
Although many technology and Internet companies have grown in terms of revenue,
few companies are profitable or have competitive market share. Our potential
strategic acquisition, strategic relationship or investment targets and partners
may have histories of net losses and may expect net losses for the foreseeable
future.
Acquisition
transactions are accompanied by a number of risks that could harm us and our
business, operating results and financial condition:
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we
could experience a substantial strain on our resources, including
time and
money;
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our
management’s attention may be diverted from our ongoing business
operations;
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while
integrating new companies, we may lose key executives or other employees
of these companies;
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we
could experience customer dissatisfaction or performance problems
with an
acquired company or technology;
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we
may become subject to unknown or underestimated liabilities of an
acquired
entity or incur unexpected expenses or losses from such acquisitions;
and
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we
may incur possible impairment charges related to goodwill or other
intangible assets or other unanticipated events or circumstances,
any of
which could harm our business.
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Consequently,
we might not be successful in integrating any acquired businesses, products
or
technologies, and might not achieve anticipated revenue and cost
benefits.
We
may be unable to attract and retain key employees and the loss of our senior
management could harm our current and future operations and
prospect.
We
are
heavily dependent on the continued services of George Lichter, our President
and
Chief Executive Officer and Scott Brogi, our Chief Financial Officer. Our
success often depends on the skills, experience and performance of other key
employees. The loss of any key employee, in particular the departure of Mr.
Lichter or Mr. Brogi could have an adverse effect on our prospects, business,
financial condition, and results of operations. Any member of our senior
management team or key employees may voluntarily terminate his employment with
us at any time upon short notice. All of our officers and employees are
employed on an “at will” basis, which may mean they may have less of an
incentive to stay with us when presented with alternative employment
opportunities. In addition,
our
senior management and
key
operating employees hold stock options and restricted stock that have vested.
These individuals may, therefore, be more likely to leave us if the shares
of
our common stock significantly appreciate in value. In addition, various senior
members of the management team, including Messrs. Lichter and Brogi, have
provisions in their employment agreements that provide for severance and other
compensation and benefits upon termination of their employment under certain
circumstances.
Failure
to attract and retain necessary technical personnel and skilled management
could
adversely affect our business. Our success depends to a significant degree
upon
our ability to attract, retain and motivate highly skilled and qualified
personnel. If we fail to attract, train and retain sufficient numbers of these
highly qualified people, our prospects, business, financial condition and
results of operations will be materially and adversely affected.
Our
senior management has never managed a public company.
The
individuals who now constitute our senior management have never had
responsibility for managing a publicly traded company. Such responsibilities
include complying with federal securities laws and making required disclosures
on a timely basis. There can be no assurance that our senior management will
be
able to implement and affect programs and policies in an effective and timely
manner that adequately respond to such increased legal, regulatory compliance
and reporting requirements. Further, this could impair our ability to comply
with legal and regulatory requirements such as those imposed by the
Sarbanes-Oxley Act of 2002. Our failure to do so could lead to the imposition
of
fines and penalties and further result in the deterioration of our
business.
New
rules, including those contained in and issued under the Sarbanes-Oxley Act
of
2002, may make it difficult for us to retain or attract qualified officers
and
directors, which could adversely affect the management of our business and
our
ability to obtain or retain listing of our common stock.
We
may be
unable to attract and retain qualified officers, directors and members of board
of directors
committees
required to provide for our effective management as a result of the recent
and
currently proposed changes in the rules and regulations which govern
publicly-held companies, including, but not limited to, certifications from
executive officers and requirements for financial experts on the board of
directors. The perceived increased personal risk associated with these recent
changes may deter qualified individuals from accepting these roles. The
enactment of the Sarbanes-Oxley Act of 2002 has resulted in the issuance of
a
series of new rules and regulations and the strengthening of existing rules
and
regulations by the Securities and Exchange Commission
(the
“SEC”)
,
as well
as the adoption of new and more stringent rules by the stock exchanges and
NASDAQ.
We
may be
unable to maintain sufficient insurance as a public company to cover liability
claims made against our officers and directors. If we are unable to adequately
insure our officers and directors, we may not be able to retain or recruit
qualified officers and directors to manage the Company.
RISKS
RELATING TO OUR BUSINESS
If
we do not attract and maintain a critical mass of online advertisers and content
purchasers or licensees, our operating results could continue to be adversely
affected.
Our
success would depend, in part, on the development, growth and maintenance of
a
critical mass of online advertisers and content purchasers and licensees, as
well as a stronger interest in our performance-based advertising and search
marketing services. If our business is unable to achieve a growing base of
online advertisers and content licensees, in particular, we may not successfully
develop or market technologies, products or services that are competitive or
accepted by online advertisers and content licensees, which comprise a large
portion of the search marketing-based community. Any decline in the number
of
online advertisers and content licensees could adversely affect our operating
results generally.
We
are dependent upon several of the major search engines to continue to provide
us
traffic that our merchant advertisers deem to be of value, and if they do not,
it could have a material adverse effect on the value of our
services.
We
are
dependent upon several of the major Internet search engines namely Google,
Yahoo!, MSN and AOL to provide us traffic that our merchant advertisers deem
to
be of value. The Web Properties business model is predicated on individuals
performing keyword searches and through those searches finding our articles
in
the non-paid search results portion of the search results page and ultimately
clicking through to the advertiser on the InfoSearch article. When our traffic
from these search engines declines for any reason, we suffer a corresponding
significant decline in revenue. We monitor the traffic delivered to our merchant
advertisers in an attempt to optimize the quality of traffic we deliver. We
review factors such as non-human processes, including robots (which create
automated, artificial traffic), spiders (which review websites for search
engines in order for the search engines to categorize the content of websites
but have no direct commercial value to the website owner), scripts (or other
software), mechanical automation of clicking and other sources and causes of
low-quality traffic, including, but not limited to, other non-human clicking
agents. Even with such monitoring in place, there is a risk that a certain
amount of low-quality traffic will be provided to our merchant advertisers,
which, if not contained, would detrimentally impact those relationships.
Low-quality traffic (or traffic that is deemed to be less valuable by our
merchant advertisers) may prevent us from growing our base of merchant
advertisers and cause us to lose relationships with existing merchant
advertisers.
We
may be subject to litigation for infringing the intellectual property rights
of
others.
Our
success depends, in part, on our ability to protect our intellectual property
and to operate without infringing on the intellectual property rights of others.
There can be no guarantee that any of our intellectual property will be
adequately safeguarded, or that it will not be challenged by third parties.
We
may be subject to patent infringement claims or other intellectual property
infringement claims that would be costly to defend and could limit our ability
to use certain critical technologies.
For
example, Overture Services, a subsidiary of Yahoo!, which operates in certain
competitive areas with us, owns a patent (U.S. Patent No. 6,269,361), which
purports to give Overture rights to certain bid-for-placement products and
pay-per-performance search technologies. Overture is currently involved in
litigation with two companies relating to this patent (FindWhat and Google).
These companies are vigorously contesting Overture’s patent. If we were to
acquire or develop a related product or business model that Overture construes
as infringing upon the above-referenced patent, then we could be asked to
license, re-engineer our product(s) or revise our business model according
to
terms that may be extremely expensive and/or unreasonable.
Any
patent litigation could negatively impact our business by diverting resources
and management attention from other aspects of the business and adding
uncertainty as to the ownership of technology and services that we view as
proprietary and essential to our business. In addition, a successful claim
of
patent infringement against us and our failure or inability to license the
infringed or similar technology on reasonable terms, or at all, could have
a
material adverse effect on our business.
RISKS
RELATING TO OUR INDUSTRY
If
we are unable to compete in the highly competitive performance-based advertising
and search marketing industries, we may experience reduced demand for our
products and services.
We
operate in a highly competitive environment. We compete with other companies
in
the following main areas:
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sales
to online advertisers of performance-based advertising;
and
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content
licensing services that allow online advertisers and merchants to
employ
our content to drive traffic to their
websites.
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Although
we currently pursue a strategy that allows us to potentially partner with all
relevant companies in the industry, there are certain companies in the industry
that may not wish to partner with us.
We
expect
competition to intensify in the future because current and new competitors
can
enter our market with little difficulty. The barriers to entering our market
are
relatively low. In fact, many current Internet and media companies presently
have the technical capabilities and advertiser bases to enter the search
marketing services industry. Further, if the consolidation trend continues
among
the larger media and search engine companies with greater brand recognition,
the
share of the market remaining for us and other smaller search marketing services
providers could decrease, even though the number of smaller providers could
continue to increase. These factors could adversely affect our competitive
position in the search marketing services industry.
Some
of
our competitors, as well as potential entrants into our market, may be better
positioned to succeed in this market. They may have:
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longer
operating histories;
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more
management experience;
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an
employee base with more extensive
experience;
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a
better ability to service customers in multiple cities in the United
States and internationally by virtue of the location of sales
offices;
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greater
brand recognition; and
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significantly
greater financial, marketing and other
resources.
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In
addition, many current and potential competitors can devote substantially
greater resources than we can to promotion, website development and systems
development. Furthermore, currently and in the future to the extent the use
of
the Internet and other online services increase, there will likely be larger,
more well-established and well-financed entities that acquire companies and/or
invest in or form joint ventures in categories or countries of interest to
us,
all of which could adversely impact our business. Any of these trends could
increase competition and reduce the demand for any of our services.
If
we are not able to respond to the rapid technological change characteristic
of
our industry, our products and services may not be
competitive.
The
market for our services is characterized by rapid change in business models
and
technological infrastructure, and we will need to constantly adapt to changing
markets and technologies to provide competitive services. We believe that our
future success will depend, in part, upon our ability to develop our services
for both our target market and for applications in new markets. We may not,
however, be able to successfully do so, and our competitors may develop
innovations that render our products and services obsolete or
uncompetitive.
Our
technical systems are vulnerable to interruption and damage that may be costly
and time-consuming to resolve and may harm our business and
reputation.
A
disaster could interrupt our services for an indeterminate length of time and
severely damage our business, prospects, financial condition and results of
operations. Our systems and operations are vulnerable to damage or interruption
from fire
,
floods
,
network
failure
,
hardware
failure
,
software
failure
,
power
loss
,
telecommunications failures
,
break-ins
,
terrorism, war or sabotage
,
computer
viruses
,
denial
of service attacks
,
penetration of our network by unauthorized computer users and “hackers” and
other similar events
,
and
other unanticipated problems.
We
may
not have developed or implemented adequate protections or safeguards to overcome
any of these events. We also may not have anticipated or addressed many of
the
potential events that could threaten or undermine our technology network. Any
of
these occurrences could cause material interruptions or delays in our business,
result in the loss of data or render us unable to provide services to our
customers. In addition, if a person is able to circumvent our security measures,
he or she could destroy or misappropriate valuable information or disrupt our
operations. We have deployed firewall hardware intended to thwart hacker
attacks. Although we maintain property insurance, our insurance may not be
adequate to compensate us for all losses that may occur as a result of a
catastrophic system failure or other loss, and our insurers may not be able
or
may decline to do so for a variety of reasons.
If
we
fail to address these issues in a timely manner, we may lose the confidence
of
our online advertisers and content licensees, our revenue may decline and our
business could suffer.
We
rely on outside firms to host our servers, and a failure of service by these
providers could adversely affect our business and
reputation.
We
rely
upon third party providers to host our main servers. In the event that these
providers experience any interruption in operations or cease operations for
any
reason or if we are unable to agree on satisfactory terms for continued hosting
relationships, we would be forced to enter into a relationship with other
service providers or assume hosting responsibilities ourselves. If we are forced
to switch hosting facilities, we may not be successful in finding an alternative
service provider on acceptable terms or in hosting the computer servers
ourselves. We may also be limited in our remedies against these providers in
the
event of a failure of service. In the past, we have experienced short-term
outages in the service maintained by one of our current co-location providers.
We also rely on third party providers for components of our technology platform,
such as hardware and software providers, credit card processors and domain
name
registrars. A failure or limitation of service or available capacity by any
of
these third party providers could adversely affect our business and
reputation.
Our
quarterly results of operations might fluctuate due to changes in the listing
parameters employed by search engines to show the results of a particular search
query, which could adversely affect our revenue and, in turn, the market price
of our common stock.
Our
revenue is heavily dependent on how search engines treat our content in their
indexes. In the event search engines determine that our content is not high
quality, such search engines may not rank our content as highly in their indexes
resulting in a reduction in our traffic, which may cause lower than expected
revenues. We are greatly dependent on a small number of major search engines,
namely Google, Yahoo!, MSN and AOL. Search engines tend to adjust their listing
parameters periodically and each adjustment tends to have an impact on how
our
content ranks in their indexes. These constant fluctuations could make it
difficult for us to predict future revenues.
Our
quarterly results of operations might fluctuate due to customer retention rates
for our content licensing product, which could adversely affect our revenue
and,
in turn, the market price of our common stock.
Our
revenue is dependent on our client retention rate. A decrease in the retention
rate could have a significant negative impact on our ongoing revenues, cash
flows and stock price. An increase in the churn rate could also adversely affect
our reputation, making it more difficult to obtain new clients, further
negatively impacting our revenues and cash flows.
We
are susceptible to general economic conditions, and a downturn in advertising
and marketing spending by merchants could adversely affect our operating
results.
Our
operating results will be subject to fluctuations based on general economic
conditions, in particular those conditions that impact merchant-consumer
transactions. If there were to be a general economic downturn that affected
consumer activity in particular, however slight, then we would expect that
business entities, including our current
online
advertisers
potential
online advertisers,
current
content
licensees and potential
content
licensees, could substantially and immediately reduce their advertising and
marketing budgets. We believe that during periods of lower consumer activity,
online spending on advertising and marketing is more likely to be reduced,
and
more quickly, than many other types of business expenses. These factors could
cause a material adverse effect on our operating results.
We
are exposed to risks associated with credit card fraud and credit payment,
and
we may suffer losses as a result of fraudulent data or payment failure by
merchant advertisers.
Many
of
our customers pay by credit card. We may suffer losses as a result of payments
made with fraudulent credit card data. Our failure to control fraudulent credit
card transactions adequately could reduce our gross profit margin. In addition,
under limited circumstances, we extend credit to online advertisers who may
default on their accounts payable to us.
Government
regulation of the Internet and online commerce may adversely affect our business
and operating results.
Companies
engaging in online search, commerce and related businesses face uncertainty
related to future government regulation of the Internet. Due to the rapid growth
and widespread use of the Internet, legislatures at the federal and state levels
are enacting and considering various laws and regulations relating to the
Internet. Furthermore, the application of existing laws and regulations to
Internet companies remains somewhat unclear. Our business and operating results
may be negatively affected by new laws, and such existing or new regulations
may
expose us to substantial compliance costs and liabilities and may impede the
growth in use of the Internet.
The
application of these statutes and others to the Internet search industry is
not
entirely settled. Further, several existing and proposed federal laws could
have
an impact on our business, for instance:
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the
Digital Millennium Copyright Act and its related safe harbors are
intended
to reduce the liability of online service providers for listing or
linking
to third-party websites that include materials that infringe copyrights
or
other rights of others; and
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the
CAN-SPAM Act of 2003 and certain state laws are intended to regulate
interstate commerce by imposing limitations and penalties on the
transmission of unsolicited commercial electronic mail via the
Internet.
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With
respect to the subject matter of each of these laws, courts may apply these
laws
in unintended and unexpected ways. As a company that provides services over
the
Internet, we may be subject to an action brought under any of these or future
laws governing online services. Many of the services of the Internet are
automated and companies, such as ours, may be unknowing conduits for illegal
or
prohibited materials. It is not known how courts will rule in many
circumstances; for example, it is possible that some courts could find strict
liability or impose “know your customer” standards of conduct in certain
circumstances.
We
may
also be subject to costs and liabilities with respect to privacy issues. Several
Internet companies have incurred costs and paid penalties for violating their
privacy policies. Further, it is anticipated that new legislation will be
adopted by federal and state governments with respect to user privacy.
Additionally, foreign governments may pass laws which could negatively impact
our business or may prosecute us for our products and services based upon
existing laws. The restrictions imposed by, and costs of complying with, current
and possible future laws and regulations related to our business could harm
our
business and operating results.
Online
commerce is relatively new and rapidly changing, and federal and state
regulations relating to the Internet and online commerce are evolving.
Currently, there are few laws or regulations directly applicable to the Internet
or online commerce on the Internet, and the laws governing the Internet that
exist remain largely unsettled. New Internet laws and regulations could dampen
growth in use and acceptance of the Internet for commerce. In addition,
applicability to the Internet of existing laws governing issues such as property
ownership, copyrights and other intellectual property issues, libel, obscenity
and personal privacy is uncertain. The vast majority of those laws were adopted
prior to the advent of the Internet and related technologies and, as a result,
do not expressly contemplate or address the unique issues presented by the
Internet and related technologies. Further, growth and development of online
commerce have prompted calls for more stringent consumer protection laws, both
in the United States and abroad. The adoption or modification of laws or
regulations applicable to the Internet could have a material adverse effect
on
our Internet business operations. We also are subject to regulation not
specifically related to the Internet, including laws affecting direct marketers
and advertisers.
In
addition, in 1998, the Internet Tax Freedom Act was enacted, which generally
placed a three-year moratorium on state and local taxes on Internet access
and
on multiple or discriminatory state and local taxes on electronic commerce.
This
moratorium has been extended until but we cannot predict whether this moratorium
will be extended in the future or whether future legislation will alter the
nature of the moratorium. If this moratorium is not extended in its current
form, state and local governments could impose additional taxes on
Internet-based transactions, and these taxes could decrease our ability to
compete with traditional retailers and could have a material adverse effect
on
our business, financial condition, results of operations and cash
flow.
In
addition, several telecommunications carriers have requested that the Federal
Communications Commission (“FCC”) regulate telecommunications over the Internet.
Due to the increasing use of the Internet and the burden it has placed on the
current telecommunications infrastructure, telephone carriers have requested
the
FCC to regulate Internet service providers and impose access fees on those
providers. If the FCC imposes access fees, the costs of using the Internet
could
increase dramatically. This could result in the reduced use of the Internet
as a
medium for commerce, which could have a material adverse effect on our Internet
business operations.
We
may incur liabilities for the activities of users of our service, which could
adversely affect our service offerings.
The
law
relating to the liability of providers of online services for activities of
their users and for the content of their merchant advertiser listings is
currently unsettled and could damage our business, financial condition and
operating results. Our insurance policies may not provide coverage for liability
arising out of activities of our users or merchant advertisers for the content
of our listings. Furthermore, we may not be able to obtain or maintain adequate
insurance coverage to reduce or limit the liabilities associated with our
businesses. We may not successfully avoid civil or criminal liability for
unlawful activities carried out by consumers of our services or for the content
of our listings. Our potential liability for unlawful activities of users of
our
services or for the content of our listings could require us to implement
measures to reduce our exposure to such liability, which may require us, among
other things, to spend substantial resources or to discontinue certain service
offerings.
RISKS
RELATING TO OUR
COMMON
STOCK
Applicable
SEC rules governing the trading of “penny stocks” limits the trading and
liquidity of our common stock which may affect the trading price of our common
stock.
Our
common stock is currently quoted on the NASD’s OTC Bulletin Board, and trades
below $5.00 per share
.
Therefore,
our common stock is considered a “penny stock” and subject to SEC rules and
regulations which impose limitations upon the manner in which such shares may
be
publicly traded. These regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the associated risks. Under these regulations, certain
brokers who recommend such securities to persons other than established
customers or certain accredited investors must make a special written
suitability determination regarding such a purchaser and receive such
purchaser’s written agreement to a transaction prior to sale. These regulations
have the effect of limiting the trading activity and reducing the liquidity
of
an investment in our common stock.
The
market price of our common stock is likely to be highly volatile and subject
to
wide fluctuations.
The
market price of our common stock is likely to be highly volatile and could
be
subject to wide fluctuations in response to a number of factors that are beyond
our control, including:
|
|
·
|
announcements
of new products or services by our competitors;
and
|
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|
·
|
fluctuations
in revenue attributable to changes in the search engine listing parameters
that rank the relevance of our
content.
|
In
addition, the market price of our common stock could be subject to wide
fluctuations in response to:
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|
·
|
quarterly
variations in our revenues and operating
expenses;
|
|
|
·
|
announcements
of technological innovations or new products or services by us;
and
|
|
|
·
|
significant
sales of our common stock by selling
stockholders.
|
Our
operating results may fluctuate significantly, and these fluctuations may cause
our common stock price to fall.
Our
operating results will likely vary in the future primarily as the result of
fluctuations in our revenues and operating expenses. If our results of
operations do not meet the expectations of current or potential investors,
the
price of our common stock may decline.
There
is a limited public market for shares of our common stock, which may make it
difficult for investors to sell their shares.
There
is
a limited public market for shares of our common stock. An active public market
for shares of our common stock may not develop, or if one should develop, it
may
not be sustained. Therefore, investors may not be able to find purchasers for
their shares of our common stock.
Item
2. Description of Property.
The
Company's corporate headquarters are located in Marina Del Rey, California.
The
Company has entered into a non-cancellable operating lease for facilities
originally through May 31, 2009 but which has an early termination provision
effective July 31, 2008 which has been exercised. The Company has monthly
payments of $17,980 from June 1, 2006 through May 31, 2007, $18,520 from June
1,
2007 through May 31, 2008 and $19,075 from June 1, 2008 through July 31, 2008.
Item
3. Legal Proceedings.
From
time
to time, we may be involved in litigation relating to claims arising out of
our
operations in the normal course of business. We currently are not a party to
any
legal proceedings, the adverse outcome of which, in management’s opinion,
individually or in the aggregate, would have a material adverse effect on our
results of operations or financial position.
On
February 28, 2007, the SEC commenced an enforcement action against Mr. Louis
Zehil, a partner of our former external legal counsel, McGuireWoods LLP, and
our
former corporate secretary, alleging that he had engaged in a fraudulent scheme
to obtain and sell to the investing public shares of securities in several
other
companies in violation of the antifraud and registration provisions of the
federal securities laws. The SEC enforcement proceeding does not include
allegations with respect to our securities; however, we commenced a review
into
possible unauthorized trading in our common stock facilitated by Mr. Zehil.
In
the fourth quarter of 2007 we reached a settlement with McGuireWoods LLP related
to their involvement in these activities. We cannot predict the outcome of
this
investigation as it is still ongoing or whether the investigation and/or any
potential proceedings resulting from this conduct might have a material adverse
impact on the Company.
Item
4. Submission of Matters to a Vote of Security Holders.
None.
PART
II
|
Item 5.
|
Market
for Common Equity Related Stockholder Matters
and
Small Business Issuer Purchases of Equity Securities.
|
Our
common stock is traded on the OTC Bulletin Board under the symbol “ISHM.OB”. The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
The
following table sets forth the high and low bid prices of our common stock
on
the OTC Bulletin Board for the stated calendar quarters.
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2006
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2007
|
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High
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Low
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High
|
|
Low
|
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First
Quarter
|
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0.74
|
|
|
0.41
|
|
|
0.27
|
|
|
0.18
|
|
|
Second
Quarter
|
|
|
0.48
|
|
|
0.23
|
|
|
0.22
|
|
|
0.12
|
|
|
Third
Quarter
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0.26
|
|
|
0.10
|
|
|
0.18
|
|
|
0.11
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Fourth
Quarter
|
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0.26
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|
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0.12
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0.18
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0.08
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The
closing bid price of our common stock on April 11, 2008 was $0.06. As of April
11, 2008, the Company had approximately 59 shareholders of record.
The
Company has never declared or paid dividends on its common stock and currently
does not intend to pay dividends on its common stock in the foreseeable future
so that it may reinvest earnings in its business. The payment of dividends,
if
any, in the future is at the discretion of the board of directors.
Item
6. Management’s Discussion and Analysis of Operations and Financial
Condition.
The
following discussion should be read in conjunction with the attached financial
statements and notes thereto. Except for the historical information contained
herein, the matters discussed below are forward-looking statements that involve
certain risks and uncertainties, including, among others, the risks and
uncertainties discussed below.
Our
actual results could differ materially from those anticipated in the
forward-looking statements as a result of various factors, including the risks
discussed in “Risk Factors” and elsewhere in this report. See “Forward-Looking
Statements.”
CRITICAL
ACCOUNTING POLICIES
Revenue
Recognition
The
Company recognizes revenue on arrangements in accordance with SEC
Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" and
No. 104 "Revenue Recognition," and Emerging Issues Task Force Issue 00-21,
"Revenue Arrangements with Multiple Deliverables." In all cases, revenue is
recognized only when the price is fixed or determinable, persuasive evidence
of
an arrangement exists, the service is performed, and collectibility of the
resulting receivable is reasonably assured.
The
Company’s revenues are derived principally from the licensing or sale of unique
content developed for its clients under the TrafficBuilder program or the sale
of advertising on a CPC basis to one of the websites in the Web Properties
group.
For
the
TrafficBuilder program, the Company derives revenue through the licensing and
sale of content to third party website
owners.
Content sale revenue is recognized when the content is delivered to and accepted
by the client. Revenue earned through a 12-month license agreement is treated
as
an installment sale and prorated revenue is recognized on a monthly basis over
the life of the agreement. Clients subject to a 12-month licensing agreement
have the right to continue leasing the content at the end of the term on a
month-to-month basis. In late September 2005, the Company added a month-to-month
licensing program with higher fees. Revenue earned under month-to-month
licensing agreements is recognized on a monthly basis. As part of the
TrafficBuilder program, the Company also earns revenue from related SEO
services, Web Design services, Web
Analytics
and Link Building sales. Revenue earned from SEO and Web Design services are
recognized as delivered while revenue from Web Analytics and Link Building
services are recognized on a monthly basis pursuant to a month-to-month license
agreement. Client deposits received in advance of work being completed for
such
services are deferred until the revenue is earned.
The
Company derives revenue from the ArticleInsider and Popdex websites in the
Web
Properties group on a CPC basis as traffic is distributed to Google AdSense
and
Kontera advertisers. The Company has established relationships with Google
and
Kontera through which they pays the Company monthly fees for clicks on
advertisements sponsored by Google or Kontera and displayed on the Company’s
websites. The Company recognizes revenue associated with the Google
AdSense
and
Kontera programs as reported by those partners to the Company at the end of
each
month.
Cost
of Sales
A
portion
of the Company’s cost of sales is related to content developed under the
TrafficBuilder program and for the ArticleInsider and Popdex websites as part
of
the Web Properties group.
For
the
TrafficBuilder program, content developed pursuant to outright sales and
licensing is developed through editors, keyword analysts and independent
contractor writers who analyze the keyphrases, write and edit the content.
The
Company recognizes and expenses those costs related to the content developed
for
outright sales to clients as the cost is incurred, while the cost of content
development for licensing subject to a 12-month contract is amortized over
the
life of the contract.
Content
developed pursuant to the Company's ArticleInsider website is capitalized to
content development since it increases the value of the network and yields
revenue to the Company over a period of years. These costs have been amortized
over an expected life of twelve months. The Company is no longer developing
new
content for the ArticleInsider website, a practice which was discontinued in
2005. The total value of unamortized content as of December 31, 2007 and
December 31, 2006 was $0 and $4,082, respectively. Total amortization expense
included in cost of sales for the year ended December 31, 2007 and 2006 was
$4,082 and $394,333, respectively.
Valuation
of Derivative Instruments
SFAS
No.
133 “Accounting for Derivative Instruments and Hedging Activities” requires that
embedded derivative instruments be bifurcated and assessed, along with
free-standing derivative instruments such as warrants, on their issuance date
and in accordance with EITF 00-19 “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” to
determine whether they should be considered a derivative liability and measure
at their fair value for accounting purposes. In determining the appropriate
fair
value, the Company uses the Black-Scholes option pricing formula
(“Black-Scholes”). At each period end, or when circumstances indicate that the
Company reevaluate the accounting of the derivative liability, derivative
liabilities are adjusted to reflect changes in fair value, with any increase
or
decrease in the fair value being recorded in results of operations as
adjustments to fair value of derivatives.
Equity
Warrant Asset
We
account for the equity warrant asset with net settlement terms to purchase
preferred stock of Demand Media as a derivative. Under the terms of the warrant,
InfoSearch is entitled to purchase 125,000 shares of Series C Preferred Stock
of
Demand Media at an exercise price of $3.85 per share. Under the accounting
treatment required by SFAS No. 133, equity warrant assets with net settlement
terms are recorded at fair value and are classified as investments on the
balance sheet.
The
fair
value of the Demand Media warrant is reviewed quarterly. We value the warrant
using the Black-Scholes option pricing model, which incorporates the following
material assumptions as of December 31, 2007:
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·
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Underlying
asset value was estimated based on information available, including
any
information regarding subsequent rounds of funding or initial public
offerings.
|
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·
|
Volatility,
or the amount of uncertainty or risk about the size of the changes
in the
warrant price, was based on public stock indices similar in nature
to the
business in which Demand Media operates and yielded a volatility
of
123.05%.
|
|
·
|
The
risk-free interest rate was 3.45%
|
|
·
|
Expected
remaining life of 3.5 years based on the contractual term of the
warrant.
|
The
valuation of the Demand Media warrant for the year ended December 31, 2006
is as
follows:
|
|
·
|
Underlying
asset value was estimated based on information available, including
any
information regarding subsequent rounds of funding or initial public
offerings.
|
|
|
·
|
Volatility,
or the amount of uncertainty or risk about the size of the changes
in the
warrant price, was based on indices similar in nature to the business
in
which Demand Media operates and yielded a volatility of
75.0%.
|
|
|
·
|
The
risk-free interest rate was 4.7%.
|
|
|
·
|
Expected
life of five years based on the contractual terms of the
warrant.
|
Any
changes from the grant date fair value of the equity warrant asset will be
recognized as increases or decreases to the equity warrant asset on our balance
sheet and as a change in the fair value of warrants within non-operating
expenses in the consolidated statement of operations.
During
the year ended December 31, 2007, the grant date fair value of the equity
warrant asset decreased by $196,788 from its original value of $308,837 at
December 31, 2006 primarily due to a shortening of duration and a change in
the
public securities used to estimate volatility.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
In
February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS No. 155”),
which amends SFAS No.133, “Accounting for Derivatives Instruments and Hedging
Activities” (“SFAS No. 133”) and SFAS No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities”(“SFAS No.
140”). SFAS No. 155 amends SFAS No. 133 to narrow the scope exception for
interest-only and principal-only strips on debt instruments to include only
such
strips representing rights to receive a specified portion of the contractual
interest or principal cash flows. SFAS No. 155 amends SFAS No. 140 to allow
qualifying special-purpose entities to hold a passive derivative financial
instrument pertaining to a beneficial interest that itself is a derivative
instrument. SFAS No. 155 is effective for financial instruments acquired,
issued, or subject to a remeasurement event for fiscal years beginning after
September 15, 2006. The adoption of SFAS 155 did not have a material impact
on the Company's results of operations and financial position.
In
March
2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
Assets” (“SFAS No.156”), which provides an approach to simplify efforts to
obtain hedge-like (offset) accounting. This Statement amends SFAS No. 140 with
respect to the accounting for separately recognized servicing assets and
servicing liabilities. SFAS No. 156(1) requires an entity to recognize a
servicing asset or servicing liability each time it undertakes an obligation
to
service a financial asset by entering into a servicing contract in certain
situations; (2) requires that a separately recognized servicing asset or
servicing liability be initially measured at fair value, if practicable; (3)
permits an entity to choose either the amortization method or the fair value
method for subsequent measurement for each class of separately recognized
servicing assets or servicing liabilities; (4) permits at initial adoption
a
one-time reclassification of available-for-sale securities to trading securities
by an entity with recognized servicing rights, provided the securities
reclassified offset the entity's exposure to changes in the fair value of the
servicing assets or liabilities; and (5) requires separate presentation of
servicing assets and servicing liabilities subsequently measured at fair value
in the balance sheet and additional disclosures for all separately recognized
servicing assets and servicing liabilities. SFAS No. 156 is effective for all
separately recognized servicing assets and liabilities as of the beginning
of an
entity's fiscal year that begins after September 15, 2006, with earlier adoption
permitted in certain circumstances. The Statement also describes the manner
in
which it should be initially applied. The adoption of SFAS 156 did
not have a material impact on the Company's results of operations and financial
position.
In
July
2006, the FASB released FASB Interpretation No. 48, "
Accounting
for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109"
("FIN
48"). FIN 48 clarifies the accounting and reporting for uncertainties in income
tax law. This interpretation prescribes a comprehensive model for the financial
statement recognition, measurement, presentation and disclosure of uncertain
tax
positions taken or expected to be taken in income tax returns. This Statement
is
effective for fiscal years beginning after December 15, 2006. The adoption
of
FIN 48 did not have a material impact on the Company’s results of operations and
financial position.
On
September 15, 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
which is effective for fiscal years beginning after November 15, 2007. This
statement defines fair value, specifies the acceptable methods for determining
fair value, and expands disclosure requirements regarding fair value
measurements. SFAS No. 157 is effective beginning January 1, 2008. In February
2008, the FASB deferred the adoption of SFAS No. 157 for one year as it applies
to certain times, including assets and liabilities measured at fair value in
a
business combination, reporting units and certain assets and liabilities
measured at fair value in connection with goodwill impairment tests in
accordance with SFAS No. 142 and long-lived assets measured at fair value for
impairment assessments under SFAS No. 144,
Accounting for the Impairment and
Disposal of Long-Lived Assets.
We are still required to adopt the
provisions of SFAS No. 157 in 2008 as it related to certain other items,
including those within the scope of SFAS No. 107,
Disclosure about Fair
Value of Financial Instrument
, and financial and nonfinancial derivatives
within the scope of SFAS No. 133. We believe that the adoption of SFAS No.
157
will not have a material impact on our consolidated financial position, results
of operations or cash flows.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements” (“SAB 108”). SAB108 provides guidance on the
consideration of the effects of prior year misstatements in quantifying current
year misstatements for the purpose of a materiality assessment. SAB 108
establishes an approach that requires quantification of financial statement
errors based on the effects of each of the company's balance sheet and statement
of operations and the related financial statement disclosures. SAB 108 permits
existing public companies to record the cumulative effect of initially applying
this approach in the first year ending after November 15, 2006 by recording
the
necessary correcting adjustments to the carrying values of assets and
liabilities as of the beginning of that year with the offsetting adjustment
recorded to the opening balance of retained earnings. Additionally, the use
of
the cumulative effect transition method requires detailed disclosure of the
nature and amount of each individual error being corrected through the
cumulative adjustment and how and when it arose. The adoption of this
pronouncement has not had a material impact on the Company's financial position
or statement of operations and cash flows.
In
September 2006, the FASB issued SFAS No. 158, “Employer's Accounting for Defined
Benefit Pension and Other Post Retirement Plans”. SFAS No. 158 requires
employers to recognize in its statement of financial position an asset or
liability based on the retirement plan's over or under funded status. SFAS
No.
158 is effective for fiscal years ending after December 15, 2006. The adoption
of this pronouncement has not had a material impact on the Company's
financial position or statement of operations and cash flows.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits
entities to choose to measure at fair value many financial instruments and
certain other items that are not currently required to be measured at fair
value. Subsequent changes in fair value for designated items will be required
to
be reported in earnings in the current period. SFAS No. 159 also establishes
presentation and disclosure requirements for similar types of assets and
liabilities measured at fair value. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently assessing the effect
of implementing this guidance, which directly depends on the nature and extent
of eligible items elected to be measured at fair value, upon initial application
of the standard on January 1, 2008.
In
December 2007, the FASB issued SFAS No. 141(revised 2007),
Business
Combinations
(“SFAS
No. 141R”), which revises current purchase accounting guidance in SFAS
No. 141,
Business
Combinations
.
SFAS
No. 141R requires most assets acquired and liabilities assumed in a
business combination to be measured at their fair values as of the date of
acquisition. SFAS No. 141R also modifies the initial measurement and
subsequent remeasurement of contingent consideration and acquired contingencies,
and requires that acquisition related costs be recognized as expense as incurred
rather than capitalized as part of the cost of the acquisition. SFAS
No. 141R is effective for fiscal years beginning after December 15,
2008 (the Company’s fiscal 2009) and is to be applied prospectively to business
combinations occurring after adoption. The impact of SFAS No. 141R on the
Company’s consolidated financial statements will depend on the nature and extent
of the Company’s future acquisition activities.
In
December 2007, the FASB issued SFAS No. 160. “Noncontrolling Interests in
Consolidated Financial Statements-and Amendment of ARB No. 51.” SFAS 160
establishes accounting and reporting standards pertaining to ownership interests
in subsidiaries held by parties other than the parent, the amount of net income
attributable to the parent and to the noncontrolling interest, changes in a
parent’s ownership interest, and the valuation of any retained noncontrolling
equity investment when a subsidiary is deconsolidated. This statement also
establishes disclosure requirements that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. SFAS 160 is effective for fiscal years beginning on or after December
15, 2008. Management has reviewed this new standard and believes that it
has no impact on the financial statements of the Company at this time; however,
it may apply in the future.
In
March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments
and
Hedging Activities ("SFAS 161"). SFAS 161 is intended to improve financial
reporting about derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects
on
an entity's financial position, financial performance, and cash flows. SFAS
161
achieves these improvements by requiring disclosure of the fair values of
derivative instruments and their gains and losses in a tabular format. It also
provides more information about an entity's liquidity by requiring disclosure
of
derivative features that are credit risk-related. Finally, it requires
cross-referencing within footnotes to enable financial statement users to locate
important information about derivative instruments. SFAS 161 will be effective
for financial statements issued for fiscal years and interim periods beginning
after November 15, 2008, will be adopted by the Company beginning in the first
quarter of 2009. The Company does not expect there to be any significant impact
of adopting SFAS 161 on its financial position, cash flows and results of
operations.
In
December 2007, the SEC issued SAB No. 110,
Certain Assumptions Used in
Valuation Methods - Expected Term
(
“
SAB
110
”
). According
to
SAB 110, under certain circumstances the SEC staff will continue to accept
beyond December 31, 2007 the use of the simplified method in developing an
estimate of expected term of share options that possess certain
characteristics in accordance with SFAS 123(R) beyond December 31, 2007. We
will adopt SAB 110 effective January 1, 2008 and continue to use the simplified
method in developing the expected term used for our valuation of stock-based
compensation.
RESULTS
OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
REVENUES
Revenues
decreased 35.4% to $4,910,304 for the year ended December 31, 2007 from
$7,600,060 for the year ended December 31, 2006. The decrease in revenue is
a
result of a 20.5% reduction in the sales and licensing of Content products
due
to the decision by Company Management to eliminate sales of our TrafficBuilder
products to certain underperforming customer categories and a 92.0% reduction
in
revenue associated with our Web Properties group, although much of this decrease
was simply due to the extinguishment of deferred revenue as described
below.
For
the
fourth fiscal quarter of 2007, however, revenues increased 5.3% to $1,253,387
from $1,190,000 for the three months ended September 30, 2007 as higher
sequential levels of content sales more than overcame decreasing Web Properties
revenue levels.
Revenue
from TrafficBuilder was $4,784,068 in 2007 versus $6,016,080 in
2006.
Revenue from TrafficBuilder products combined for 97.4% of total revenues for
2007 while revenue
for
Web
Properties accounted for only 2.6% in 2007. This compares with 79.2% and 20.8%
of revenues attributable to TrafficBuilder and Web Properties, respectively,
in
2006.
Revenue
from Web Properties was $126,236 in 2007 versus $1,583,980 in 2006. Most of
the
decrease was due to the extinguishment of deferred revenue in 2006, as the
actual revenue through Google AdSense decreased by only $103,689 to $126,236
in
2007 from $229,925 in 2006, and the remaining approximately $1,354,055 booked
as
revenue was simply deferred revenue being relieved from the balance sheet for
which cash had been received in 2004 and early 2005.
Looking
forward to the fiscal year ending December 31, 2008, we expect revenues to
be
challenged as a result of the expiration of our 18 month agreement
with Demand Media on March 31, 2008, which accounted for a significant portion
(24.8%) of 2007 revenue. While the Company has signed a new agreement with
Demand Media to produce expert content for one of its high-profile websites,
at
this point the Company only has commitments for $369,000 in 2008 revenue versus
the $1,217,124 of total 2007 revenues generated from the initial contract.
As a
result, going forward revenues and cash flows will be significantly impacted
unless this contract can effectively be replaced by Demand Media or other
similar customers.
COST
OF
SALES AND GROSS PROFIT
The
Company had a gross profit of $3,517,417 and a gross margin of 71.6% for the
year ended December 31, 2007 versus gross profits of $4,926,375 and a gross
margin of 64.8% for the comparable period of 2006. The cost of sales consists
principally of traffic purchased for resale, customer service and content
developed for sale or license to our clients.
The
decrease in gross profit for the year ended December 31, 2007 over the year
ended December 31, 2006 is mainly due to reduced revenues from the continued
aging of inactive websites in the Web Properties Group resulting in a reduction
in search engine traffic and revenue, combined with Management’s decision to
focus sales of our TrafficBuilder products on a subset of potential clients
who
could benefit the most from our products and services. This was partially offset
by the Company rationalizing headcount levels and costs to those required for
these new targeted prospects. We spent $0 in 2007 acquiring traffic for our
affiliate program that contributed to Web Properties revenue of $126,236 versus
the $937,960 we spent in 2006 associated with $1,583,980 in Web Properties
revenue. We discontinued the affiliate network program shortly after the
first quarter of 2006 as we had harvested a substantial portion of the remaining
deferred revenue associated with the Web Properties group.
For
the
years ended December 31, 2007 and 2006, $0 and $49,360, respectively, of content
development costs
of
the
Company were capitalized and amortized over their useful lives. The Company
recorded $0 and $192,808 in amortization expenses during 2007 and 2006,
respectively, associated with capitalized development costs for the Web
Properties group and recorded $4,082 and $201,525 in amortization expenses
during 2007 and 2006, respectively, associated with capitalized content
development costs for TrafficBuilder.
The
gross
profit attributable to Web Properties was $69,282 in 2007 versus $596,940 in
2006 and the gross profit attributable to TrafficBuilder was $3,448,135 in
2007
versus $4,329,435 in 2006. The gross margin experienced by Web Properties was
54.9% in 2007 versus 37.7% in 2006 and the gross margin experienced by
TrafficBuilder was
72.1%
in
2007 versus 72.0% in 2006.
OPERATING
EXPENSES
Operating
expenses consist of selling expenses and general and administrative expenses.
Selling
expenses consist of costs incurred to develop and implement marketing and sales
programs for the Company’s products for TrafficBuilder. These include costs
associated with the marketing department participation in trade shows, media
development and advertising. These selling expenses also include the costs
of
hiring and maintaining a sales department. These costs decreased 14.4% from
$2,138,695 for the year ended December 31, 2006 to $1,831,548 in the same period
of 2007 as the Company streamlined sales and marketing efforts and adjusted
the
compensation schedule to align the members of the sales team more specifically
with the overall goals of the Company.
General
and administrative expenses include personnel, rent, benefits, accounting,
legal
costs as well as the expensing of stock options and restricted stock grants,
depreciation and amortization and other overhead related costs. These costs
decreased 61.0% to $3,754,240 for the year ended December 31, 2007
from
$9,600,049 for the year ended December 31, 2006. This decrease is primarily
a
result of a reduced number of employees and executive compensation costs
including non-cash equity compensation expenses. Expenses associated with equity
grants to consultants, employees and members of the board of directors from
continuing operations for the year ended December 31, 2006 were $4,144,794,
which included expenses associated with stock option grants of $1,280,890 and
restricted stock issued to certain employees in lieu of cash compensation of
$45,000, primarily resulting from the Company’s decision to accelerate the
vesting of outstanding stock options and restricted stock grants on June 30,
2006 and expensing them. Expenses for depreciation and amortization from
continuing operations decreased to $118,535 for the year ended December 31,
2007
from $557,317 for the same period in 2006. Depreciation and amortization
expenses decreased in 2007 primarily as a result of decreased amortization
expenses associated with the reduction in amortization period to one year for
capitalized content development costs associated with our Web Properties group
in 2006. Amortization for capitalized content development decreased to $4,083
in
2007 from $394,333 the previous year.
LOSS
FROM
OPERATIONS
The
resulting Loss from Operations decreased 69.6% to $2,068,371 for the year ended
December 31, 2007 from $6,812,369 for the year ended December 31, 2006, largely
due to significantly lower expense levels during the second half of 2007.
And
for
the fourth fiscal quarter ending December 31, 2007, the Company posted an
Operating Profit of $24,390, continuing the trend of improvement during the
second half of the year from an Operating Loss of $184,491 during the third
quarter of 2007 which itself was 82.8% lower than the second quarter of
2007.
OTHER
NON-OPERATING INCOME/EXPENSE
Other
non-operating net income in 2007 is comprised of $252,707 in net income from
a
lawsuit settlement in December 2007, a change in the fair value of warrants
of
$233,285 as compared to $1,728,443 in 2006 and net interest income of $52,153
as
compared to $92,414 in 2006.
Other
non-operating net income in 2006 also included liquidated damages associated
with the November 2005 private placement of the Company’s securities and
interest income received on the cash balances the Company maintains in money
market and restricted cash accounts. Liquidated damages expense (including
interest) totaled $509,904 in for the year ended December 31, 2006.
DISCONTINUED
OPERATIONS
During
the year ended December 31, 2007 there were no discontinued
operations.
During
the year ended December 31, 2006, the gain on sale of the assets of
Answerbag
was
$1,919,962, partially offset by the loss from discontinued operations of
$412,132, which included depreciation and amortization expenses of $58,212
and
restricted stock expenses of $45,000. Expenses associated with option grants
to
employees involved in the operation of Answerbag were $33,451 for the year
ended
December 31, 2006.
TAXES
For
the
year ended December 31, 2007, the Company incurred a tax liability of $6,083,
comprised of $1,783 for Delaware corporate taxes, $3,050 for California state
taxes and $1,250 in Federal taxes.
For
the
year ended December 31, 2006, the Company incurred a tax liability of $18,585,
comprised of $8,300 for Delaware corporate taxes and $10,285 for California
state taxes.
NET
LOSS
We
had a
net loss of $1,536,309 or $0.03 per share in the year ended December 31,
2007, compared to net loss of
$
4,039,908,
or $0.09 per share
,
in the
comparable period of 2006. This decrease was due to a decrease in revenues
and
gross profit more than offset by a larger decrease operating expenses such
as
non-cash equity compensation, employee compensation and professional fees as
well as liquidated damages.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
decreased by $1,708,415 to $787,239 for the year ended December 31, 2007
relative to the Company’s fiscal year ending December 31, 2006. This decline is
mainly due to the use of cash on hand to fund operations principally during
the
first half of the year ended December 31, 2007, partially offset by the gross
proceeds of $450,000 from a legal settlement in the fourth quarter of
2007.
Cash
used
in operating activities consisted principally of cash used in the net loss
of
$1,536,309 along with the change in fair value of warrants of $233,285. This
was
offset by non-cash charges for equity based compensation of $157,959,
depreciation and amortization of $118,535, plus the net change of current assets
and current liabilities. The decrease in current assets and liabilities resulted
primarily from increases in accounts receivable of $171,277 and an increase
in
deferred revenue of $72,127, and netted against a decrease in accounts payable,
accrued expenses and other payables of $531,002.
Cash provided
by investing activities for years ended December 31, 2007 and 2006 was $271,567
and $1,989,729, respectively. For the year ended December 31, 2007, cash
provided by investing activities consisted primarily of the release of
restricted cash of $360,530. During 2006, cash provided by investing activities
consisted principally of the net proceeds from the sale of the Answerbag assets
of $2,937,149, offset by cash payments for the purchase of Answerbag of
$479,888, an increase in restricted cash of $380,530, the purchase of property
and equipment of $37,640 and $49,361 for development of content.
Cash
used
in financing activities for the year ended December 31, 2007 of $14,021,
consisted primarily of $17,621 in payments related to capital lease obligations
which are now entirely satisfied, partially offset by stock warrants exercised
for $3,600. Cash used in financing activities for the year ended December 31,
2006 of $27,229 consisted of $33,004 in principal payments on capital leases
partially offset by $5,775 for the exercise of stock options.
As
of
December 31, 2007, the Company had cash and cash equivalents amounting to
$787,239 a decrease of $1,708,415 from the balance at December 31, 2006.
Restricted cash for the year ending 2007 was $20,000 in a certificate of deposit
securing payment obligations. Cash and cash equivalents include cash on hand
and
cash in banks in demand and time deposit accounts with maturities of 90 days
or
less. At year ending December 31, 2006, the Company had $380,530 in restricted
cash including $302,108 in escrow from the sale of Answerbag, Inc., $23,422
held
at various financial institutions and online payment processing firms, and
$55,000 in certificate of deposits securing payment obligations. The Company
had
net working capital of $170,999 and $1,750,263 at December 31, 2007 and December
31, 2006. The use of cash from operating activities declined significantly
in
the final quarter of 2007 due to significant reductions in going forward
operating expense levels from earlier in the year. Accordingly, the Company
did not need any additional capital during 2007, as forecast.
Going
forward, we expect revenues to be challenged as a result of the expiration
of an
agreement with Demand Media signed in the fourth quarter of 2006 which expired
on March 31, 2008 and accounted for a significant portion (24.8%) of 2007
revenue. While the Company has signed a new agreement with Demand Media to
produce expert content for one of its high-profile websites, at this point
the
Company only has commitments for $369,000 in 2008 revenue versus the $1,217,124
of total 2007 revenues generated from the initial contract. As a result, going
forward revenue and cash flows will be significantly impacted unless this
contract can effectively be replaced by Demand Media or other similar customers.
There
are
no material commitments for additional capital expenditures at December 31,
2007
or December 31, 2006. The operating lease for the offices has future minimum
lease payments of $130,750 in 2008.
FINANCING
Although
the Company posted a net loss of $1,531,721 and cash actually decreased by
$1,922,201 for the first half of 2007, this was reduced to a net loss of $4,588
for the second half of the year as a result of significantly lower operating
expenses. As a result the Company had no need to seek outside financing during
2007 due to its improved operating performance, as cash from operations met
all
cash requirements. After the extinguishment of its capital leases in the
fourth quarter, the Company has no debt obligations.
The
Company is attempting to attract major accounts to replace revenues
from Demand Media, partnering with resellers to increase its effective
distribution, providing new payment terms to clients as well as looking for
acquisition opportunities. As a result the Company will seek external financing
in 2008 to allow it to support both working capital and acquisition
requirements.
OFF-BALANCE
SHEET ARRANGEMENTS
The
Company has no off-balance sheet arrangements at December 31, 2007 or December
31, 2006.
Item
7. Financial Statements.
The
financial statements and related financial statement schedules are included
herein and filed as a part of this report beginning on page F-1.
Item
8. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure.
None.
Item
8A. Controls and Procedures.
(a)
Evaluation of Disclosure Controls and Procedures
The
term
“disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e)
of the Exchange Act. This term refers to the controls and procedures of a
company that are designed to ensure that information required to be disclosed
by
a company in the reports that it files under the Exchange Act is recorded,
processed, summarized, and reported within the required time periods. Our Chief
Executive Officer and our Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures as of December 31,
2006.
As a result of the material weakness described below, they have concluded that
our disclosure controls and procedures were not effective as of December 31,
2006 in providing reasonable assurance that information required to be disclosed
by the Company in reports that it files or submits under the Exchange Act was
properly recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms.
As
described below, the Company restated its financial statements for the fiscal
year ended December 31, 2006. Management has concluded that this restatement
resulted from how the Company accounted for cancelled stock options upon the
termination of employees. Under standards established by the Public Accounting
Oversight Board a “material weakness” is a significant deficiency, or
combination of deficiencies, that results in more than a remote likelihood
that
a material misstatement of the annual or interim financial statements will
not
be prevented or detected. A “significant deficiency” is a control deficiency, or
combination of control deficiencies, that adversely affects our ability to
initiate, authorize, record, process, or report external financial data reliably
in accordance with generally accepted accounting principles such that there
is
more than a remote likelihood that a misstatement of our annual or interim
financial statements that is more than inconsequential will not be prevented
or
detected.
At
the
beginning of 2006, we adopted FASB 123R,
Share
Based Payment
,
and
began recording expenses associated with stock option and restricted stock
grants to employees. The Company previously accounted for cancelled stock
options upon the termination of employees by recording an expense for the
unvested portion of each terminated employee’s options. Upon further examination
of our accounting methodology for cancelled stock options, we determined this
to
be in error. We have determined that the cancelled stock options should not
have been expensed and have restated our financial information for the fiscal
year ended December 31, 2006.
In
order
to remediate this material weakness, the Company has hired an outside
consultant to assist it in addressing and resolving accounting and
reporting matters for certain equity issuances and other complex transaction
that involve the application of highly specialized accounting principles so
that
as of December 31, 2007 this was no longer a material weakness.
Under
the
supervision and with the participation of our management, including the Chief
Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of our disclosure controls and procedures as required by Exchange
Act Rule 13a-15(b) as of the end of the period covered by this report. Based
on
that evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures are effective as of
December 31, 2007.
(b)
Management’s Report on Internal Control over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for the Company. Internal control over
financial reporting is a process to provide reasonable assurance regarding
the
reliability of our financial reporting for external purposes in accordance
with
accounting principles generally accepted in the United States of America.
Internal control over financial reporting includes maintaining records that
in
reasonable detail accurately and fairly reflect our transactions; providing
reasonable assurance that transactions are recorded as necessary for preparation
of our financial statements; and providing reasonable assurance that
unauthorized acquisition, use or disposition of company assets that could have
a
material effect on our financial statements would be prevented or
detected on a timely basis. Because of its inherent limitations, internal
control over financial reporting is not intended to provide absolute assurance
that a misstatement of our financial statements would be prevented or
detected.
Management
conducted an evaluation of the effectiveness
of our internal control over financial reporting based on the framework in
Internal Control - Integrated Framework
issued by
the Committee of Sponsoring Organizations of the Treadway Commission
("COSO"). Based on this evaluation, managment concluded that the company's
internal control over financial reporting was effective as of December 31,
2007. There were no changes in our internal control over financial reporting
during the quarter ended December 31, 2007 that have materially affected, or
are
reasonably likely to materially affect, our internal control over financial
reporting. Our independent auditors have not audited and are not required to
audit this assessment of our internal control over financial reporting for
the
fiscal year ended December 31, 2007.
Item
8B. Other Information.
None.
PART
III
Item
9. Directors and Executive Officers.
The
following table contains information with respect to our executive officers
and
directors, including their ages as of February 28, 2008. There are no family
relationships between any of our executive officers or directors.
|
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
|
|
George
Lichter
|
|
55
|
|
Director,
President and Chief Executive Officer
|
|
|
|
|
|
|
|
Scott
Brogi
|
|
43
|
|
Vice
President and Chief Financial Officer
|
|
|
|
|
|
|
|
John
LaValle
|
|
51
|
|
Director,
Chairman of the Audit Committee
|
George
Lichter
-
Mr.
Lichter has served as a director, President and Chief Executive
Officer
of
the
Company since August 2005. Prior to joining the Company, Mr. Lichter co-founded
and served as Co-Chief Executive Officer of the Whole Body/Yoga Works, a
national family of Yoga and alternative health and fitness centers from January
2002 through August 2005. He currently serves there as a member of the
board
of
directors.
Prior to co-founding Whole Body/Yoga Works, Mr. Lichter served concurrently
as
President of Ask Jeeves International and Chief Executive Officer of Ask Jeeves
UK from May 1999 through January 2002. Prior to Ask Jeeves, Mr. Lichter was
the
Senior Vice President of Vivendi/Havas Interactive which, prior to its
divestiture, was Cendant Software from 1994 through April 1999. Prior to that,
Mr. Lichter was an entertainment attorney in the Beverly Hills law firm of
Rosenfeld, Meyer & Susman. Mr. Lichter graduated Phi Beta Kappa with a
bachelor’s degree from UCLA and received a Juris Doctor degree from Stanford Law
School.
Scott
Brogi
-
Mr.
Brogi has served as the Chief Financial Officer
of
the
Company since June 2007 and was elected Corporate Secretary on June 11, 2007.
Prior to joining the Company,
Mr.
Brogi
held senior finance and business development positions with a variety of public
and private firms such Pictage, Inc. from May 2000 to May 2006 where he managed
both finance and business development leading to a sale to global private equity
firm Apax Partners. Prior to that, he ran operations and corporate development
for several early stage digital entertainment and health care companies,
including institutionally-funded AccentCare where he managed the entire
acquisition process and before that at a division of publicly-traded ARV
Assisted Living where he helped build a nationwide footprint of in-facility
rehabilitation units that were ultimately sold to a public pharmaceutical
company, from 1997 to 2000. Mr. Brogi began his career with progressively
escalating responsibilities in corporate and investment banking at Chase
Manhattan during the period from 1987 to 1993 and later at Houlihan, Lokey,
Howard & Zukin with responsibility for financial analytics and relationship
management with an emphasis on emerging digital technologies related to the
Internet from 1995 to 1997. Mr. Brogi received his Bachelor of Science from
Syracuse University in 1987 and his MBA from The UCLA Anderson School of
Management in 1995.
John
LaValle
-
Mr.
LaValle has been a director since May 3, 2005. Mr. LaValle has over 20 years
of
experience with high-growth technology companies during which time he has helped
raise more than $700 million in funding through venture capitalists, bank and
lease financing, and public offerings. He has completed three successful IPOs
and one of the largest secondary offerings ever done by any Internet company.
From July 2005 until June 2006, Mr. LaValle was the COO and CFO of National
Beverage Properties, a real estate company. From February 2004 until July 2005,
Mr. LaValle was the CFO of TelASIC Communications, a communication chips and
subsystems manufacturer. From April 2001 until August 2002, Mr. LaValle was
the
CFO of Kotura, Inc., a manufacturer of integrated photonics. Mr. LaValle also
provided consulting services to TelASIC Communications and Kotura, Inc. from
August 2002 until February 2004. Prior to Kotura, Mr. LaValle was CFO of
Lightcross, Inc. a manufacturer of integrated, silicon-based optical products
for telecommunications equipment. Prior to that, he was CFO and Executive Vice
President of Operations of Stamps.com (IPO in 1999), CFO of Comcore
Semiconductor, a high-performance DSP company (acquired by National
Semiconductor in 1998), and CFO of Trikon Technologies (IPO in 1995), a chemical
vapor deposition and plasma etch semiconductor equipment manufacturer. Mr.
LaValle also served as CFO of Superconductor Technologies (IPO in 1992), a
manufacturer of high temperature thin film superconductors used in cellular
base
station applications, and as CFO of PS Medical, a manufacturer of implantable
neurosurgery products. Early in his career, he held senior financial analyst
positions with Chevron Corporation and Andersen Consulting. Mr. LaValle received
his undergraduate degree with Summa Cum Laude honors from Boston College, and
earned his MBA from Harvard Business School where he was awarded multiple
Fellowships. Mr. LaValle also sits on the board of CyberDefender, a Santa
Monica, CA based private company producing anti-spyware
software.
Code
of Ethics
We
have
adopted a code of ethics which is applicable to the Company’s principal
executive officer, principal financial officer, principal accounting officer
or
controller, or persons performing similar functions. A copy of our code of
ethics may be requested without charge by contacting the Company’s Chief
Financial Officer at the Company’s principal executive offices located at 4086
Del Rey Avenue, Marina Del Rey, California 90292.
Audit
Committee and Audit Committee Financial Expert
The
board
of directors established an Audit Committee on December 14, 2005.
John
LaValle is the
initial
and sole
member
of
the
Audit Committee. The board of directors has determined that Mr. LaValle is
independent
as
defined in the standards established by the SEC, is financially literate and
is
a “financial expert” as defined in the SEC rules.
Procedure
for the Consideration of Board Candidates Submitted by
Stockholders
The
board
of directors established a Nominating Committee on May 9, 2006. John
LaValle is the sole member of the Nominating Committee. The board of
directors has
adopted
procedures for
the
submission of director nominees by stockholders for consideration by
the board. If a determination is made that an additional director is
required, the board will consider nominees submitted by the Company’s
stockholders. Stockholders can submit qualified names of nominees for director
by writing to our Corporate Secretary, Scott Brogi, at 4086 Del Rey Avenue,
Marina Del Rey, California 90292. For such nominee to be considered, the
nomination must be received by the Corporate Secretary not less than 90 days
prior to the date of the Company’s proxy materials for the preceding year’s
annual meeting and the nomination must include the following
information:
|
·
|
the
name and address of the proposing stockholder as it appears on the
Company’s books and the number of shares of Common Stock that are owned
beneficially by such stockholder (if the stockholder is not a holder
of
record appropriate evidence of the stockholder’s ownership must be
submitted with the nomination);
|
|
·
|
the
name, address and contact information of the nominee;
|
|
·
|
a
statement of the nominee’
s
business and educational
experience;
|
|
·
|
detailed
information about any relationship or understanding between the proposing
stockholder and the nominee or any other stockholder or group of
stockholders; and
|
|
·
|
a
statement that the nominee is willing to be considered and willing
to
serve as a director if nominated and
elected.
|
Communications
with the Board of Directors
The
board
of directors has established a process for stockholders to communicate with
members of the board. If you would like to contact the board
,
you can
do so by forwarding your concern, question or complaint to the Company’s
Corporate Secretary, Scott Brogi, at 4086 Del Rey Avenue, Marina Del Rey,
California 90292.
Item
10. Executive Compensation.
SUMMARY
COMPENSATION TABLE
The
following tables summarize the annual compensation paid and options granted
for
the two years ended December 31, 2007 and 2006
to
the
Company’s Chief Executive Officer and other executive officers whose total
annual salary and bonus for 2007 or 2006 exceeded $100,000:
|
Name
and
Principal
Position
(a)
|
|
Year
(b)
|
|
Salary
($)
(c)
|
|
Bonus
($)
(d)
|
|
Stock
Awards
($)
(e)
|
|
Option
Awards
($)
(f)
|
|
Non-
Equity
Incentive
Plan
Compensation
($)
(g)
|
|
Non-
Qualified
Deferred
Compensation
Earnings
($)
(h)
|
|
All
other
Compensation
($)
(i)
|
|
Total
($)
(j)
|
|
|
George
Lichter (1)
|
|
|
2007
|
|
|
250,000
|
|
|
139,255
|
|
|
0
|
|
|
|
|
|
0
|
|
|
0
|
|
|
7,200
|
|
|
0
|
|
|
Chief
Executive Officer
|
|
|
2006
|
|
|
200,000
|
|
|
359,501
|
|
|
1,111,512
|
|
|
|
|
|
0
|
|
|
0
|
|
|
9,600
|
|
|
1,713,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott
Brogi (2)
|
|
|
2007
|
|
|
108,958
|
|
|
0
|
|
|
0
|
|
|
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Chief
Financial
Officer
|
|
|
2006
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frank
Knuettel II (3)
|
|
|
2007
|
|
|
191,339
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Chief
Financial
Officer
|
|
|
2006
|
|
|
182,917
|
|
|
138,236
|
|
|
318,731
|
|
|
274,651
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
814,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bob
Myers (4)
|
|
|
2007
|
|
|
137,397
|
|
|
0
|
|
|
0
|
|
|
250,000
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Vice
President, Production
|
|
|
2006
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heather
Gore (5)
|
|
|
2007
|
|
|
141,059
|
|
|
0
|
|
|
0
|
|
|
125,000
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Vice
President, Marketing
|
|
|
2006
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
Warthen (6)
|
|
|
2007
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Vice
President and Chief Technology Officer
|
|
|
2006
|
|
|
14,750
|
|
|
0
|
|
|
90,000
|
|
|
400,000
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
112,083
|
|
(1)
Mr.
Lichter was hired as our Chief Executive Officer as of August 2005 and entered
into an employment agreement on January 4, 2006. All Other Compensation for
Mr.
Lichter is comprised of a car allowance.
(2)
Mr.
Brogi was hired as our Chief Financial Officer as of June 2007.
(3)
Mr.
Myers was hired as our Vice President, Production as of January 2007. On March
7, 2008, Mr. Myers was terminated.
(4)
Ms.
Gore was hired as our Vice President, Marketing as of January 2007. On March
10,
2008, Heather Gore resigned effectively but entered into a consulting
agreement.
(5)
Mr.
Knuettel was hired as our Chief Financial Officer as of March 2005 and resigned
effective June 2007.
(6)
Mr.
Warthen was hired as an Executive Vice President and Chief Technology Officer
as
of July 2006. Mr. Warthen’s employment agreement with the Company provides for
an initial annual base salary of $180,000, which shall be paid in cash or shares
of InfoSearch common stock issued, at the Company’s option,. The Company has the
right to pay Mr. Warthen in cash or stock for the first year of his employment,
which began on July 1, 2006. The Company elected to pay Mr. Warthen with stock
for the first year and Mr. Warthen is receiving his base salary in the form
of
common stock, which amounts to 107,143 shares per month, or portion thereof,
for
a total of 1,285,714 shares through the one year anniversary date of his
employment with the Company. The number of shares was determined based on the
fair market value of the Company’s common stock on September 30, 2006. Through
June 15, 2007, Mr. Warthen earned 641,000 shares of our common
stock.
OUTSTANDING
EQUITY AWARDS AT FISCAL-YEAR END
|
|
|
Option
awards
|
|
Stock
awards
|
|
|
Name
(a)
|
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
(b)
|
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
(c)
|
|
Equity
Incentive
Plan
Awards:
Number
of
Securities
Underlying
Unexercised
Unearned
Options
(#)
(d)
|
|
Option
Exercise
Price
($)
(e)
|
|
Option
Expiration
Date
(f)
|
|
Number
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
(#)
(g)
|
|
Market
Value
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
($)
(h)
|
|
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares
or
Units
or
Other
Rights
That
Have
Not
Vested
(#)
(i)
|
|
Equity
Incentive
Plan
Awards:
Market
or
Payout
Value
of
Unearned
Shares,
Units
or
Other
Rights
That
Have
Not
Vested
($)
(j)
|
|
|
George
Lichter
CEO
(1)
|
|
|
325,000
|
|
|
0
|
|
|
0
|
|
|
0.17
|
|
|
12/10/2016
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
447,150
|
|
|
0
|
|
|
0
|
|
|
0.20
|
|
|
1/12/2017
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
184,283
|
|
|
1,140,717
|
|
|
0
|
|
|
0.20
|
|
|
1/12/2017
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
(1)
On
December 12, 2006, the board of directors approved options to purchase up to
2,097,150 shares of the Company’s common stock to George Lichter. Pursuant to
the terms and subject to the limitations of the Stock Option Plan, such grant
to
Mr. Lichter could not exceed options to purchase up to 325,000 shares of common
stock. The Company has treated the portion of such grant to the extent it
exceeded options to purchase 325,000 options as invalid and void ab initio.
The
valid portion of the grant that survived was for options to purchase 325,000
shares of common stock. Such options were 100% vested on the date of the grant,
have a term of ten years, have an exercise price of $0.17 per share, and are
subject to the terms and conditions of the Stock Option Plan. On January 12,
2007, the Company granted Mr. Lichter options to purchase an aggregate of
1,772,150 shares of common stock. Of this amount, options to purchase up to
1,000,000 shares of common stock were granted under the Stock Option Plan,
have
a term of ten years, and have an exercise price of $0.20 per share, of which,
options to purchase up to 447,150 shares of common stock were 100% vested on
the
date of the grant and options to purchase up to 552,850 shares of common stock
vest in equal monthly installments over the 36 month period following the date
of the grant. The remaining options to purchase 772,150 shares of common stock,
pursuant to the January 12, 2007 grant, were granted pursuant to the terms
of a
separate grant agreement, which options will vest immediately upon the first
occurrence of the Company reporting a net profit for a full fiscal year
following fiscal year 2006. These options are for a term of ten years, have
an
exercise price of $0.20 per share, and are subject to terms substantially
similar to grants under the Stock Option Plan.
DIRECTOR
COMPENSATION
We
compensate our non-employee directors, John LaValle and Claudio Pinkus for
their
service as members of our board of directors. Management directors do not
receive any compensation for their services as directors other than the
compensation they receive as our officers.
|
Name
(a)
|
|
Fees
Earned
or
Paid
in
Cash
($)
(b)
|
|
Stock
Awards
($)
(c)
|
|
Option
Awards
($)
(d)
|
|
Non-
Equity
Incentive
Plan
Compensation
($)
(d)
|
|
Change
in
Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings
(f)
|
|
All
Other
Compensation
($)
(g)
|
|
Total
($)
(h)
|
|
|
Claudio
Pinkus (1)
|
|
$
|
37,500
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
37,500
|
|
|
John
LaValle (2)
|
|
$
|
50,000
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
50,000
|
|
(1)
Mr.
Pinkus receives $50,000 per year for his service as a director and Executive
Chairman. On April 4, 2005, the date of his appointment to the board of
directors, Mr. Pinkus was granted 100,000 shares of restricted stock which
vested on April 4, 2006, the one year anniversary of his appointment. Pursuant
to a consulting arrangement with the Company, Mr. Pinkus received during fiscal
year 2006, 1,800,027 shares of restricted stock valued at $1,111,512, consulting
income of $75,000, health care reimbursements of $7,200 and bonuses of
$288,838.
(2)
Mr.
LaValle receives $25,000 per year for his service as a director and an
additional $25,000 per year for his service as the chair and sole member of
the
Audit Committee.
Employment
Agreements
We
entered into an employment agreement effective August 23, 2005 with George
Lichter as Chief Executive Officer, which was subsequently amended effective
July 1, 2006 (as amended,
the
“Lichter Employment Agreement”). The Lichter Employment Agreement, as amended,
provides for an annual base salary of $250,000,
subject
to annual increases, and an annual performance-based bonus of up to $150,000.
In
addition, Mr. Lichter receives an automobile allowance of $600 per
month.
Pursuant
to the Lichter Employment Agreement, Mr. Lichter was granted, under the Stock
Option Plan, a restricted stock award representing 675,000 shares of our common
stock, of which 225,000 shares vested on January 4, 2006 and the remaining
shares vested in three installments of 150,000 shares each on February 23,
2006,
April 23, 2006 and August 23, 2006.
Mr.
Lichter may participate, as a selling stockholder, in any financing transaction
undertaken by us for the purpose of satisfying the tax liability incurred by
Mr.
Lichter as a result of the restricted stock award. Pursuant to the Lichter
Employment Agreement, the Company paid Mr. Lichter’s tax liability in connection
with his restricted stock grant.
Lichter
was also subsequently granted an additional stock award representing 675,000
shares of our common stock, of which 225,000 shares vested on January 4, 2006
and the remaining shares vested in three installments of 150,000 shares each
on
February 23, 2006, April 23, 2006 and August 23, 2006.
Pursuant
to the decision by the board of directors to accelerate the vesting of
outstanding options and shares of restricted stock, all of these options and
shares of restricted stock became fully exercisable as of June 30, 2006.
Mr.
Lichter may terminate the Lichter Employment Agreement and his employment with
the Company for Good Reason (as defined in the Lichter Employment Agreement),
including in connection with a Change of Control (as defined in the Lichter
Employment Agreement) that results in the termination of Mr. Lichter’s
employment with the Company or a material adverse change in Mr. Lichter’s duties
and responsibilities. If Mr. Lichter terminates the Lichter Employment Agreement
and his employment with the Company for Good Reason or in connection with a
Change of Control as described above, or if the Company terminates the Lichter
Employment Agreement and Mr. Lichter’s employment with the Company without Cause
(as defined in the Lichter Employment Agreement) (and, with respect to (ii),
(iii) and (iv) below, so long as Mr. Lichter has not and does not violate
certain provisions of the Lichter Employment Agreement), the Company will
pay
or
provide to Mr. Lichter: (i) any earned but unpaid base salary, unpaid pro rata
annual bonus and unused vacation days accrued through his last day of employment
with the
Company,
including any carryover days; (ii) Mr. Lichter’s full base salary for six
months; (iii) Mr. Lichter’s annual bonuses that he would have been awarded
during the same six month period; and (iv) continued coverage, at the Company’s
expense, under all benefits plans in which Mr. Lichter was a participant
immediately prior to his last date of employment with the Company. In addition,
any unvested shares of restricted common stock granted pursuant to the Lichter
Employment Agreement will automatically vest.
Employment
under the Lichter Employment Agreement is at will and therefore InfoSearch
may
terminate Mr. Lichter’s employment at any time and for any reason subject to the
provisions set forth above.
On
May 1,
2007, the Company, entered into a Second Amendment to Employment Agreement
(the
“Second Amendment”) with George Lichter, the Company's Chief Executive Officer
and a director of the Company. The Second Amendment, effective as of January
12,
2007, amends Mr. Lichter's Employment Agreement dated January 4, 2006 and
effective as of August 23, 2005, as amended by the Amendment to Employment
Agreement, effective as of July 1, 2006 (as amended by the Amendment to
Employment Agreement, the “Employment Agreement”) and among other things, that
Mr. Lichter is eligible to receive a quarterly bonus in an amount not to exceed
25% of his then current base salary for each calendar quarter (or a pro-rata
portion of such bonus in the case of a period of less than three months) within
the board of directors' sole discretion and also revises the definition of
a
“Change of Control” so that a change of ownership in the outstanding voting
securities of the Company constituting a “Change of Control” is determined based
on the outstanding voting securities owned collectively by the common
stockholders and warrant holders of the Company as of January 12, 2007, rather
than August 23, 2005 as provided for in the Employment Agreement prior to the
Second Amendment.
On
June
9, 2007, the Company entered into an employment agreement with Scott Brogi,
the
Company's Chief Financial Officer with an annual base salary of $200,000.
Additionally Mr. Brogi is eligible for a bonus of 40% of his base salary. The
basis for this bonus is revenue and operating income goals and individual goals
to be determined. Mr. Brogi also received an option to purchase 1,000,000 shares
of the Company's Common stock at $0.14 per share, the closing price as of June
11, 2007. These options were granted on June l1, 2007, expire ten years after
the grant date and vest on an equal monthly basis over a 36 month period. In
the
event Mr. Brogi’s employment is terminated or his responsibilities are
materially reduced within 12 months of a change of control of the Company,
Mr.
Brogi will receive six months of base salary and a 6 month acceleration of
vesting of these stock options. Change of control is defined as the acquisition
by a single shareholder (or beneficial owner) of a minimum of 51% of the then
outstanding ordinary shares of the Company. Upon termination, death or long
term
disability, Mr. Brogi receives additional benefits under the agreement. If
termination is without cause, he is entitled to 3 months salary, any bonus
earned through the date of termination and 3 months acceleration of vesting
of
his stock options.
We
entered into an executive employment agreement with Frank Knuettel II, dated
March 8, 2005
(the
“Knuettel Employment Agreement”). The Knuettel Employment Agreement provides for
an initial annual base salary of $175,000, provided that if Mr. Knuettel remains
in the employment of the Company in the month following the second consecutive
quarter that the Company is profitable on a GAAP basis, his
a
nnual
base salary will be increased to $185,000. The Knuettel Employment Agreement
further provides for a potential target bonus equal to 30% of
his
then
current annual base salary, contingent on the Company’s achieving revenue and
operating income goals and Mr. Knuettel’s attaining individual goals established
by the board
of
directors. Under the Knuettel Employment Agreement, Mr. Knuettel received
options to purchase up to 262,500 shares of our common stock at an exercise
price of $0.76 per share pursuant to the Stock Option Plan, which vest over
a
four-year period. Additionally, Mr. Knuettel received an award of 352,500
restricted shares of our common stock, which also vest over a four-year period
of his employment with the Company. Mr. Knuettel was also subsequently granted
an additional stock award representing 167,500 shares, under which 25% of the
shares vested on January 4, 2006, 12.5% of the shares vested
on
July
7, 2006 and the remaining shares will vest over three years in equal, monthly
installments, ending on January 4,
2009.
Mr.
Knuettel was granted an additional option award representing 82,500 shares,
under which 25% of the shares vested on January 4, 2006, 12.5% of the shares
vested on July 7, 2006 and the remaining shares will vest over three years
in
equal, monthly installments, ending on January 4, 2009. Pursuant to the decision
by the board of directors to accelerate the vesting of outstanding options
and
shares of restricted stock, all of these options and shares of restricted stock
became fully exercisable as of June 30, 2006. Mr. Frank Knuettel, II, resigned
as Chief Financial Officer of the Company effective June 15, 2007. Thereafter
Mr. Knuettel was party to a consulting agreement whereby he provided certain
ongoing services to the Company through September 15, 2007 for which he received
cash compensation as well as 100,000 shares of restricted stock which have
fully
vested in three essentially equal monthly installments through September 15,
2007.
We
made
an offer of employment, which was accepted and may be deemed an employment
agreement, to Robert Myers, our Vice President of Production on January 8,
2008
(the
“Myers Employment Agreement”). The Myers Employment Agreement does not have a
termination date and sets forth the following terms and conditions: During
the
Term, the Company shall pay, and the Executive agrees to accept, in
consideration for the Executive’s services hereunder,
pro
rata
semi-monthly payments of the annual salary of $140,000.00, less all applicable
taxes and other appropriate deductions. The Executive’s base salary will be
subject to further adjustment pursuant to the Company’s employee compensation
policies in effect from time to time.
The
Executive shall be entitled to a potential target bonus of thirty-five percent
(35%) of Executive’s annual base salary. Subject to the Board’s consent, the
Company shall issue to the Executive an option to acquire 250,000 shares of
the
Company’s common stock (the “Common Stock”) pursuant to the Company’s 2004 Stock
Option Plan, as amended on December 12, 2006 (the “Plan”).
The
exercise
price of the option to be granted pursuant to this paragraph 9(a) shall be
equal
to the fair market value per share of the Common Stock as determined by the
closing price on the date of the grant. Such grant shall be evidenced by and
subject to the terms and conditions of an option agreement in a form
substantially similar to that attached hereto as Exhibit A. The vesting period
of the grant shall be four years, with vesting commencing on the Effective
Date.
One-eighth of the shares shall vest on the six month anniversary of the
Effective Date with the balance of the shares vesting in equal monthly
installments over the following forty-two months. On each of the first two
anniversaries of the Effective Date, subject to determination of merit during
an
annual performance review and Board’s consent, and provided that Executive
continues to be employed by the Company on each of the anniversary dates,
Executive shall be entitled to an additional grant of 62,500 shares on each
anniversary.
At
any
time during the Term, the Company may terminate this Agreement and the
Executive’s employment hereunder for Cause. For purposes of this Agreement,
“Cause” shall mean: (a) the willful and continued failure of the Executive to
perform substantially his duties and responsibilities for the Company (other
than any such failure resulting from a Disability) after a written demand by
the
Board for substantial performance is delivered to the Executive by the Company,
which specifically identifies the manner in which the Board believes that the
Executive has not substantially performed his duties and responsibilities,
which
willful and continued failure is not cured by the Executive within thirty (30)
days of his receipt of such written demand; (b) the conviction of, or plea
of
guilty or
nolo
contendere
to a
felony, after the exhaustion of all available appeals; or (c)
fraud,
dishonesty, competition with the Company, unauthorized use of any of the
Company’s or any of its subsidiary’s trade secrets or confidential
information,
or gross
misconduct which is materially and demonstratively injurious to the Company.
Termination under [for cause] shall not be subject to cure. Termination of
the
Executive for Cause pursuant to [subsection (a) ] shall be made by delivery
to
the Executive of a copy of the written demand referred to in [subsection (a),
or
pursuant to [subsection] (b) or (c) by delivery to the Executive of a written
notice from the Board, either of which shall specify the basis of such
termination, the conduct justifying such termination, and the particulars
thereof and finding that in the reasonable judgment of the Board, the conduct
set forth in [subsection] (a), [subsection] (b) or [subsection] (c), as
applicable, has occurred and that such occurrence warrants the Executive’s
termination of employment. Upon receipt of such demand or notice, the Executive,
shall be entitled to appear before the Board for the purpose of demonstrating
that Cause for termination does not exist or that the circumstances which may
have constituted Cause have been cured in accordance with the provisions of
[subsection] (a). No termination shall be final until the Board has reached
a
determination regarding “Cause” following such appearance. Upon termination of
this Agreement for Cause, the Company shall have no further obligations or
liability to the Executive or his heirs, administrators or executors with
respect to compensation and benefits thereafter, except for the obligation
to
pay the Executive any earned but unpaid base salary. The Company shall deduct,
from all payments made hereunder, all applicable taxes, including income tax,
FICA and FUTA, and other appropriate deductions.
At
any
time during the Term, the either Party shall be entitled to terminate this
Agreement and the Executive’s employment with the Company without cause. If the
Executive terminates this Agreement, the Executive shall provide prior written
notice of at least 30 days to the Company. Upon termination of this Agreement
and the Executive’s employment with the Company pursuant to this paragraph
10(d)(i) by the Company, the Company shall have no further obligations to the
Executive or his heirs, administrators or executors with respect to compensation
and benefits thereafter, except for the obligation to pay to the Executive
any
earned but unpaid base salary, any unpaid expenses and base salary and
acceleration of stock option vesting according to the following schedule: If
the
Company terminates this Agreement between January 8, 2007 and January 7, 2008,
Executive will receive base salary for three (3) months after the date of
termination and will forward vest an additional three (3) months after the
date
of termination. If the Company terminates this Agreement between January 8,
2008
and January 7, 2009, Executive will receive base salary for four (4) months
after the date of termination and will forward vest an additional four (4)
months after the date of termination. If the Company terminates this Agreement
between January 8, 2009 and January 7, 2010, Executive will receive base salary
for five (5) months after the date of termination and will forward vest an
additional five (5) months after the date of termination. If the Company
terminates this Agreement between January 8, 2010 and January 7, 2011, Executive
will receive base salary for six (6) months after the date of termination and
will forward vest an additional six (6) months after the date of termination.
Under no circumstances shall the salary continuation or the forward vesting
exceed six (6) months, regardless of length of service. The Company shall
deduct, from all payments made hereunder, all applicable taxes, including income
tax, FICA and FUTA, and other appropriate deductions. The amounts described
in
paragraph 10(d)(i) shall be paid to the Executive in the same manner as they
would have been paid, in accordance with the provisions of paragraph 5(a),
had
the Executive remained employed by the Company.
We
made
an offer of employment, which was accepted and may be deemed an employment
agreement, to Heather Gore, our Vice President of Marketing on January 2,
2008
(the
“Gore Employment Agreement”). The Gore Employment Agreement does not have a
termination date and provides for the following terms and conditions: to
provide
Ms. Gore with an annual salary of $130,000 ($5,416.66 per pay period) less
payroll deductions and all required withholdings; a bonus plan - 35% of base
pay, paid out quarterly, with metrics objectives developed and mutually agreed
upon within the first 90 days of her employment. No bonus will be payable until
such time as the metrics objectives are identified and agreed upon. Upon the
commencement of Ms. Gore’s employment and subject to Board approval, the Company
will grant her an option to purchase 125,000 shares of the Company’s Common
Stock (the “Option”) at an exercise price equal to the fair market value on the
date of grant. The Option shall be subject to the vesting restrictions and
all
other terms of the Company’s current Stock Option Plan and your Stock Option
Agreement. However, we will propose to the Board that her initial cliff vesting
period be reduced from twelve (12) months to six (6) months. Ms. Gore’s regular
place of employment will be Austin, Texas. However, she will also work out
of
the Los Angeles area office at least one week per month. Reasonable travel
expenses will be reimbursed to her according to the company’s travel and expense
reimbursement policies. Ms. Gore’s employment with the company is “at-will.” The
terms of her employment with the Company; however, does not constitute an
employment contract for a specified duration. Ms. Gore’s employment may be
terminated with our without cause or notice at any time, at the option of either
her or the Company. Ms. Gore has executed the Company’s Employee Proprietary
Information and Inventions Agreement, Insider Trading Agreement.
We
made
an offer of employment, which was accepted and may be deemed an employment
agreement, to David Warthen, our Chief Technology Officer on June 11, 2006
(the
“Warthen Employment Agreement”)
.
The
Warthen Employment Agreement does not have a termination date. Mr. Warthen
also
currently serves as the Chief Executive Officer of Eye Games, Inc., a developer
of web-cam, interactive video games. We do not have any relationship with Eye
Games, Inc., and we have never been a party to any transaction or agreement
with
Eye Games, Inc. The Warthen Employment Agreement provides for an initial annual
base salary of $180,000, which shall be paid in cash or shares of InfoSearch
common stock issued, at the Company’s option. The Company has the right to pay
Mr. Warthen in cash or stock for the first year of his employment, which began
on July 1, 2006. The Company elected to pay Mr. Warthen with stock for the
first
year and Mr. Warthen is receiving his base salary in the form of common stock,
which amounts to 107,143 shares per month, or portion thereof, for a total
of
1,285,714 shares through the one year anniversary date of his employment with
the Company. The number of shares was determined based on the fair market value
of the Company’s common stock on September 30, 2006. Through March 31, 2007, Mr.
Warthen earned 964,286 shares of our common stock. Under the Warthen
Employment Agreement, Mr. Warthen received options to purchase up to 400,000
share of our common stock pursuant to the Stock Option
Plan,
which shall vest in equal monthly installments over three years. Mr. Warthen’s
employment with InfoSearch was on an “at will” basis, and Mr. Warthen resigned
as of June 2007.
2004
Stock Option Plan
The
Stock
Option Plan gives the board of directors the ability to provide incentives
through grants or awards of stock options, stock appreciation rights, and
restricted stock awards (collectively, “Awards”) to present and future employees
of InfoSearch. Outside directors, consultants and other advisors are also
eligible to receive Awards under the Stock Option Plan.
Pursuant
to an amendment in December 2006, a total of 10,450,000 shares of our common
stock are reserved for issuance under the Stock Option Plan. If an incentive
award expires or terminates unexercised or is forfeited, or if any shares are
surrendered to us in connection with an Award, the shares subject to such award
and the surrendered shares will become available for further awards under the
Stock Option Plan. As of December 31, 2007 and 2006, respectively, 3,897,150
and
5,277,511 shares or options were issued and outstanding, leaving a balance
of
6,552,850 and 5,172,489 shares in the Stock Option Plan for future
issuance.
Shares
issued under the Stock Option Plan through the settlement, assumption or
substitution of outstanding Awards or obligations to grant future Awards as
a
condition of acquiring another entity will not reduce the maximum number of
shares available under the Stock Option Plan. In addition, the number of shares
subject to the Stock Option Plan, any number of shares subject to any numerical
limit in the Stock Option Plan, and the number of shares and terms of any Award
may be adjusted in the event of any change in our outstanding common stock
by
reason of any stock dividend, spin-off, split-up, stock split, reverse stock
split, recapitalization, reclassification, merger, consolidation, liquidation,
business combination or exchange of shares or similar transaction.
No
more
than 1,000,000 shares of the authorized shares may be allocated to Awards
granted or awarded to any individual participant during any calendar year.
Any
shares of restricted stock and any shares underlying a grant of options that
are
forfeited will not count against this limit.
The
board
of directors or one of its committees administers the Stock Option Plan. If
Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”),
and Rule 16b-3 under the Exchange Act apply to us and the Stock Option Plan,
then each member of the board of directors or committee, which must have at
least two members, must meet the standards of independence necessary to be
classified as an “outside director” for purposes of Section 162(m) of the Code
and an outside director for the purposes of Rule 16b-3 of the Exchange Act.
Subject to the terms of the Stock Option Plan, the board of directors or the
committee administering the Stock Option Plan will have complete authority
and
discretion to determine the terms of Awards.
The
Stock
Option Plan authorizes the grant of incentive stock options and nonqualified
stock options. Incentive stock options are stock options that satisfy the
requirements of Section 422 of the Code. Nonqualified stock options are stock
options that do not satisfy the requirements of Section 422 of the Code. Options
granted under the Stock Option Plan entitle the grantee, upon exercise, to
purchase a specified number of shares from us at a specified exercise price
per
share. The board of directors or the committee administering the Stock Option
Plan determines the period of time during which an option may be exercised,
as
well as any vesting schedule, except that no option may be exercised more than
ten years after the date of grant. The exercise price for shares of common
stock
covered by an option cannot be less than the fair market value of the common
stock on the date of grant.
Under
the
Stock Option Plan, a participant may not surrender an option for the grant
of a
new option with a lower exercise price or another incentive award. In addition,
if a participant’s option is cancelled before its termination date, the
participant may not receive another option within six months of the cancellation
date unless the exercise price of the new option equals or exceeds the exercise
price of the cancelled option.
A
stock
option may also have a reload feature. Under this feature, if the grantee pays
the exercise price in the form of previously owned shares of common stock,
then
the grantee may receive a reload option for the same number of shares
surrendered in payment of the exercise price. The exercise price of the reload
option will be equal to the fair market value of the common stock on the date
the option is exercised.
The
Stock
Option Plan also authorizes the grant of restricted stock awards on terms and
conditions established by the board of directors or the committee administering
the Stock Option Plan. The terms and conditions will include the designation
of
a restriction period during which the shares are not transferable and are
subject to forfeiture.
The
board
of directors or the committee administering the Stock Option Plan may grant
stock appreciation rights (SARs) under the Stock Option Plan. Subject to the
terms of the award, SARs entitle the participant to receive a distribution
in an
amount not to exceed the number of shares of common stock subject to the portion
of the SAR exercised multiplied by the difference between the market price
of a
share of common stock on the date of exercise of the SAR and the market price
of
a share of common stock on the date of grant of the SAR. Such distributions
are
payable in cash or shares of common stock, or a combination thereof, as
determined by the committee.
The
board
of directors may suspend or terminate the Stock Option Plan without stockholder
approval or ratification at any time or from time to time. Unless sooner
terminated, the Stock Option Plan will terminate on December 15, 2014. The
board of directors may also amend the Stock Option Plan at any
time.
Item
11. Security Ownership of Certain Beneficial Owners and
Management
and
Related Stockholder Matters.
The
following table sets forth certain information regarding the beneficial
ownership of the Company’s common stock
as
of
December 31, 2007 by (i) each person who, to our knowledge, beneficially owns
more than 5% of our common stock; (ii) each of our directors and executive
officers; and (iii) all of our executive officers and directors as a
group
:
.
Unless
otherwise indicated, the address of each beneficial owner is 4086 Del Rey
Avenue, Marina Del Rey, California 90292.
|
Name
and Address of Beneficial Owner
|
|
Amount
(1)
|
|
Percent
Of
Class
|
|
|
George
Lichter (2)
|
|
|
3,201,864
|
|
|
6.1
|
%
|
|
Claudio
Pinkus
|
|
|
1,259,427
|
|
|
2.3
|
%
|
|
Scott
Brogi
|
|
|
300,000
|
|
|
*
|
|
|
John
LaValle
|
|
|
100,000
|
|
|
*
|
|
|
Trinad
Capital Master Fund, Ltd. (3)
2121
Avenue of the Starts, Suite 1650
Los
Angeles, California 90067
|
|
|
13,117,782
|
|
|
25.0
|
%
|
|
Bruce
Galloway (4)
|
|
|
6,800,376
|
|
|
13.0
|
%
|
|
All
Executive Officers and Directors as a group (total of 5
persons)
|
|
|
4,861,291
|
|
|
9.3
|
%
|
*
represents beneficial ownership of less than 1%
|
(1)
|
Beneficial
ownership is calculated based on 52,493,592 shares of common stock
outstanding as of December 31, 2007. Beneficial ownership is determined
in
accordance with Rule 13d-3 of the Exchange Act. The number of shares
beneficially owned by a person includes shares of common stock
subject
to restricted stock grants, options or warrants held by that person
that
are currently exercisable or issuable or exercisable or issuable
within 60
days of December 31, 2007. The shares issuable pursuant to those
restricted stock grants, options or warrants are deemed outstanding
for
computing the percentage ownership of the person holding these options
and
warrants but are not deemed outstanding for the purposes of computing
the
percentage ownership of any other person. The persons and entities
named
in the table have sole voting and sole investment power with respect
to
the shares set forth opposite the stockholder’s name, subject to community
property laws, where applicable.
|
|
(2)
|
Includes 517,617
shares of common stock issuable upon exercise of stock options that
are
exercisable within 60 days of December 31, 2007.
|
|
|
|
|
(3)
|
Based
solely upon a Schedule 13G filed with the SEC by Trinad Capital Master
Fund, Ltd. on December 24, 2007. These securities are owned directly
by
Trinad Capital Master Fund, Ltd. (the "Master Fund") which is a reporting
person. These securities may be deemed to be beneficially owned by
Trinad
Management, LLC, the investment manager of the Master Fund and Trinad
Capital LP; a controlling stockholder of the Master Fund; Trinad
Advisors
II LLC, the general partner of Trinad Capital LP; Robert S. Ellin,
the
managing director of and portfolio manager for Trinad Management,
LLC and
the managing director of Trinad Advisors II LLC and Jay A. Wolf a
managing
director of and portfolio manager for Trinad Management, LLC and
a
managing director of Trinad Advisors II LLC. Each such reporting
person
disclaims beneficial ownership of the reported securities except
to the
extent of his or its pecuniary interest therein, and this report
shall not
be deemed an admission that such reporting person is the beneficial
owner
of the securities for purposes of Section 16 of the Exchange Act,
or for
any other purpose. The business address for Trinad Capital Master
Fund,
Ltd. is 2121 Avenue of the Stars, Suite 1650, Los Angeles, California
90067.
|
|
|
|
|
(4)
|
Based
solely upon a Schedule 13D, filed with the SEC by Bruce Galloway
on
December 7, 2007.
As
of the date hereof, Strategic Turnaround Equity Partners, L.P. (Cayman),
Galloway Capital Management LLC (as the general partner of Strategic
Turnaround Equity Partners, L.P. (Cayman)), Bruce Galloway and Gary
L.
Herman (as a Managing Members of Galloway Capital Management LLC)
are
deemed to beneficially own an aggregate of 5,523,750 shares of Common
Stock, representing approximately 10.44% of the number of shares
of Common
Stock stated to be outstanding by the Company in its Quarterly Report
on
Form 10-Q, as filed with the Securities and Exchange Commission on
November 16, 2007. Strategic Turnaround Equity Partners, L.P. (Cayman)
is
deemed to be the direct beneficial owner of 5,523,750 shares of Common
Stock. Galloway Capital Management LLC is deemed to be the indirect
beneficial owner of 5,523,750 shares of Common Stock. Bruce Galloway
and
Gary L. Herman are deemed to be the indirect beneficial owners of
5,523,750 shares of Common Stock. Each of Galloway Capital Management
LLC,
Bruce Galloway and Gary L. Herman disclaim beneficial ownership of
the
shares of Common Stock directly beneficially owned by Strategic Turnaround
Equity Partners, L.P. (Cayman) (except for (i) the indirect interest
of
Galloway Capital Management LLC by virtue of being the general partner
of
Strategic Turnaround Equity Partners, L.P. (Cayman), (ii) the indirect
interests of Bruce Galloway and Gary L. Herman by virtue of being
members
of Galloway Capital Management LLC, and (iii) the indirect interests
of
Bruce Galloway and Gary L. Herman by virtue of being limited partners
of
Strategic Turnaround Equity Partners, L.P. (Cayman). Galloway Capital
Management LLC, Gary L. Herman and Bruce Galloway have shared power
to
direct the vote and shared power to direct the disposition of these
shares
of Common Stock.
Of
the total 1,276,626 shares of common stock directly reported by Mr.
Galloway, 1,108,626 shares of Common stock are held by Mr. Galloway’s
Individual Retirement Account, 70,000 shares of Common Stock are
held by
Mr. Galloway’s son for which Mr. Galloway has the power to vote and
dispose, and 98,000 shares of Common Stock are held by RexonGalloway
Capital Growth, an investment company in which Mr. Galloway is a
member
and for which Mr. Galloway retains investment and voting discretion.
Of
the total of 64,000 shares of common stock reported by Mr. Herman,
25,000
shares are directly beneficially owned by Mr. Herman and 39,000 are
held
by Mr. Herman’s retirement
accounts.
|
(a)
Equity Compensation Plan Information
The
following table sets forth, as of December 31, 2007, the number of securities
outstanding, the weighted average exercise price of such options, warrants
and
rights
and
the
number of securities remaining available for future issuance under the Company’s
compensation plans previously approved by the Company’s stockholders and the
Company’s compensation plans not previously approved by the Company’s
stockholders
:
|
Plan category
|
|
Number of
securities to be
issued on
exercise of
outstanding
options, warrants
and rights
(a)
|
|
Weighted
average exercise
price of
outstanding
options, warrants
and rights
(b)
|
|
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities
reflected in
column(a))
(c)
|
|
|
Equity
compensation plans approved by security holders
|
|
|
3,897,150
|
|
$
|
0.18
|
|
|
6,552,850
|
|
|
Equity
compensation plans not approved by security holders
|
|
|
772,150
|
|
$
|
0.20
|
|
|
0
|
|
|
Total
|
|
|
3,897,150
|
|
$
|
0.18
|
|
|
6,552,850
|
|
Item
12. Certain Relationships and Related Transactions.
As
of
December 31, 2007 the Company had a remaining balance of accounts receivable
from Mr. David Warthen, Chief Technology Officer until June of 2007, of $12,530,
to repay the Company for income taxes paid on behalf of him.
The
Company is listed on the OTC Bulletin Board which does not have a requirement
that a majority of the board of directors be independent. The board of directors
has adopted the definition of “independent” included in the New York Stock
Exchange Listed Company Manual and has determined that, of the members of the
board of directors, only John LaValle is independent. The board of directors
established an Audit Committee on December 14, 2005, and established a
Nominating Committee and a Compensation Committee on May 9, 2006. Mr. LaValle
is
the sole member of the Audit Committee and the Nominating Committee. Mr. LaValle
and Claudio Pinkus are members of the Compensation Committee.
Item
13. Exhibits
(a)
The
following exhibits are to be filed as part of this report:
|
Exhibit
No.
|
|
Description
|
|
Incorporated
by Reference to Filings Indicated
|
|
2.1
|
|
Agreement
and Plan of Merger and Reorganization dated as of December 30, 2004
among
Trafficlogic, Inc., MAC Worldwide, Inc. and Trafficlogic Acquisition
Corp.
|
|
Exhibit
2.1 to Company’s Current Report on Form 8-K filed on January 4, 2005 File
No. 333-97385
|
|
|
|
|
|
|
|
2.2
|
|
Split
Off Agreement dated December 30, 2004 among MAC Worldwide, Inc.,
Vincenzo
Cavallo, Anthony Cavallo, Mimi & Coco, Inc. and Trafficlogic,
Inc.
|
|
Exhibit
2.2 to Company’s Current Report on Form 8-K filed on January 4, 2005 File
No. 333-97385
|
|
3.1.1
|
|
Certificate
of Incorporation
|
|
Exhibit
3.1 to Company’s Form SB-2 filed on July 31, 2002, File Number
333-97385)
|
|
|
|
|
|
|
|
3.1.2
|
|
Certificate
of Amendment to Certificate of Incorporation of MAC Worldwide,
Inc.
|
|
Exhibit
3.1.2 to Company’s Current Report on Form 8-K filed on January 4, 2005
File No. 333-97385
|
|
|
|
|
|
|
|
3.1.3
|
|
Certificate
of Amendment to Certificate of Incorporation of MAC Worldwide,
Inc.
|
|
Exhibit
3.1.3 to Company’s Current Report on Form 8-K filed on January 4, 2005
File No. 333-97385
|
|
|
|
|
|
|
|
3.2
|
|
Amended
and Restated Bylaws
|
|
Exhibit
3.3 to Company’s Form SB-2/A filed on March 23, 2006, File Number
333-130173
|
|
|
|
|
|
|
|
4.1
|
|
Specimen
stock certificate representing the Company’s common stock
|
|
Exhibit
4.1 to the Registrant’s Registration Statement on Form SB-2 filed on July
31, 2002 (Registration No.
333-97385)
|
|
4.2
|
|
Form
of Warrant issued in connection with the Securities Purchase Agreement
dated November 2, 2005 between InfoSearch and the signatory Investors
thereto
|
|
Exhibit
4.1 to InfoSearch’s Current Report on Form 8-K filed on November 7, 2005
File No. 333-97385
|
|
|
|
|
|
|
|
4.3
|
|
Form
of Warrants issued to Demand Media, Inc.
|
|
Exhibit
4.1 to InfoSearch's Current Report on Form 8-K filed on October 6,
2006,
File No. 333-97385
|
|
|
|
|
|
|
|
4.4
|
|
Common
Stock Purchase Warrant issued to Gemini Partners, Inc. on July 6,
2006
|
|
|
|
|
|
|
|
|
|
4.5
|
|
Form
of Common Stock Purchase Warrants issued to GP Group LLC on August
6,
2006, September 6, 2006 and October 6, 2006
|
|
|
|
|
|
|
|
|
|
10.4
|
|
Stock
Option Plan (1)
|
|
Exhibit
10.5 to Company’s Current Report on Form 8-K filed on January 4, 2005 File
No. 333-97385
|
|
|
|
|
|
|
|
10.5
|
|
Subscription
Agreement
|
|
Exhibit
10.6 to Company’s Current Report on Form 8-K filed on January 4, 2005 File
No. 333-97385
|
|
|
|
|
|
|
|
10.6
|
|
Employment
Agreement dated March 8, 2005 between InfoSearch and Frank Knuettel
II (1)
|
|
Exhibit
10.1 to Company’s Current Report on Form 8-K filed on March 14, 2005 File
No. 333-97385
|
|
|
|
|
|
|
|
10.7
|
|
Employment
Agreement dated August 23, 2005 between InfoSearch Media, Inc. and
George
Lichter (1)
|
|
Exhibit
10.1 to InfoSearch’s Current Report on Form 8-K filed on August 26, 2005
File No. 333-97385
|
|
10.9
|
|
Securities
Purchase Agreement dated November 2, 2005 between InfoSearch and
the
signatory Investors thereto
|
|
Exhibit
10.1 to InfoSearch’s Current Report on Form 8-K filed on November 7, 2005
File No. 333-97385
|
|
|
|
|
|
|
|
10.10
|
|
Registration
Rights Agreement dated November 2, 2005 between InfoSearch and the
signatory Investors thereto
|
|
Exhibit
10.2 to InfoSearch’s Current Report on Form 8-K filed on November 7, 2005
File No. 333-97385
|
|
|
|
|
|
|
|
10.11
|
|
Agreement
and Plan of Merger and Reorganization among InfoSearch, Apollo Acquisition
Corp., Answerbag and Joel Downs, Sunny Walia and Richard Gazan dated
as of
February 21, 2006
|
|
Exhibit
2.1 to InfoSearch’s Current Report on Form 8-K filed on February 27, 2006
File No. 333-97385
|
|
|
|
|
|
|
|
10.12
|
|
Employment
Agreement dated March 14, 2006 between InfoSearch and Edan Portaro
(1)
|
|
Exhibit
10.18 to InfoSearch’s Quarterly Report on Form 10-Q/A filed on July 11,
2006 File No. 333-7385
|
|
|
|
|
|
|
|
10.13
|
|
Consulting
Agreement dated August 23, 2005 between InfoSearch and Claudio Pinkus
(1)
|
|
Exhibit
10.19 to InfoSearch’s Quarterly Report on Form 10-Q/A filed on July 11,
2006 File No. 333-7385
|
|
10.14
|
|
Asset
Purchase Agreement
|
|
Exhibit
10.21 to InfoSearch’s Current Report on Form 8-K filed on October 6, 2006
File No. 333-97385
|
|
|
|
|
|
|
|
10.15
|
|
Amendment,
dated as of November 3, 2006, to Employment Agreement, dated as of
January
4, 2006, between InfoSearch and George Lichter (1)
|
|
Exhibit
10.22 to InfoSearch’s Current Report on Form 8-K filed on November 6, 2006
File No. 333-97385
|
|
|
|
|
|
|
|
10.17
|
|
Form
of Indemnity Agreement
|
|
Exhibit
10.4 to InfoSearch's Current Report on Form 8-K filed on January
4, 2005
File No. 333-97385
|
|
|
|
|
|
|
|
10.18
|
|
Employment
Agreement dated June 11, 2006 between InfoSearch and David Warthen
(1)
|
|
|
|
|
|
|
|
|
|
10.19
|
|
Form
of Incentive Stock Option Agreement under the MAC Worldwide, Inc.
2004
Stock Option Plan, as amended (1)
|
|
|
|
|
|
|
|
|
|
10.20
|
|
Form
of Restricted Stock Agreement under the MAC Worldwide, Inc. 2004
Stock
Option Plan, as amended (1)
|
|
|
|
|
|
|
|
|
|
14
|
|
Code
of Ethics
|
|
Exhibit
14 to Company’s Annual Report on Form 10-KSB filed on April 15, 2005 File
No. 333-97385
|
|
|
|
|
|
|
|
21
|
|
List
of Subsidiaries
|
|
Exhibit
21.1 to the Company’s Quarterly Report on Form 10-Q/A filed on July 11,
2006 File No. 333-7385
|
|
23.1*
|
|
Consent
of Rose, Snyder & Jacobs.
|
|
|
|
|
|
|
|
|
|
23.2*
|
|
Consent
of Singer Lewak Greenbaum & Goldstein LLP.
|
|
|
|
|
|
|
|
|
|
31.1*
|
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a),
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
|
|
|
|
|
31.2*
|
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a),
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
|
|
|
|
|
32.1*
|
|
Certifications
of Chief Executive Officer and Chief Financial Officer pursuant to
18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
*
Included in this filing.
(1)
A
management contract or compensatory plan or arrangement required to be filed
as
an exhibit to this report pursuant to Item 13 of Form 10-KSB.
Item
14. Principal Accountant Fees and Expenses.
The
Audit
Committee has implemented policies and procedures for the pre-approval of all
audit, audit-related and tax services for the Company, which meets the
requirements under the Sarbanes-Oxley Act of 2002 and SEC rules. The Audit
Committee has pre-approved certain audit, audit-related, and tax services to
be
performed by our independent auditors, Rose, Snyder & Jacobs.
Effective,
December 31, 2007, by unanimous written consent of the Company’s Board of
Directors, Rose, Snyder & Jacobs were selected to be the registered public
accounting firm for the Company, replacing Singer Lewak Greenbaum and Goldstein
LLP. Singer Lewak Greenbaum and Goldstein LLP was the independent registered
public accounting firm that audited the Company’s financial statements for the
fiscal years ending December 31, 2006. The aggregate fees for audit and related
services by our previous accounting firm, Singer Lewak Greenbaum and Goldstein
LLP, for fiscal years 2007 and 2006 are as follows:
|
|
|
Year
Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
Audit
Fees
1
|
|
$
|
321,094
|
|
$
|
254,709
|
|
|
Audit Related
Fees
2
|
|
$
|
2,000
|
|
$
|
110,619
|
|
|
Tax
Fees
3
|
|
$
|
8,458
|
|
$
|
7,493
|
|
|
All
Other Fees
4
|
|
$
|
0
|
|
$
|
0
|
|
|
TOTAL
|
|
$
|
331,552
|
|
$
|
372,821
|
|
|
(1)
|
Represents
fees for professional services rendered in connection with the audit
of
our annual financial statements, reviews of our quarterly financial
statements and advice provided on accounting matters that arose in
connection with audit services.
|
|
|
|
|
(2)
|
Represents
fees for professional services related to the filing of SB-2 registration
statements and other statutory or regulatory
filings.
|
|
(3)
|
Represents
fees for tax services provided in connection with general tax
matters.
|
|
(4)
|
All
other fees represent fees for services provided to the Company that
are
not otherwise included in the categories
above.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the registrant caused this report to be signed on its behalf
by the undersigned, thereby duly authorized.
|
|
|
|
|
|
INFOSEARCH
MEDIA, INC.
|
|
|
|
|
|
|
|
/s/
George Lichter
|
|
|
By:
George Lichter
|
|
|
Its:
Chief Executive Officer
|
|
|
|
|
|
Date:
April 15, 2008
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
|
|
|
/s/
George Lichter
|
|
|
By:
George Lichter
|
|
|
Its:
Chief Executive Officer and Director
|
|
|
(Principal
Executive Officer)
|
|
|
Date:
April 15, 2008
|
|
|
|
/s/
Scott Brogi
|
|
|
By:
Scott Brogi
|
|
|
Its:
Chief Financial Officer
|
|
|
(Principal Financial and Accounting Officer)
|
|
|
Date:
April 15, 2008
|
|
|
|
/s/
John LaValle
|
|
|
By:
John LaValle
|
|
|
Its:
Director
|
|
|
Date:
April 15, 2008
|
EXHIBIT
INDEX
|
Exhibit
No.
|
|
Description
|
|
Incorporated
by Reference to Filings Indicated
|
|
2.1
|
|
Agreement
and Plan of Merger and Reorganization dated as of December 30, 2004
among
Trafficlogic, Inc., MAC Worldwide, Inc. and Trafficlogic Acquisition
Corp.
|
|
Exhibit
2.1 to Company’s Current Report on Form 8-K filed on January 4, 2005 File
No. 333-97385
|
|
|
|
|
|
|
|
2.2
|
|
Split
Off Agreement dated December 30, 2004 among MAC Worldwide, Inc.,
Vincenzo
Cavallo, Anthony Cavallo, Mimi & Coco, Inc. and Trafficlogic,
Inc.
|
|
Exhibit
2.2 to Company’s Current Report on Form 8-K filed on January 4, 2005 File
No. 333-97385
|
|
|
|
|
|
|
|
3.1.1
|
|
Certificate
of Incorporation
|
|
Exhibit
3.1 to Company’s Form SB-2 filed on July 31, 2002, File Number
333-97385)
|
|
|
|
|
|
|
|
3.1.2
|
|
Certificate
of Amendment to Certificate of Incorporation of MAC Worldwide,
Inc.
|
|
Exhibit
3.1.2 to Company’s Current Report on Form 8-K filed on January 4, 2005
File No. 333-97385
|
|
|
|
|
|
|
|
3.1.3
|
|
Certificate
of Amendment to Certificate of Incorporation of MAC Worldwide,
Inc.
|
|
Exhibit
3.1.3 to Company’s Current Report on Form 8-K filed on January 4, 2005
File No. 333-97385
|
|
|
|
|
|
|
|
3.2
|
|
Amended
and Restated Bylaws
|
|
Exhibit
3.3 to Company’s Form SB-2/A filed on March 23, 2006, File Number
333-130173
|
|
|
|
|
|
|
|
4.1
|
|
Specimen
stock certificate representing the Company’s common stock
|
|
Exhibit
4.1 to the Registrant’s Registration Statement on Form SB-2 filed on July
31, 2002 (Registration No. 333-97385)
|
|
|
|
|
|
|
|
4.2
|
|
Form
of Warrant issued in connection with the Securities Purchase Agreement
dated November 2, 2005 between InfoSearch and the signatory Investors
thereto
|
|
Exhibit
4.1 to InfoSearch’s Current Report on Form 8-K filed on November 7, 2005
File No. 333-97385
|
|
|
|
|
|
|
|
4.3
|
|
Form
of Warrants issued to Demand Media, Inc.
|
|
Exhibit
4.1 to InfoSearch's Current Report on Form 8-K filed on October 6,
2006,
File No. 333-97385
|
|
|
|
|
|
|
|
4.4
|
|
Common
Stock Purchase Warrant issued to Gemini Partners, Inc. on July 6,
2006
|
|
|
|
|
|
|
|
|
|
4.5
|
|
Form
of Common Stock Purchase Warrants issued to GP Group LLC on August
6,
2006, September 6, 2006 and October 6, 2006
|
|
|
|
|
|
|
|
|
|
10.4
|
|
Stock
Option Plan (1)
|
|
Exhibit
10.5 to Company’s Current Report on Form 8-K filed on January 4, 2005 File
No. 333-97385
|
|
|
|
|
|
|
|
10.5
|
|
Subscription
Agreement
|
|
Exhibit
10.6 to Company’s Current Report on Form 8-K filed on January 4, 2005 File
No. 333-97385
|
|
10.6
|
|
Employment
Agreement dated March 8, 2005 between InfoSearch and Frank Knuettel
II (1)
|
|
Exhibit
10.1 to Company’s Current Report on Form 8-K filed on March 14, 2005 File
No. 333-97385
|
|
|
|
|
|
|
|
10.7
|
|
Employment
Agreement dated August 23, 2005 between InfoSearch Media, Inc. and
George
Lichter (1)
|
|
Exhibit
10.1 to InfoSearch’s Current Report on Form 8-K filed on August 26, 2005
File No. 333-97385
|
|
|
|
|
|
|
|
10.9
|
|
Securities
Purchase Agreement dated November 2, 2005 between InfoSearch and
the
signatory Investors thereto
|
|
Exhibit
10.1 to InfoSearch’s Current Report on Form 8-K filed on November 7, 2005
File No. 333-97385
|
|
|
|
|
|
|
|
10.10
|
|
Registration
Rights Agreement dated November 2, 2005 between InfoSearch and the
signatory Investors thereto
|
|
Exhibit
10.2 to InfoSearch’s Current Report on Form 8-K filed on November 7, 2005
File No. 333-97385
|
|
|
|
|
|
|
|
10.11
|
|
Agreement
and Plan of Merger and Reorganization among InfoSearch, Apollo Acquisition
Corp., Answerbag and Joel Downs, Sunny Walia and Richard Gazan dated
as of
February 21, 2006
|
|
Exhibit
2.1 to InfoSearch’s Current Report on Form 8-K filed on February 27, 2006
File No. 333-97385
|
|
|
|
|
|
|
|
10.12
|
|
Employment
Agreement dated March 14, 2006 between InfoSearch and Edan Portaro
(1)
|
|
Exhibit
10.18 to InfoSearch’s Quarterly Report on Form 10-Q/A filed on July 11,
2006 File No. 333-7385
|
|
|
|
|
|
|
|
10.13
|
|
Consulting
Agreement dated August 23, 2005 between InfoSearch and Claudio Pinkus
(1)
|
|
Exhibit
10.19 to InfoSearch’s Quarterly Report on Form 10-Q/A filed on July 11,
2006 File No. 333-7385
|
|
|
|
|
|
|
|
10.14
|
|
Asset
Purchase Agreement
|
|
Exhibit
10.21 to InfoSearch’s Current Report on Form 8-K filed on October 6, 2006
File No. 333-97385
|
|
|
|
|
|
|
|
10.15
|
|
Amendment,
dated as of November 3, 2006, to Employment Agreement, dated as of
January
4, 2006, between InfoSearch and George Lichter (1)
|
|
Exhibit
10.22 to InfoSearch’s Current Report on Form 8-K filed on November 6, 2006
File No. 333-97385
|
|
|
|
|
|
|
|
10.17
|
|
Form
of Indemnity Agreement
|
|
Exhibit
10.4 to InfoSearch's Current Report on Form 8-K filed on January
4, 2005
File No. 333-97385
|
|
|
|
|
|
|
|
10.18
|
|
Employment
Agreement dated June 11, 2006 between InfoSearch and David Warthen
(1)
|
|
|
|
|
|
|
|
|
|
10.19
|
|
Form
of Incentive Stock Option Agreement under the MAC Worldwide, Inc.
2004
Stock Option Plan, as amended (1)
|
|
|
|
|
|
|
|
|
|
10.20
|
|
Form
of Restricted Stock Agreement under the MAC Worldwide, Inc. 2004
Stock
Option Plan, as amended (1)
|
|
|
|
|
|
|
|
|
|
14
|
|
Code
of Ethics
|
|
Exhibit
14 to Company’s Annual Report on Form 10-KSB filed on April 15, 2005 File
No. 333-97385
|
|
21
|
|
List
of Subsidiaries
|
|
Exhibit
21.1 to the Company’s Quarterly Report on Form 10-Q/A filed on July 11,
2006 File No. 333-7385
|
|
|
|
|
|
|
|
23.1*
|
|
Consent
of Rose, Snyder & Jacobs.
|
|
|
|
|
|
|
|
|
|
23.2*
|
|
Consent of
Singer Lewak
Greenbaum & Goldstein LLP.
|
|
|
|
|
|
|
|
|
|
31.1*
|
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a),
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
|
|
|
|
|
31.2*
|
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a),
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
|
|
|
|
|
32.1*
|
|
Certifications
of Chief Executive Officer and Chief Financial Officer pursuant to
18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
*
Included in this filing.
(1)
A
management contract or compensatory plan or arrangement required to be filed
as
an exhibit to this report pursuant to Item 13 of Form 10-KSB.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
INFOSEARCH
MEDIA, INC.
AUDITED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2007 AND 2006
|
|
Page
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
F-3
|
|
|
|
|
Consolidated
Statements of Operations for the years ended December 31, 2007 and
2006
|
F-4
|
|
|
|
|
Consolidated
Statements of Stockholders’ Equity (Deficit) for the years ended December
31, 2007 and 2006
|
F-5
|
|
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2007 and
2006
|
F-6
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
F-7
|
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders
InfoSearch
Media, Inc.
Marina
Del Rey, California
We
have
audited the accompanying consolidated balance sheet of InfoSearch Media, Inc.,
and subsidiaries (the “Company”) as of December 31, 2007, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
the year then ended. These consolidated 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
audit.
We
conducted our audit in accordance with the standards established by the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of
its
internal control over financial reporting. Our audit included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit
provides 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 InfoSearch Media, Inc.,
and
subsidiaries as of December 31, 2007, and the results of its operations and
its
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has sustained recurring operating
losses and continues to generate negative cash flows from operations. These
factors, among others, raise substantial doubt about the Company’s ability to
continue as a going concern. Management’s plans in regards to these matters are
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
/s/
Rose, Snyder & Jacobs
A
Corporation of Certified Public Accountants
Encino,
California
April
11,
2008
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors
InfoSearch
Media, Inc.
Marina
Del Rey, California
We
have
audited the consolidated balance sheet of InfoSearch Media, Inc. and
subsidiaries as of December 31, 2006, and the related consolidated statements
of
operations, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based
on
our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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 InfoSearch Media, Inc.
and
subsidiaries as of December 31, 2006, and the results of their operations and
their cash flows for the year then ended, in conformity with U.S. generally
accepted accounting principles.
/s/
Singer Lewak Greenbaum & Goldstein LLP
SINGER
LEWAK GREENBAUM & GOLDSTEIN LLP
Los
Angeles, California
April
17,
2007
INFOSEARCH
MEDIA, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
December
31,
2007
|
|
December
31,
2006
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
787,239
|
|
$
|
2,495,654
|
|
|
Restricted
cash
|
|
|
20,000
|
|
|
380,530
|
|
|
Accounts
receivable, net of allowance for doubtful accounts of $25,500 and
$0 for
2007 and 2006, respectively
|
|
|
215,518
|
|
|
68,941
|
|
|
Due
from related parties
|
|
|
-
|
|
|
50,732
|
|
|
Prepaid
and other current assets
|
|
|
104,245
|
|
|
201,604
|
|
|
TOTAL
CURRENT ASSETS
|
|
|
1,126,702
|
|
|
3,197,461
|
|
|
|
|
|
|
|
|
|
|
|
EMPLOYEE
ADVANCE
|
|
|
1,800
|
|
|
1,000
|
|
|
CONTENT
DEVELOPMENT
|
|
|
-
|
|
|
4,083
|
|
|
PROPERTY
AND EQUIPMENT, NET
|
|
|
130,650
|
|
|
131,139
|
|
|
SECURITY
DEPOSIT
|
|
|
37,500
|
|
|
37,500
|
|
|
EQUITY
WARRANT ASSET
|
|
|
112,049
|
|
|
308,837
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
1,408,701
|
|
$
|
3,680,020
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
228,308
|
|
$
|
204,271
|
|
|
Accrued
bonuses
|
|
|
12,553
|
|
|
264,515
|
|
|
Accrued
expenses
|
|
|
172,132
|
|
|
400,052
|
|
|
Accrued
expenses Answerbag acquisition
|
|
|
-
|
|
|
75,156
|
|
|
Capital
leases
|
|
|
-
|
|
|
17,621
|
|
|
Deferred
revenue
|
|
|
526,868
|
|
|
454,741
|
|
|
Provision
for refunds payable/chargebacks
|
|
|
15,842
|
|
|
30,842
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
955,703
|
|
|
1,447,198
|
|
|
|
|
|
|
|
|
|
|
|
FAIR
VALUE OF WARRANT LIABILITY
|
|
|
967,651
|
|
|
1,396,215
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
1,923,354
|
|
|
2,843,413
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY (DEFICIT):
|
|
|
|
|
|
|
|
|
Preferred
stock, undesignated, par value $.001per share, 25,000,000
shares
|
|
|
|
|
|
|
|
|
Authorized;
no shares issued and outstanding;
|
|
|
-
|
|
|
-
|
|
Common
stock, $.001 par value, authorized 200,000,000 shares;
issued
and outstanding 52,493,592 and 51,162,267, at December 31, 2007
and 2006,
respectively
|
|
|
52,494
|
|
|
51,491
|
|
|
Committed
stock, 0 and 164,282 shares at December 31, 2007 and 2006,
respectively
|
|
|
-
|
|
|
22,586
|
|
|
Additional
paid in capital
|
|
|
11,336,742
|
|
|
11,130,109
|
|
|
Accumulated
deficit
|
|
|
(11,903,889
|
)
|
|
(10,367,580
|
)
|
|
TOTAL
STOCKHOLDERS' EQUITY (DEFICIT):
|
|
|
(514,653
|
)
|
|
836,606
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
$
|
1,408,701
|
|
$
|
3,680,020
|
|
See
reports of independent registered public accounting firms and notes to
consolidated financial statements.
INFOSEARCH
MEDIA, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
Year
Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
TRAFFICBUILDER
SALES
|
|
$
|
4,784,068
|
|
$
|
6,016,080
|
|
|
WEB
PROPERTIES SALES
|
|
|
126,236
|
|
|
1,583,980
|
|
|
NET
SALES
|
|
|
4,910,304
|
|
|
7,600,060
|
|
|
|
|
|
|
|
|
|
|
|
TRAFFICBUILDER
COST OF SALES
|
|
|
1,335,933
|
|
|
1,686,645
|
|
|
WEB
PROPERTIES COST OF SALES
|
|
|
56,954
|
|
|
987,040
|
|
|
COST
OF SALES
|
|
|
1,392,887
|
|
|
2,673,685
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
$
|
3,517,417
|
|
$
|
4,926,375
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
General
& administrative
|
|
|
3,754,240
|
|
|
9,600,049
|
|
|
Sales
& marketing
|
|
|
1,831,548
|
|
|
2,138,695
|
|
|
TOTAL
COSTS AND EXPENSES
|
|
|
5,585,788
|
|
|
11,738,744
|
|
|
LOSS
FROM OPERATIONS
|
|
$
|
(2,068,371
|
)
|
$
|
(6,812,369
|
)
|
|
|
|
|
|
|
|
|
|
|
CHANGE
IN FAIR VALUE OF WARRANTS
|
|
|
233,285
|
|
|
1,728,443
|
|
|
LIQUIDATED
DAMAGES
|
|
|
-
|
|
|
(502,397
|
)
|
|
OTHER
INCOME (EXPENSE) (NOTE 13)
|
|
|
252,707
|
|
|
(35,244
|
)
|
|
INTEREST
EXPENSE
|
|
|
(7,044
|
)
|
|
(13,406
|
)
|
|
INTEREST
INCOME
|
|
|
59,197
|
|
|
105,820
|
|
|
LOSS
FROM CONTINUING OPERATIONS BEFORE TAX
|
|
|
(1,530,226
|
)
|
|
(5,529,153
|
)
|
|
|
|
|
|
|
|
|
|
|
TAXES
FROM CONTINUING OPERATIONS
|
|
|
6,083
|
|
|
18,585
|
|
|
NET
LOSS FROM CONTINUING OPERATIONS
|
|
|
(1,536,309
|
)
|
|
(5,547,738
|
)
|
|
|
|
|
|
|
|
|
|
|
DISCONTINUED
OPERATIONS (NOTE 12)
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations of Answerbag, Inc.
|
|
|
-
|
|
|
(412,132
|
)
|
|
Gain
on disposal of discontinued operations
|
|
|
-
|
|
|
1,919,962
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
FROM DISCONTINUED OPERATIONS
|
|
|
-
|
|
|
1,507,830
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(1,536,309
|
)
|
$
|
(4,039,908
|
)
|
|
|
|
|
|
|
|
|
|
|
LOSS
PER SHARE FROM CONTINUING OPERATIONS -
|
|
|
|
|
|
|
|
|
BASIC
|
|
$
|
(0.03
|
)
|
$
|
(0.12
|
)
|
|
DILUTED
|
|
$
|
(0.03
|
)
|
$
|
(0.12
|
)
|
|
LOSS
PER SHARE FROM DISCONTINUED OPERATIONS -
|
|
|
|
|
|
|
|
|
BASIC
|
|
$
|
-
|
|
$
|
0.03
|
|
|
DILUTED
|
|
$
|
-
|
|
$
|
0.03
|
|
|
LOSS
PER SHARE
|
|
|
|
|
|
|
|
|
BASIC
|
|
$
|
(0.03
|
)
|
$
|
(0.09
|
)
|
|
DILUTED
|
|
$
|
(0.03
|
)
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING
–
BASIC
|
|
|
51,887,244
|
|
|
47,202,261
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING – DILUTED
|
|
|
51,887,244
|
|
|
47,202,261
|
|
See
reports of independent registered public accounting firms and notes to
consolidated financial statements.
INFOSEARCH
MEDIA, INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
Common
Stock
|
|
Comitted
Common
|
|
Additional
Paid-In
|
|
Accumulated
|
|
Total
Stockholders'
|
|
|
|
|
Shares
|
|
Amount
|
|
Stock
|
|
Capital
|
|
Deficit
|
|
(Deficit)
|
|
|
BALANCE
- December 31, 2005
|
|
|
42,277,775
|
|
$
|
42,278
|
|
$
|
-
|
|
$
|
6,056,291
|
|
$
|
(6,327,670
|
)
|
$
|
(229,101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock
|
|
|
4,974,786
|
|
|
4,975
|
|
|
|
|
|
2,889,450
|
|
|
|
|
|
2,894,425
|
|
|
Answerbag
acquisition
|
|
|
844,748
|
|
|
844
|
|
|
|
|
|
264,930
|
|
|
|
|
|
265,774
|
|
|
Returned
shares Steve Lazuka
|
|
|
(1,000,000
|
)
|
|
(1,000
|
)
|
|
|
|
|
1,000
|
|
|
|
|
|
-
|
|
|
Committted
stock
|
|
|
|
|
|
|
|
|
22,586
|
|
|
|
|
|
|
|
|
22,586
|
|
|
Stock
option exercise
|
|
|
41,250
|
|
|
41
|
|
|
|
|
|
5,734
|
|
|
|
|
|
5,775
|
|
|
Employee
option compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
1,314,341
|
|
|
|
|
|
1,314,341
|
|
|
Stock
grants
|
|
|
27,500
|
|
|
28
|
|
|
|
|
|
8,222
|
|
|
|
|
|
8,250
|
|
|
Stock-bright
star award
|
|
|
18,525
|
|
|
19
|
|
|
|
|
|
6,211
|
|
|
|
|
|
6,230
|
|
|
Liquidated
damages
|
|
|
4,306,613
|
|
|
4,306
|
|
|
|
|
|
505,598
|
|
|
|
|
|
509,904
|
|
|
Gemini
warrants
|
|
|
|
|
|
|
|
|
|
|
|
68,752
|
|
|
|
|
|
68,752
|
|
|
GP
Group warrants
|
|
|
|
|
|
|
|
|
|
|
|
9,580
|
|
|
|
|
|
9,580
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,039,908
|
)
|
|
(4,039,908
|
)
|
|
BALANCE
- December 31, 2006
|
|
|
51,491,197
|
|
|
51,491
|
|
|
22,586
|
|
|
11,130,109
|
|
|
(10,367,580
|
)
|
|
836,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock
|
|
|
264,477
|
|
|
265
|
|
|
|
|
|
36,612
|
|
|
|
|
|
36,877
|
|
|
Gemini
warrants
|
|
|
360,000
|
|
|
360
|
|
|
|
|
|
3,240
|
|
|
|
|
|
3,600
|
|
|
Sale
of Answerbag
|
|
|
164,282
|
|
|
164
|
|
|
(22,586
|
)
|
|
22,422
|
|
|
|
|
|
-
|
|
|
Employee
option compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
104,906
|
|
|
|
|
|
104,906
|
|
|
Shares
issued for sales and consulting agreements
|
|
|
213,636
|
|
|
214
|
|
|
|
|
|
39,453
|
|
|
|
|
|
39,667
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,536,309
|
)
|
|
(1,536,309
|
)
|
|
BALANCE
- December 31,2007
|
|
|
52,493,592
|
|
$
|
52,494
|
|
$
|
-
|
|
$
|
11,336,742
|
|
$
|
(11,903,889
|
)
|
$
|
(514,653
|
)
|
See
reports of independent registered public accounting firms and notes to
consolidated financial statements.
INFOSEARCH
MEDIA, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
Year
ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(1,536,309
|
)
|
$
|
(4,039,908
|
)
|
|
|
|
|
|
|
|
|
|
Adjustment
to reconcile net loss to net cash
used
in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
118,535
|
|
|
615,529
|
|
|
Equity
based compensation
|
|
|
157,959
|
|
|
4,223,245
|
|
|
Issuance
of warrants
|
|
|
-
|
|
|
78,331
|
|
|
Loss
from disposal of fixed assets
|
|
|
-
|
|
|
10,937
|
|
|
Liquidated
damages
|
|
|
-
|
|
|
509,904
|
|
|
Change
in fair value of warrants
|
|
|
(233,285
|
)
|
|
(1,728,443
|
)
|
|
Gain
on sale of Answerbag assets
|
|
|
-
|
|
|
(1,919,962
|
)
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(171,277
|
)
|
|
(64,492
|
)
|
|
Prepaid
expenses and other current assets
|
|
|
147,291
|
|
|
(16,074
|
)
|
|
Accounts
payable, accrued expenses and other liabilities
|
|
|
(531,002
|
)
|
|
222,141
|
|
|
Provision
for refunds
|
|
|
10,000
|
|
|
(13,309
|
)
|
|
Deferred
revenue
|
|
|
72,127
|
|
|
(2,173,306
|
)
|
|
NET
CASH USED IN OPERATING ACTIVITIES
|
|
|
(1,965,961
|
)
|
|
(4,295,406
|
)
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
360,530
|
|
|
(380,530
|
)
|
|
Net
cash payments in purchase of Answerbag
|
|
|
-
|
|
|
(479,888
|
)
|
|
Net
proceeds from sales of Answerbag assets
|
|
|
-
|
|
|
2,937,149
|
|
|
Capital
expenditures
–
fixed
assets
|
|
|
(88,963
|
)
|
|
(37,640
|
)
|
|
Capital
expenditures – content development
|
|
|
|
|
|
(49,361
|
)
|
|
NET
CASH PROVIDED BY INVESTING ACTIVITIES
|
|
|
271,567
|
|
|
1,989,729
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Principal
payments of capital lease obligations
|
|
|
(17,621
|
)
|
|
(33,004
|
)
|
|
Stock
option / warrant exercise
|
|
|
3,600
|
|
|
5,775
|
|
|
NET
CASH USED IN FINANCING ACTIVITIES
|
|
|
(14,021
|
)
|
|
(27,229
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(1,708,415
|
)
|
|
(2,332,906
|
)
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - BEGINNING OF PERIOD
|
|
|
2,495,654
|
|
|
4,828,560
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - END OF PERIOD
|
|
$
|
787,239
|
|
$
|
2,495,654
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
7,044
|
|
$
|
13,406
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax paid
|
|
$
|
6,083
|
|
$
|
18,585
|
|
|
|
|
|
|
|
|
|
|
NON-CASH
SUPPLEMENTAL DISCLOSURE OF INVESTING
AND
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Stock
issued for purchase of property and equipment
|
|
$
|
25,000
|
|
$
|
-
|
|
|
Stock
issued or committed to be issued for the acquisition of
Answerbag
|
|
$
|
-
|
|
$
|
462,499
|
|
See
reports of independent registered public accounting firms and notes to
consolidated financial statements.
InfoSearch
Media, Inc.
Notes
to the Consolidated Financial Statements
For
the Years Ended December 31, 2007 and 2006
|
1.
|
Organization
and Nature of Operations
|
On
December 31, 2004, Trafficlogic, Inc., a California corporation (“Trafficlogic”)
merged with MAC Worldwide, Inc. (“MAC”); the surviving company changed its name
to InfoSearch Media, Inc. (“InfoSearch” or the “Company”). Such merger consisted
of three related transactions: (1) the merger (the “Merger”) of Trafficlogic
with and into a newly organized and wholly-owned subsidiary of MAC, Trafficlogic
Acquisition Corp., a Delaware corporation, which later changed its name to
Trafficlogic, Inc. (“Acquisition Sub”); (2) the disposition of MAC’s
wholly-owned operating subsidiary, Mimi & Coco, Inc., a Canadian
corporation; and (3) the closing of a private placement offering of common
stock, par value $0.001 per share (the “Private Placement Transaction”). The
current officers and directors of the Company are contained in Part III of
this
Annual Report on Form 10-KSB for the year ended December 31,
2007.
The
Company’s principal executive offices are located at 4086 Del Rey Avenue, Marina
Del Rey, California 90292. The Company’s telephone number is (310) 437-7380.
The
Company is a Los Angeles-based provider of "smart" search-targeted text and
video content for the Internet, designed to improve traffic, brand recognition
and website performance for publishing and media clients. InfoSearch's network
of professional writers, editors, technical specialists and video production
resources help businesses succeed on the Web by implementing text and video
content-based internet marketing solutions. InfoSearch's search marketing
solutions involve
online
content that supports the non-paid search marketing initiatives of its clients.
Non-paid search
results
,
otherwise
known as organic
,
are
the
search results that the search engines find on the World Wide Web as opposed
to
those listings for which companies pay for placement. During
the
first
half of
2007,
we
derived revenue from our two primary operating groups, Content and Web
Properties, and launched several new products including TrafficBuilder Text
and
TrafficBuilder Video. In the third quarter of 2007, we launched an updated
website better describing the Company’s new suite of products and
services.
Content
We
deliver, through sale or license agreements, branded original content for use
by
our clients on their websites
.
Utilizing sophisticated content and keywords analytics, content developed in
the
TrafficBuilder Text program drives traffic to the client's website through
additional pages of text content which helps deliver improved search engine
performance. The TrafficBuilder content provides an environment engineered
to
stimulate a sale through the use of content focused on the client's products
and
services. We derive revenue from this content through either the sale or
licensing of products and services. While many of our small to medium sized
business clients prefer the leasing option over the purchase alternative because
it provides a lower upfront cost, larger firms generally prefer the outright
purchase of the content. We are actively pursuing both methods and have created
a dedicated team to focus on the larger clients and affiliate or reseller
relationships.
We
also
offer supplemental products, including Web analytics and links through
partnerships with specialized service providers where the Company acts as a
reseller of certain products. The analytics and links products are both sold
on
a month-to-month basis.
In
February 2007, the Company launched a new search-targeted online video product
called
TrafficBuilder
Video
to
provide the same customer benefits as the Company's written, text-based product
line, TrafficBuilder Text, including improved organic search engine performance,
increased quality site traffic and brand recognition.
TrafficBuilder Video
is
primarily being offered to a select number of major online media partners such
as Rodale Publishing.
See
reports of independent registered public accounting
firms.
Web
Properties
We
currently operate numerous content-based websites, including ArticleInsider,
through which we distribute traffic to advertisers. These websites are a
collection of general informational articles focused on various business
topics.
We
are no
longer seeking or engaging new customers for these websites and are harvesting
the deferred revenues associated with customers we previously engaged for these
websites. However
,
we
continue to monetize traffic to these websites through the use of Google's
AdSense program. In March 2006,
we
purchased Answerbag, Inc. (“Answerbag”), a consumer information website built
through content generated from its users. In October 2006, we entered into
a
multi-year alliance with Demand Media, Inc. (“Demand Media”), a next generation
media company, pursuant to which we sold all of the assets of Answerbag to
Demand Media, and Demand Media also agreed to purchase our products and
services. During the period of our operation of Answerbag, the site generated
revenue through the use of Google's AdSense program.
Going
Concern
The
accompanying financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States
of
America, which contemplate continuation of the Company as a going concern.
Although the Company reduced its net loss to $4,588 for the second half of
the
year by significantly lowering operating expenses and has increased cash to
$787,239 as of December 31, 2007, the Company has historically experienced
recurring net losses and negative cash flows from operations. During the year
ending December 31, 2007 the Company reported a net loss of $1,536,309 and
negative flows from operations of $1,965,961. In view of these conditions,
the
Company’s ability to continue as a going concern is contingent upon its ability
to ultimately maintain profitable operations or secure additional financing.
Management believes that its current and future plans provide an opportunity
to
continue as a going concern. The accompanying financial statements do not
include any adjustments relating to the recoverability and classification of
recorded assets, or the amounts and classification of liabilities that may
be
necessary in the event the Company cannot continue as a going
concern.
|
2.
|
Summary
of Significant Accounting
Policies
|
Basis
of Consolidation
The
consolidated financial statements include the accounts of the Company and one
subsidiary, Answerbag, Inc., a California corporation, which was acquired by
the
Company in March 2006 and the assets of which were subsequently sold in October
2006. All significant inter company accounts and transactions have been
eliminated in consolidation.
Revenue
Recognition
The
Company recognizes revenue on arrangements in accordance with SEC Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" and
No. 104 "Revenue Recognition," and Emerging Issues Task Force Issue
00-21,"Revenue Arrangements with Multiple Deliverables." In all cases, revenue
is recognized only when the price is fixed or determinable, persuasive evidence
of an arrangement exists, the service is performed, and collectibility of the
resulting receivable is reasonably assured.
The
Company's revenues are derived principally from the sale or licensing of Content
to third party web site owners through its TrafficBuilder suite of products
and
services. Revenue from Content sales is recognized when the content is delivered
to and accepted by the client. Revenue earned from Content licensing is treated
as an installment sale and prorated revenue is recognized on a monthly basis
over the life of the agreement. The Company offers a 12 month license agreement
under which Clients have the right to continue leasing the content at the end
of
the term on a month-to-month basis. The Company offers a month-to-month
licensing agreement and revenue earned on this type of licensing agreement
is
recognized on a monthly basis. The Company also earns revenue from supplemental
services such as web analytics, directory submissions and link building. These
services are provided under month-to-month license agreements and revenue earned
from these services is recognized on a monthly basis. Client deposits received
in advance of work being completed for such services are treated as deferred
revenue until the services are performed and the revenue is then
recognized.
See
reports of independent registered public accounting firms.
The
Company also derives revenue from the sale of interactive advertising on a
CPC
basis through its Web Properties such as ArticleInsider. The Company has
established a relationship with Google whereby Google pays InfoSearch fees
for
clicks on advertisements sponsored by Google and displayed on the ArticleInsider
web site. The Company recognizes revenue associated with the Google AdSense
program as reported by Google to the Company at the end of each
month.
Cost
of Sales
The
majority of the Company's cost of sales is related to its Content products
developed under the TrafficBuilder product line. For the TrafficBuilder program,
content developed pursuant to outright sales and licensing is developed through
keyword analysts, writers, editors, and other independent contractors who
analyze the keywords, write and edit the content. The Company recognizes and
expenses those costs related to the content developed for outright sales and
for
month-to-month licensing to clients as the cost is incurred, while the cost
of
content development for licensing subject to a 12-month contract is amortized
over the life of the contract.
Content
developed pursuant to the Company's ArticleInsider website was capitalized
to
content development since it increases the value of the network and yields
revenue to the Company over a period of years. These costs have been amortized
over an expected life of twelve months. The Company is no longer developing
new
content for the ArticleInsider website, a practice which was discontinued in
2005. The total value of unamortized content as of December 31, 2007 and
December 31, 2006 was $0 and $4,082, respectively. Total amortization expense
included in cost of sales for the year ended December 31, 2007 and 2006 was
$4,082 and $394,333, respectively.
Cash
and Cash Equivalents
Cash
includes cash on hand and cash in banks in demand and time deposit accounts
with
original maturities of 90 days or less. At December 31, 2007, the Company had
restricted cash of 20,000 in a certificate of deposit securing payment
obligations. At December 31, 2006, the Company had restricted cash of $380,530,
including $302,108 in escrow from the sale of Answerbag, Inc., $23,422 held
at
various financial institutions and payment processing firms, and $55,000 in
certificates of deposit securing payment obligations.
Use
of
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Reclassifications
Certain
account balances in the prior year may have been reclassified to permit
meaningful comparison with the current year.
Concentrations
Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist principally of cash and cash equivalents and trade receivables.
The Company maintains cash and cash equivalents with high-credit, quality
financial institutions. At December 31, 2007 and 2006, the cash balances held
at
financial institutions in excess of federally insured limits.
One
client, Demand Media, represented approximately 25% of the Company’s revenue for
the year ended December 31, 2007 and 11% of the Company’s accounts receivable at
December 31, 2007. For the year ended December 31, 2006, no client represented
greater than 10% of our revenues. Accounts receivable from Google and Linkworth
represented approximately 24% of the Company’s accounts receivable at December
31, 2006.
Accounts
Receivable
Credit
is
generally extended based upon an evaluation of each customer's financial
condition, with terms consistent in the industry and no collateral required.
The
Company determines an allowance for collectibility on a periodic basis. Amounts
are written off against the allowance in the period the Company determines
that
the receivable is uncollectible.
See
reports of independent registered public accounting firms.
Long-Lived
Asset Impairment
The
Company periodically evaluates whether events and circumstances have occurred
that indicate that the remaining estimated useful life of long-lived assets
may
warrant revision or that the remaining balance may not be recoverable. When
factors indicate that the asset should be evaluated for possible impairment,
the
Company uses an estimate of the undiscounted net cash flows over the remaining
life of the asset in measuring whether the asset is recoverable. Based upon
the
anticipated future income and cash flow from operations and other factors,
relevant in the opinion of the Company’s management, there has been no
impairment.
Fair
Value of Financial Instruments
To
meet
the reporting requirements of SFAS No. 107, “Disclosures About Fair Value of
Financial Instruments” (“SFAS 107”), the Company calculates the fair value of
financial instruments and includes this additional information in the notes
to
financial statements when the fair value is different than the book value of
those financial instruments. When the fair value is equal to the book value,
no
additional disclosure is made. The Company uses quoted market prices whenever
available to calculate these fair values.
Valuation
of Derivative Instruments
SFAS
No.
133 “Accounting for Derivative Instruments and Hedging Activities” requires that
embedded derivative instruments be bifurcated and assessed, along with
free-standing derivative instruments such as warrants, on their issuance date
and in accordance with EITF 00-19 “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” to
determine whether they should be considered a derivative liability and measure
at their fair value for accounting purposes. In determining the appropriate
fair
value, the Company uses the Black-Scholes option pricing formula (“Black
Scholes”). At each period end, or when circumstances indicate that the Company
reevaluate the accounting of the derivative liability, derivative liabilities
are adjusted to reflect changes in fair value, with any increase or decrease
in
the fair value being recorded in results of operations as Change in Fair Value
of Warrants.
Property
and Equipment
Property
and equipment is stated at cost and depreciation is calculated using the
straight-line method over the related assets' estimated economic lives ranging
from three to five years. Amortization of leasehold improvements is calculated
using the straight-line method over the lesser of the estimated economic useful
lives or the lease term. Property under capital leases is amortized over the
lease terms and included in depreciation and amortization expense.
Deferred
Revenue
Deferred
revenue primarily represents payments received from customers as deposits in
advance of the delivery of content, links or analytics under its TrafficBuilder
program. In addition, a small remaining amount of the deferred revenue is
associated with the ArticleInsider program. Deferred revenue results from
payments received from customers as deposits in excess of revenue earned as
content is delivered for the TrafficBuilder program and based on click-through
activity (web site visitations) for ArticleInsider advertisements and will
be
recognized as traffic is delivered.
For
the
years ended December 31, 2007 and 2006, the Company recorded an expense related
to chargebacks of $28,703 and $181,375, respectively. These chargebacks arise
when monthly prepayments made, typically in electronic form, are rejected by
the
credit card processor. In limited situations, this can arise due to a dispute
with the Company. In other situations, this arises when the client will no
longer honor charges on this card. A provision has been recorded for estimated
chargebacks at year-end.
Income
Taxes
The
Company follows Statement of Financial Accounting Standards No. 109, “Accounting
for Income Taxes”, which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are based on the differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. The
Company also follows FASB Interpretation No. 48,
Accounting
for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109
(FIN
48)
which clarifies the accounting and reporting for uncertainties in income tax
law
have been included in the financial statements or tax returns.
See
reports of independent registered public accounting firms.
The
significant components of the provision for income tax expense for the years
ended December 31, 2007 and 2006 were $6,083 and $18,585 respectively, for
the
state current provision. There was no state deferred provision or federal tax
provision. Due to its current net loss position, the Company has provided a
valuation allowance in full on its net deferred tax assets in accordance with
SFAS 109 and in light of the uncertainty regarding ultimate realization of
the
net deferred tax assets.
The
Company adopted FASB Issued Interpretation No. 48 (“Fin 48”) “Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement 109” on
January 1, 2007, which was issued in July 2006 and clarifies the accounting
for
uncertain tax positions. Uncertain tax positions are recognized in the financial
statements for positions which are considered more likely than not of being
sustained based on the technical merits of the position on audit by the tax
authorities. The measurement of the tax benefit recognized in the financial
statements is based upon the largest amount of the tax benefit that, in
management’s judgment, is greater than 50% likely of being realized based on a
cumulative probability assessment of the possible outcomes. The implementation
of Fin 48 did not have a material impact on the amount, reporting and
disclosures of our fully reserved deferred tax assets resulting primarily from
tax loss carryforwards.
Accounting
for Stock-Based Compensation
Effective
January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123(R), “Share-Based Payment”
(“SFAS
123(R)”), which requires the measurement and recognition of compensation expense
for all share-based payment awards made to employees and directors, including
stock options based on their fair values. In March 2005, the SEC issued staff
Accounting Bulletin No. 107 (SAB 107) to provide guidance on SFAS 123(R).
The Company has applied SAB 107 in its adoption of SFAS 123(R).
The
Company adopted SFAS 123(R) using the modified prospective transition method
as
of January 1, 2006. In accordance with the modified prospective transition
method, the Company’s financial statements for prior periods have not been
restated to reflect, and do not include, the impact of SFAS
123(R). Share-based compensation expense recognized is based on the value
of the portion of share-based payment awards that is ultimately expected to
vest. Share-based compensation expense recognized in the Company's Consolidated
Statement of Operations during the years ended December 31, 2007 and 2006
includes compensation expense for share-based payment awards granted prior
to,
but not yet vested as of December 31, 2005, based on the grant date fair value
estimated in accordance with the pro forma provisions of SFAS
123.
The
Company attributes the value of share-based compensation to expense using the
straight-line method. Share-based compensation expense related to stock
options was recorded in the accompanying Statements of Operations as
follows:
|
|
|
Year
Ended
December
31,
2007
|
|
Year
Ended
December
31,
2006
|
|
|
Selling
and marketing
|
|
$
|
1,865
|
|
$
|
194,267
|
|
|
General
and administration
|
|
|
103,041
|
|
|
1,086,712
|
|
|
Discontinued
Operations
|
|
|
|
|
|
33,451
|
|
|
Total
share-based compensation expense for stock options
|
|
$
|
104,906
|
|
$
|
1,314,341
|
|
On
June 30, 2006, all of the stock option grants issued
to employees prior to June 30, 2006 had exercise prices above the closing
price
at the end of the second quarter. The board of directors, in an effort to
maintain employee retention, approved the acceleration of vesting of stock
option grants and restricted stock grants in the amount of 1,428,403 shares
and
1,042,240 shares, respectively. Grants for all employees employed as of the
close of business on June 30, 2006 were accelerated as of June 30, 2006.
This resulted in a share-based compensation expense of $1,041,029 associated
with the acceleration of stock option grants and $718,790 associated with
restricted stock grants. Both of these values are included in the total
share-based compensation expense of $4,223,245 for the year ended December
31,
2006.
The
Company’s calculations were made using the Black-Scholes option pricing model
with the following weighted average assumptions for the years ended December
31,
2007 and 2006: expected life, five years following the grant date; stock
volatility, 135.04% and 110.75%, respectively; risk-free interest rates of
3.45%
and 4.57%, respectively; and no dividends during the expected term. As
stock-based compensation expense recognized in the consolidated statements
of
operations pursuant to SFAS No. 123(R) is based on awards ultimately expected
to
vest, expense for grants beginning upon adoption of SFAS No. 123(R) on January
1, 2006 is reduced for estimated forfeitures. SFAS No. 123(R) requires
forfeitures to be estimated at the time of grant and revised, if necessary,
in
subsequent periods if actual forfeitures differ from those estimates.
Forfeitures are estimated based on historical experience of forfeited stock
options as a percent of total options granted.
See
reports of independent registered public accounting firms.
Recently
Issued Accounting Pronouncements
In
February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS No. 155”),
which amends SFAS No.133, “Accounting for Derivatives Instruments and Hedging
Activities” (“SFAS No. 133”) and SFAS No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities”(“SFAS No.
140”). SFAS No. 155 amends SFAS No. 133 to narrow the scope exception for
interest-only and principal-only strips on debt instruments to include
only such
strips representing rights to receive a specified portion of the contractual
interest or principal cash flows. SFAS No. 155 amends SFAS No. 140 to allow
qualifying special-purpose entities to hold a passive derivative financial
instrument pertaining to a beneficial interest that itself is a derivative
instrument. SFAS No. 155 is effective for financial instruments acquired,
issued, or subject to a remeasurement event for fiscal years beginning
after
September 15, 2006. The adoption of SFAS 156 did not have a material impact
on the Company's results of operations and financial position.
In
March
2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial
Assets” (“SFAS No.156”), which provides an approach to simplify efforts to
obtain hedge-like (offset) accounting. This Statement amends SFAS No. 140
with
respect to the accounting for separately recognized servicing assets and
servicing liabilities. SFAS No. 156(1) requires an entity to recognize
a
servicing asset or servicing liability each time it undertakes an obligation
to
service a financial asset by entering into a servicing contract in certain
situations; (2) requires that a separately recognized servicing asset or
servicing liability be initially measured at fair value, if practicable;
(3)
permits an entity to choose either the amortization method or the fair
value
method for subsequent measurement for each class of separately recognized
servicing assets or servicing liabilities; (4) permits at initial adoption
a
one-time reclassification of available-for-sale securities to trading securities
by an entity with recognized servicing rights, provided the securities
reclassified offset the entity's exposure to changes in the fair value
of the
servicing assets or liabilities; and (5) requires separate presentation
of
servicing assets and servicing liabilities subsequently measured at fair
value
in the balance sheet and additional disclosures for all separately recognized
servicing assets and servicing liabilities. SFAS No. 156 is effective for
all
separately recognized servicing assets and liabilities as of the beginning
of an
entity's fiscal year that begins after September 15, 2006, with earlier
adoption
permitted in certain circumstances. The Statement also describes the manner
in
which it should be initially applied. The adoption of SFAS 156 did
not have a material impact on the Company's results of operations and financial
position.
In
July
2006, the FASB released FASB Interpretation No. 48, "Accounting for
Uncertainty
in Income Taxes, an interpretation of FASB Statement No. 109" ("FIN
48"). FIN 48
clarifies the accounting and reporting for uncertainties in income
tax law. This
interpretation prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of uncertain
tax positions
taken or expected to be taken in income tax returns. This Statement
is effective
for fiscal years beginning after December 15, 2006. The adoption of
FIN 48 did
not have a material impact on the Company’s results of operations and financial
position.
On
September 15, 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
which is effective for fiscal years beginning after November 15, 2007.
This
statement defines fair value, specifies the acceptable methods for determining
fair value, and expands disclosure requirements regarding fair value
measurements. SFAS No. 157 is effective beginning January 1, 2008. In
February
2008, the FASB deferred the adoption of SFAS No. 157 for one year as
it applies
to certain times, including assets and liabilities measured at fair value
in
connection with goodwill impairment tests in accordance with SFAS No.
142 and
long-lived assets measured at fair value for impairment assessments under
SFAS
No. 144.
Accounting for the Impairment and Disposal of Long-Lived Assets.
We are still required to adopt the provisions of SFAS No. 157 in
2008 as it
related to certain other items, including those within the scope of SFAS
No,
1097,
Disclosure about Fair Value of Financial Instrument
, and
financial and nonfinancial derivatives within the scope of SFAS No. 133.
We
believe that the adoption of SFAS No. 157 will not have a material impact
on our
consolidated financial position, results of operations or cash
flows.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements
in
Current Year Financial Statements” (“SAB 108”). SAB108 provides guidance on the
consideration of the effects of prior year misstatements in quantifying
current
year misstatements for the purpose of a materiality assessment. SAB 108
establishes an approach that requires quantification of financial statement
errors based on the effects of each of the company's balance sheet and
statement
of operations and the related financial statement disclosures. SAB 108
permits
existing public companies to record the cumulative effect of initially
applying
this approach in the first year ending after November 15, 2006 by recording
the
necessary correcting adjustments to the carrying values of assets and
liabilities as of the beginning of that year with the offsetting adjustment
recorded to the opening balance of retained earnings. Additionally, the
use of
the cumulative effect transition method requires detailed disclosure
of the
nature and amount of each individual error being corrected through the
cumulative adjustment and how and when it arose. The adoption of this
pronouncement has not had a material impact on the Company's financial
position
or statement of operations and cash flows.
In
September 2006, the FASB issued SFAS No. 158, “Employer's Accounting for Defined
Benefit Pension and Other Post Retirement Plans”. SFAS No. 158 requires
employers to recognize in its statement of financial position an asset
or
liability based on the retirement plan's over or under funded status.
SFAS No.
158 is effective for fiscal years ending after December 15, 2006. The
adoption
of this pronouncement has not had a material impact on the Company's
financial position or statement of operations and cash flows.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial
Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits
entities to choose to measure at fair value many financial instruments
and
certain other items that are not currently required to be measured at
fair
value. Subsequent changes in fair value for designated items will be
required to
be reported in earnings in the current period. SFAS No. 159 also establishes
presentation and disclosure requirements for similar types of assets
and
liabilities measured at fair value. SFAS No. 159 is effective for fiscal
years
beginning after November 15, 2007. The Company is currently assessing
the effect
of implementing this guidance, which directly depends on the nature and
extent
of eligible items elected to be measured at fair value, upon initial
application
of the standard on January 1, 2008.
In
December 2007, the FASB issued SFAS No. 141(revised 2007),
Business
Combinations
(“SFAS
No. 141R”), which revises current purchase accounting guidance in SFAS
No. 141,
Business
Combinations
.
SFAS
No. 141R requires most assets acquired and liabilities assumed in a
business combination to be measured at their fair values as of the date
of
acquisition. SFAS No. 141R also modifies the initial measurement and
subsequent remeasurement of contingent consideration and acquired contingencies,
and requires that acquisition related costs be recognized as expense
as incurred
rather than capitalized as part of the cost of the acquisition. SFAS
No. 141R is effective for fiscal years beginning after December 15,
2008 (the Company’s fiscal 2009) and is to be applied prospectively to business
combinations occurring after adoption. The impact of SFAS No. 141R on the
Company’s consolidated financial statements will depend on the nature and extent
of the Company’s future acquisition activities.
In
December 2007, the FASB issued SFAS No. 160. “Noncontrolling Interests in
Consolidated Financial Statements-and Amendment of ARB No. 51.” SFAS 160
establishes accounting and reporting standards pertaining to ownership
interests
in subsidiaries held by parties other than the parent, the amount of
net income
attributable to the parent and to the noncontrolling interest, changes
in a
parent’s ownership interest, and the valuation of any retained noncontrolling
equity investment when a subsidiary is deconsolidated. This statement
also
establishes disclosure requirements that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. SFAS 160 is effective for fiscal years beginning on or after
December
15, 2008. Management has reviewed this new standard and believes that it
has no impact on the financial statements of the Company at this time;
however,
it may apply in the future.
See
reports of independent registered public accounting
firms.
In
March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments
and
Hedging Activities ("SFAS 161"). SFAS 161 is intended to improve financial
reporting about derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects
on
an entity's financial position, financial performance, and cash flows.
SFAS 161
achieves these improvements by requiring disclosure of the fair values
of
derivative instruments and their gains and losses in a tabular format.
It also
provides more information about an entity's liquidity by requiring disclosure
of
derivative features that are credit risk-related. Finally, it requires
cross-referencing within footnotes to enable financial statement users to locate
important information about derivative instruments. SFAS 161 will be
effective
for financial statements issued for fiscal years and interim periods
beginning
after November 15, 2008, will be adopted by the Company beginning in
the first
quarter of 2009. The Company does not expect there to be any significant
impact
of adopting SFAS 161 on its financial position, cash flows and results
of
operations.
In
December 2007, the SEC issued SAB No. 110,
Certain Assumptions Used in
Valuation Methods - Expected Term
(
“
SAB
110
”
)
According to SAB
110, under certain circumstances the SEC staff will continue to accept
beyond
December 31, 2007 the use of the simplified method in developing an estimate
term of share options that possess certain characteristics in accordance
with
SFAS 123(R) beyond December 31, 2007. We will adopt SAB 110 effective
January 1, 2008 and continue to use the simplified method in developing
the
expected term used for our valuation of stock-based
compensation.
In
September 2006, the FASB issued SFAS No. 158, “Employer's Accounting for Defined
Benefit Pension and Other Post Retirement Plans”. SFAS No. 158 requires
employers to recognize in its statement of financial position an asset or
liability based on the retirement plan's over or under funded status. SFAS
No.
158 is effective for fiscal years ending after December 15, 2006. The adoption
of this pronouncement has not had an impact on the Company's financial position
or statement of operations and cash flows.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits
entities to choose to measure at fair value many financial instruments and
certain other items that are not currently required to be measured at fair
value. Subsequent changes in fair value for designated items will be required
to
be reported in earnings in the current period. SFAS No. 159 also establishes
presentation and disclosure requirements for similar types of assets and
liabilities measured at fair value. SFAS No. 159 is effective for fiscal
years
beginning after November 15, 2007. The Company is currently assessing the
effect
of implementing this guidance, which directly depends on the nature and extent
of eligible items elected to be measured at fair value, upon initial application
of the standard on January 1, 2008.
In
December 2007, the FASB issued SFAS No. 141(revised 2007),
Business
Combinations
(“SFAS
No. 141R”), which revises current purchase accounting guidance in SFAS
No. 141,
Business
Combinations
.
SFAS
No. 141R requires most assets acquired and liabilities assumed in a
business combination to be measured at their fair values as of the date of
acquisition. SFAS No. 141R also modifies the initial measurement and
subsequent remeasurement of contingent consideration and acquired contingencies,
and requires that acquisition related costs be recognized as expense as incurred
rather than capitalized as part of the cost of the acquisition. SFAS
No. 141R is effective for fiscal years beginning after December 15,
2008 (the Company’s fiscal 2009) and is to be applied prospectively to business
combinations occurring after adoption. The impact of SFAS No. 141R on the
Company’s consolidated financial statements will depend on the nature and extent
of the Company’s future acquisition activities.
In
December 2007, the FASB issued SFAS No. 160. “Noncontrolling Interests in
Consolidated Financial Statements-and Amendment of ARB No. 51.” SFAS 160
establishes accounting and reporting standards pertaining to ownership interests
in subsidiaries held by parties other than the parent, the amount of net
income
attributable to the parent and to the noncontrolling interest, changes in
a
parent’s ownership interest, and the valuation of any retained noncontrolling
equity investment when a subsidiary is deconsolidated. This statement also
establishes disclosure requirements that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. SFAS 160 is effective for fiscal years beginning on or after December
15, 2008. Management has reviewed this new standard and believes that it
has no impact on the financial statements of the Company at this time; however,
it may apply in the future.
In
March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments
and
Hedging Activities ("SFAS 161"). SFAS 161 is intended to improve financial
reporting about derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects
on
an entity's financial position, financial performance, and cash flows. SFAS
161
achieves these improvements by requiring disclosure of the fair values of
derivative instruments and their gains and losses in a tabular format. It
also
provides more information about an entity's liquidity by requiring disclosure
of
derivative features that are credit risk-related. Finally, it requires
cross-referencing within footnotes to enable financial statement users to
locate
important information about derivative instruments. SFAS 161 will be effective
for financial statements issued for fiscal years and interim periods beginning
after November 15, 2008, will be adopted by the Company beginning in the
first
quarter of 2009. The Company does not expect there to be any significant
impact
of adopting SFAS 161 on its financial position, cash flows and results of
operations.
See
reports of independent registered public accounting firms.
|
3.
|
Property
and Equipment
|
The
property and equipment for the year ended December 31, 2007 and 2006
was:
|
|
|
2007
|
|
2006
|
|
|
Computer
equipment
|
|
$
|
365,632
|
|
$
|
355,794
|
|
|
Software
|
|
|
86,606
|
|
|
35,907
|
|
|
Website
|
|
|
53,425
|
|
|
-
|
|
|
Other
equipment
|
|
|
42,918
|
|
|
42,918
|
|
|
Leasehold
improvements
|
|
|
62,076
|
|
|
62,076
|
|
|
Furniture
and fixtures
|
|
|
48,167
|
|
|
48,167
|
|
|
Total
fixed assets
|
|
|
658,824
|
|
|
544,862
|
|
|
Less:
Accumulated depreciation
|
|
|
(528,174
|
)
|
|
(413,723
|
)
|
|
Net
property and equipment
|
|
$
|
130,650
|
|
$
|
131,139
|
|
Depreciation
and amortization expense for the years ended December 31, 2007 and 2006 was
$118,535 and $167,220, respectively.
Property
and equipment under capital leases was $90,348 at December 31, 2007 and 2006,
respectively. Accumulated depreciation related to equipment under capital leases
was $90,348 at December 31, 2007 and $34,393 at December 31, 2006.
The
Company accounts for the equity warrant asset with net settlement terms to
purchase preferred stock of Demand Media as a derivative in accordance with
Statement of Financial Accounting Standards No. 133 (SFAS 133) “Accounting for
Derivative Instruments and Hedging Activities”. Under the terms of the warrant,
InfoSearch is entitled to purchase 125,000 shares of Series C Preferred Stock
of
Demand Media at an exercise price of $3.85 per share. Under the accounting
treatment required by SFAS No. 133, equity warrant assets with net settlement
terms are recorded at fair value and are classified as investments on the
balance sheet.
The
fair
value of the Demand Media warrant is reviewed quarterly. We value the warrant
using the Black-Scholes option pricing model, which incorporates the following
material assumptions at December 31, 2007 and 2006:
|
|
·
|
Underlying
asset value was estimated based on information available, including
any
information regarding subsequent rounds of funding or initial public
offerings.
|
|
|
|
|
|
|
·
|
Volatility,
or the amount of uncertainty or risk about the size of the changes
in the
warrant price, was based on indices similar in nature to the business
in
which Demand Media operates and yielded a volatility of 123.05% and
75.00%, respectively.
|
|
|
|
|
|
|
·
|
The
risk-free interest rate was 4.7% and 3.45%,
respectively.
|
|
|
|
|
|
|
·
|
Expected
remaining life of 3.5 and 5 years, respectively, based on the contractual
term of the warrant.
|
See
reports of independent registered public accounting firms.
Changes
from the grant date fair value of the equity warrant asset is recognized as
increases or decreases to the equity warrant asset on the consolidated balance
sheet and as net change in the fair value of warrants within the non-operating
section of the consolidated statement of operations.
During
the year ended December 31, 2007 and 2006, the grant date fair value of the
equity warrant asset decreased by $196,788 and $0, respectively.
As
of
December 31, 2007 and December 31, 2006, the Company had deferred revenue of
$526,868 and $454,741, respectively, all of which is classified as current.
The
Company allocates between the current portion and the long term portion based
upon its historical experience and its estimate of click through activity over
the succeeding 12 months.
The
following table reconciles the Federal statutory rate of 35% to the Company’s
effective tax rate:
|
|
|
Year Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
Expected
income tax (benefit)
|
|
$
|
(430,166
|
)
|
$
|
(1,367,249
|
)
|
|
State
tax (benefit), net of Federal effect
|
|
|
1,600
|
|
|
1,056
|
|
|
Permanent
differences
|
|
|
(31,722
|
)
|
|
(31,722
|
)
|
|
Increase
in valuation allowance
|
|
|
285,824
|
|
|
1,268,058
|
|
|
Other
|
|
|
(180,547
|
)
|
|
148,442
|
|
|
Actual
Income tax
|
|
$
|
6,083
|
|
$
|
18,585
|
|
The
components of the Company’s deferred tax asset at December 31, 2007 are as
follows:
|
Net
operating loss
|
|
$
|
4,170,150
|
|
$
|
3,772,813
|
|
|
Share-based
compensation
|
|
|
637,434
|
|
|
597,634
|
|
|
Other
|
|
|
(42,055
|
)
|
|
109,258
|
|
|
Valuation
allowance
|
|
|
(4,765,528
|
)
|
|
(4,479,705
|
)
|
|
Deferred
tax asset
|
|
$
|
-
|
|
$
|
-
|
|
As
of
December 31, 2007, the Company had Federal net operating losses totaling
approximately $10,355,012, which will expire in 2025. The change in valuation
analysis of the Federal deferred tax asset at December 31, 2007 was
$285,824. As of December 31, 2007, the Company had California net operating
losses totaling approximately $10,297,105, which will expire in between 2014
and
2017. The change in valuation analysis of the state deferred tax asset at
December 31, 2006 was $336,509.
Net
loss
per share is computed as net loss divided by the weighted average number of
common shares outstanding for the period. As of December 31, 2007 and December
31, 2006, 9,246,281 and 13,035,918 shares exercisable from stock options,
restricted stock and warrants were excluded from the computation of net loss
per
share as their effect would be anti-dilutive.
See
reports of independent registered public accounting firms.
|
8.
|
Stockholders’
Equity (Deficit)
|
The
authorized capital stock currently consists of 200,000,000 shares of common
stock, par value $0.001 per share, and 25,000,000 shares of preferred stock,
par
value $0.001 per share, the rights and preferences of which may be established
from time to time by the Company’s board of directors. As of December 31, 2007
and December 31, 2006, there were 52,493,592 and 51,162,267 shares of the
Company’s common stock issued and outstanding, respectively, and options
exercisable, warrants exercisable or restricted stock for 9,597,709 and
13,035,918 shares of common stock, respectively. No other securities, including
without limitation any preferred stock, convertible securities, options,
warrants, promissory notes or debentures are outstanding.
Common
Stock
Holders
of common stock are entitled to one vote for each share held on all matters
submitted to a vote of stockholders and do not have cumulative voting rights.
Accordingly, holders of a majority of the shares of common stock
entitled
to vote in any election of directors may elect all of the directors standing
for
election. Subject to preferences that may be applicable to any shares of
preferred stock outstanding at the time, holders of common stock
are
entitled to receive dividends ratably, if any, as may be declared from time
to
time by
the
board
of directors out of funds legally available therefore.
Upon
our
liquidation, dissolution or winding up, the holders of our common stock are
entitled to receive ratably, our net assets available after the payment
of:
|
|
a.
|
all
secured liabilities, including any then outstanding secured debt
securities which we may have issued as of such time;
|
|
|
|
|
|
|
b.
|
all
unsecured liabilities, including any then unsecured outstanding secured
debt securities which we may have issued as of such time;
and
|
|
|
|
|
|
|
c.
|
all
liquidation preferences on any then outstanding preferred
stock.
|
Holders
of common stock have no preemptive, subscription, redemption or conversion
rights, and there are no redemption or sinking fund provisions applicable to
the
common stock. The rights, preferences and privileges of holders of common stock
are subject to, and may be adversely affected by, the rights of the holders
of
shares of any series of preferred stock which we may designate and issue in
the
future.
In
connection with a private placement transaction on November 7, 2005 for which
8,359,375 shares of common stock was issued for total proceeds of $5.35 million,
the investors received 4,179,686 warrants to purchase 4,179,686 shares of common
stock. The warrants expire on November 7, 2010 and are exercisable at a price
of
$0.88 per share. These securities where offered and sold by the Company in
reliance on exemptions from registration provided by Section 4(2) of the
Securities Act and Regulation D promulgated thereunder. The investors were
“accredited investors” as that term is defined under Regulation D.
As
required by the private placement transaction on November 7, 2005, since a
registration statement was not declared effective by the SEC within the
timeframe set forth in the Registration Rights Agreement, the Company was
required to pay liquidated damages and related interest of $509,904 during
the
year ended December 31, 2006. On August 22, 2006, the investors agreed to accept
4,306,613 shares of the Company’s common stock in exchange for extinguishment of
this liability. The number of shares issued in exchange for the liquidated
damages was determined based on a discount to the average of the Company’s stock
price for the five days preceding the first
issuance
date, which is the date three days following receipt of the minimum two-thirds
majority necessary to amend the Registration Rights Agreement. These shares
were
issued to the investors on October 4, 2006, and are recorded as equity as of
December 31, 2006. The interest expense associated with the liquidated damages
was $7,507.
The
warrants issued to all participants in the November 7, 2005 private placement
require the Company to settle the contracts by the delivery of registered
shares. At the date of issuance, the Company did not have an effective
registration statement related to the shares that could be issued should the
warrant holders exercise the warrants. In addition, the warrant holders have
the
right to require that the Company settle the warrant on a net-cash basis in
a
fundamental transaction, regardless of the form of tender underlying the
fundamental transaction. As the contracts must be settled by the delivery of
registered shares and the delivery of the registered shares are not controlled
by the Company and the rights of the warrant holders to settle in cash
potentially in preference to other stockholders
receiving
other forms of consideration, pursuant to EITF 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock", the warrants are being treated as a liability.
See
reports of independent registered public accounting firms.
The
fair
value of the warrants at the date of issuance was recorded as a warrant
liability on the consolidated balance sheet and the change in fair value at
each
reporting date is included in net change in fair value of warrants within the
non-operating section of the consolidated statement of operations. The value
of
the warrants on December 31, 2007 and 2006 was $309,567 and $485,138,
respectively. In addition, the fair value decreased from December 31, 2006
through December 31, 2007 by $175,571. The change in fair value was calculated
by using the Black-Scholes pricing model with the following assumptions at
December 31, 2007 and 2006: expected life, 34 and 46 months, respectively;
stock
volatility, 135.04% and 110.12%, respectively; risk-free interest rate of 3.45%
and 4.6%, respectively; and no dividends during the expected term.
On
July
6, 2006
,
the
Company entered into a Settlement Agreement and Release of Claims (the
“Settlement Agreement”), with Gemini Partners, Inc. (“Gemini”), pursuant to
which the Company issued to Gemini a Common Stock Purchase Warrant immediately
exercisable into 300,000 shares of the Company’s common stock at a price of
$0.01 per share. Such warrant expires on January 1, 2010. Pursuant to the
Settlement Agreement, Gemini agreed to cancel
its
existing warrant to purchase 300,000 shares of our common stock at a purchase
price of $1.00 per share.
The
Company has performed an EITF 00-19 analysis of the warrants issued pursuant
to
the Settlement Agreement and determined that they will be accounted for as
equity. The
fair
value of the warrant
was
calculated as of July 6, 2006 using the Black-Scholes pricing model with the
following assumptions: expected life
of
54
months
following the grant date; stock volatility of 104.13%; risk-free interest rate
of 5.2%; and no dividends during the expected term. The fair value of the
warrant was determined to be $68,752. The warrant was offered and sold by
the Company in reliance on exemptions from registration provided by Section
4(2)
of the Securities Act as such transaction did not involve any public offering.
During the year ended December 31, 2007, these warrants were exercised in
full.
On
July
6,
2006, the Company entered into a GP Group Consulting Agreement (the “Consulting
Agreement”) with
GP
Group,
LLC (“GP Group”), pursuant to which it issued to GP Group a Common Stock
Purchase Warrant on August 6, 2006, September 6, 2006 and October 6, 2006,
each such warrant immediately exercisable into 20,000 shares of the Company’s
common stock at a price of $0.01 per share. Each such warrant expires on January
1, 2010.
The
Company has performed an EITF 00-19 analysis of the warrants issued pursuant
to
the Consulting Agreement and determined that they will be accounted for as
equity. The fair values of the warrants were calculated as of each respective
issuance dates using the Black-Scholes pricing model with the following
assumptions: expected life of 46, 45, and 44 months following the grant dates;
stock volatility
,
of
104.12%,
106.98%, and 109.50%; risk-free interest rates of 4.88%, 4.76% and 4.66%; and
no
dividends during the expected term, for warrants issued August 6, September
6,
and October 6, 2006, respectively. The fair values of the three warrants were
determined to be $4,165, $2,804 and $2,611, respectively. The Consulting
Agreement was terminated effective October 24, 2006. The warrants were offered
and sold by the Company in reliance on exemptions from registration provided
by
Section 4(2) of the Securities Act as such transaction did not involve any
public offering. During the year ended December 31, 2007, these warrants were
exercised in full.
In
conjunction with the Asset Purchase Agreement the Company entered into on
October 3, 2006 to sell substantially all of the assets of Answerbag to Demand
Media, Demand received a five year warrant to purchase 5,000,000 shares of
the
Company's common stock at a purchase price of $0.158 per share that expires
on
October 3, 2011. The exercise price of the warrant was determined by calculating
the average of the closing price of the Company’s common stock from the average
of the ten day period from September 11, 2006 to September 22, 2006, and the
average of the ten day period from October 4, 2006 to October 17, 2006. In
accordance with EITF 00-19, the warrant will be treated as a liability because
of the requirement to maintain an effective registration statement for a period
of two years. The fair value of the warrant was calculated as of October 4,
2006
using the Black-Scholes pricing model with the following assumptions: expected
life of 60 months following the grant date; stock volatility, 109.79%; risk-free
interest rates of 4.50%; and no dividends during the expected term. The fair
value of the warrant was determined to be $598,836 and appears on the balance
sheet as Fair Value of Warrant Liability along with the warrants issued pursuant
to the private placement transaction closed in November 2005. As of December
31,
2007 and 2006, the fair value of the warrant was calculated using the
Black-Scholes pricing model with the following assumptions: expected life of
45
and 57 months, respectively; stock volatility of 135.04% and 110.12%,
respectively; risk-free interest rates of 3.45% and 4.71%, respectively; and
no
dividends during the expected term. As of December 31, 2007 and 2006, the fair
value of the warrant was determined to be $658,084 and $911,077, respectively,
resulting in a decrease of the fair value of the warrant issued to Demand Media
of $252,993. The warrant was offered and sold by the Company in reliance on
exemptions from registration provided by Section 4(2) of the Securities Act
as
such transaction did not involve any public offering.
On
February 16, 2005, pursuant to a consulting agreement
between the Company and its investor relations firm, the Company issued 20,000
shares of common stock to our investor relations firm in return for services
rendered for a total of $76,000 to InfoSearch. The Company relied on the
exemptions from registration provided by Section 4(2) of the Securities Act
and
Regulation D promulgated thereunder, because the transaction did not involve
any
public offering and was made in connection with a privately negotiated
transaction.
The
company issued 4,510,411 shares of restricted common stock in 2006 to members
of
the Company's board of directos and certain officers. The Company incurred
$2,894,423 in non-cash equity compensation expenses associated with these
grants, of which $2,849,423 was included in general and administrative expense
and $45,000 was included in discontinued operations. The Company issued 46,025
shares of common stock to certain employees as part of incentive or
severance programs, incurring $14,480 in non-cash equity compensation
expenses.
See
reports of independent registered public accounting firms.
The
Company issued 264,477 shares of restricted common stock in 2007 to an employee.
The Company incurred $83,076 in non-cash equity compensation expenses associated
with these grants, which was included in general and administrative expense.
Per
the employee's employment agreement, the Company has the right to pay the
employee his base salary in cash or common shares. The number of shares was
determined based on the fair market value of the Company’s common stock on
September 30, 2006.
On
January 8, 2007 the Company agreed to acquire certain assets of Naturally
Open,
Inc. for 113,636 shares of common stock, which was amended on May 21, 2007,
and
the stock was issued on October 16, 2007. At the time of the transaction,
InfoSearch Media stock was valued at 22 cents a share, the Company recorded
$25,000 in non-cash expenses associated with these grants, which was included
in
general and administrative expenses.
During
2007 the Company issued 100,000 shares of restricted stock to Mr. Frank
Knuettel, II. This was in connection with a consulting agreement he entered
into
subsequent to his resignation as Chief Financial Officer of the Company
effective June 15, 2007, whereby he provided certain ongoing services to
the
Company through September 15, 2007 for which he received cash compensation
as
well as 100,000 shares of restricted stock which vested in three essentially
equal monthly installments through September 15, 2007. The Company incurred
$16,000 in non-cash equity compensation expenses associated with these grants,
which was included in general and administrative
expenses.
Preferred
Stock
The
board
of directors is authorized, without further stockholder approval, to issue
up to
25,000,000 shares of preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions of these shares, including
dividend rights, conversion rights, voting rights, terms of redemption and
liquidation preferences, and to fix the number of shares constituting any series
and the designations of these series. These shares may have rights senior to
the
common stock. At December 31, 2007 and 2006, the Company had no shares of
preferred stock outstanding.
The
description of our securities contained herein is a summary only and may be
exclusive of certain information that may be important to you. For more complete
information, you should read our Certificate of Incorporation and its
restatements and amendments, together with our corporate bylaws.
The
2004
Stock Option Plan gives the board of directors the ability to provide incentives
through grants or awards of stock options, stock appreciation rights, and
restricted stock awards (collectively, “Awards”) to present and future employees
of us and our affiliated companies. Outside directors, consultants, and other
advisors are also eligible to receive Awards under the 2004 Stock
Option
Plan.
On
June
30, 2006, all of the stock option grants issued to employees prior to June
30,
2006 had exercise prices above the closing price at the end of the second
quarter. The board of
directors,
in an effort to maintain employee retention, approved the acceleration of
vesting of stock option grants and restricted stock grants, in the amount of
1,428,403 shares and 1,042,240 shares, respectively. Grants for all employees
employed as of the close of business on June 30, 2006 were accelerated as of
June 30, 2006. This resulted in a share-based compensation expense of
$1,041,029, associated with the acceleration of stock option grants and $718,790
associated with restricted stock grants. Both of these values are included
in
the total share-based compensation expense of $4,223,245 for the year-ended
December 31, 2006.
On
December 12, 2006, the 2004 Stock Option Plan was amended (as amended, the
“Plan”)
by
a vote
of the stockholders
to
increase the number of shares of common stock reserved to issuance to 10,425,000
from 5,212,500. If an incentive award expires or terminates unexercised or
is
forfeited, or if any shares are surrendered to us in connection with an Award,
the shares subject to such award and the surrendered shares will become
available for further awards under the Plan.
Shares
issued under the Plan through the settlement, assumption or substitution of
outstanding Awards or obligations to grant future Awards as a condition of
acquiring another entity will not reduce the maximum number of shares available
under the Plan. In addition, the number of shares subject to the Plan, any
number of shares subject to any numerical limit in the Plan, and the number
of
shares and terms of any Award may be adjusted in the event of any change in
our
outstanding common stock by reason of any stock dividend, spin-off, split-up,
stock split, reverse stock split, recapitalization, reclassification, merger,
consolidation, liquidation, business combination or exchange of shares or
similar transaction.
See
reports of independent registered public accounting firms.
No
more
than 1,000,000 shares of the authorized shares may be allocated to Awards
granted or awarded to any individual participant during any calendar year.
Any
shares of restricted stock and any shares underlying a grant of options that
are
forfeited will not count against this limit.
The
Plan
authorizes the grant of Incentive Stock Options and Nonqualified Stock Options.
Incentive Stock Options are stock options that satisfy the requirements of
Section 422 of the Code. Nonqualified Stock Options are stock options that
do
not satisfy the requirements of Section 422 of the Code. Options granted under
the Plan entitle the grantee, upon exercise, to purchase a specified number
of
shares from us at a specified exercise price per share. The committee determines
the period of time during which an Option may be exercised, as well as any
vesting schedule, except that no Option may be exercised more than ten years
after the date of grant. The exercise price for shares of common stock covered
by an Option cannot be less than the fair market value of the common stock on
the date of grant.
A
summary
of the Company’s stock option activity is as follows:
|
|
|
#
of Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
|
Outstanding
as of December 31, 2006
|
|
|
3,151,619
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,427,150
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
$
|
|
|
|
|
|
|
|
|
|
Cancelled
/ Forfeited
|
|
|
2,681,619
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
Outstanding
as of December 31, 2007
|
|
|
3,897,150
|
|
$
|
0.18
|
|
|
9.11
|
|
$
|
157,361
|
|
|
Exercisable
as of December 31, 2007
|
|
|
1,321,672
|
|
$
|
0.22
|
|
|
8.97
|
|
$
|
81,554-
|
|
|
Expected
to vest in future years
|
|
|
2,575,478
|
|
$
|
0.17
|
|
|
9.25
|
|
$
|
75,807-
|
|
The
weighted average grant date fair value of options granted during the year ended
December 31, 2007 and December 31, 2006, respectively, was $0.18 and $0.22.
The
intrinsic value of options exercised during the year ended December 31, 2006
was
$2,888.
Additional
information regarding options outstanding at December 31, 2007 is as
follows:
|
|
|
Options outstanding
|
|
Options exercisable
|
|
|
Exercise
prices
|
|
Number of
shares
|
|
Weighted
average
remaining
contractual
Life (Years)
|
|
Weighted
Average
Exercise
Price
|
|
Number
of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
|
$0.14
|
|
|
1,010,000
|
|
|
9.44
|
|
$
|
0.14
|
|
|
169,793
|
|
$
|
0.14
|
|
|
$0.15
|
|
|
210,000
|
|
|
9.84
|
|
$
|
0.15
|
|
|
-
|
|
$
|
0.15
|
|
|
$0.17
|
|
|
345,000
|
|
|
8.94
|
|
$
|
0.17
|
|
|
330,000
|
|
$
|
0.17
|
|
|
$0.19
|
|
|
440,000
|
|
|
9.16
|
|
$
|
0.19
|
|
|
94,821
|
|
$
|
0.19
|
|
|
$0.20
|
|
|
1,772,150
|
|
|
9.03
|
|
$
|
0.20
|
|
|
631,434
|
|
$
|
0.20
|
|
|
$0.22
|
|
|
17,500
|
|
|
8.57
|
|
$
|
0.22
|
|
|
8,750
|
|
$
|
0.22
|
|
|
$0.23
|
|
|
15,000
|
|
|
8.77
|
|
$
|
0.23
|
|
|
4,374
|
|
$
|
0.23
|
|
|
$0.39
|
|
|
10,000
|
|
|
8.26
|
|
$
|
0.39
|
|
|
10,000
|
|
$
|
0.39
|
|
|
$0.41
|
|
|
5,000
|
|
|
8.35
|
|
$
|
0.41
|
|
|
5,000
|
|
$
|
0.41
|
|
|
$0.78
|
|
|
50,000
|
|
|
7.84
|
|
$
|
0.78
|
|
|
50,000
|
|
$
|
0.78
|
|
|
$0.81
|
|
|
22,500
|
|
|
6.09
|
|
$
|
0.81
|
|
|
17,500
|
|
$
|
0.81
|
|
|
Total
Options
|
|
|
3,897,150
|
|
|
9.11
|
|
$
|
0.18
|
|
|
1,321,672
|
|
$
|
0.22
|
|
See
reports of independent registered public accounting firms.
Subject
to Section 14 of the InfoSearch Media, Inc. 2004 Stock Option Plan (the “Plan”)
as amended, there shall be reserved for issuance under the Plan an aggregate
of
10,450,000 shares of Common Stock. At December 31, 2007, 6,552,850 shares were
available for future grants under the Company's Stock Option Plan (remaining
balance reflects issuance of restricted stock).
As
of
December 31, 2007, the total compensation related to non-vested option awards
yet to be expensed was $351,190 to be recognized over a weighted average period
of 3.54 years.
As
of
December 31, 2007, we had 5,459,131 shares of restricted stock grants
outstanding to employees and directors of the Company.
A
summary
of the Company’s restricted stock activity is as follows:
|
|
|
Shares
|
|
Weighted
Average
Grant Date Fair
Value
|
|
|
Non
Vested Shares as of December 31, 2006
|
|
|
642,857
|
|
$
|
0.14
|
|
|
Granted
|
|
|
100,000
|
|
|
0.16
|
|
|
Forfeited
|
|
|
-
|
|
|
0.00
|
|
|
Vested
|
|
|
742,857
|
|
|
0.14
|
|
|
Non
Vested Shares as of December 31, 2007
|
|
|
0
|
|
|
0.00
|
|
|
10.
|
Related
Party Transactions
|
At
December 31, 2007 and December 31, 2006, accounts receivable from related
parties was $0 and $50,732, respectively, including amounts due from George
Lichter, Chief Executive Officer, of $0 and $19,338, respectively, and amounts
due from David Warthen, Chief Technology Officer until June 2007, of $12,530
and
$31,394, to repay the Company for income taxes paid on behalf of each
individual. Mr. Lichter paid the full amount to the Company in January 2007
and
Mr. Warthen paid $18,864 to the Company in March 2007.
As
of
December 31, 2005, the Company had a loan due from Walter Lazuka, an InfoSearch
stockholder and brother of our former director and executive officer Steve
Lazuka, totaling $25,000. This loan was entered into with Mr. Walter Lazuka
in a
series of transactions from March 19, 2004 through September 16, 2004. This
loan
was written off as uncollectible as of June 30, 2006.
On
August
23, 2005, we entered into a 12-month consulting agreement with Claudio Pinkus,
a
member of our board of directors (the
“
Pinkus
Consulting Agreement”). The Pinkus Consulting Agreement provided
for
an
annual consulting fee of $100,000 to be paid in semi-monthly payments. The
Pinkus Consulting Agreement also provided for a quarterly bonus payment of
up to
$25,000 for each quarter, as determined by the Company’s board
of
directors. Pursuant to the Pinkus Consulting Agreement, Mr. Pinkus provided
strategic and financial advisory consulting services to us as requested by
our
Chief Executive Officer or our board of directors. Pursuant to the Pinkus
Consulting Agreement, Mr. Pinkus was also granted 1,350,000 shares of restricted
stock, of which 450,000 shares vested on January 4, 2006, 300,000 shares vested
on each of February 23, 2006 and April 23, 2006 and a remaining installment
of
300,000 shares vested on June 30, 2006. Pursuant to the Pinkus Consulting
Agreement, on April 5, 2006, the board of directors
approved
the payment of $203,513 in cash and a grant of 450,027 shares of common stock
to
Mr. Pinkus in repayment of his tax obligations. The Pinkus Consulting Agreement
expired pursuant to its terms on August 23, 2006, and on November 9, 2006 our
board of directors granted Mr. Pinkus his full quarterly bonus for the second
and third quarters of 2006.
See
reports of independent registered public accounting firms.
|
11.
|
Commitments
and Contingencies
|
The
Company has entered into a non-cancelable operating lease for facilities
originally through May 31, 2009 but which has an early termination provision
effective July 31, 2008 which has been exercised. Rental expense was $229,073
and $193,360 for years ended December 31, 2007 and 2006, respectively. At
December 31, 2007
,
the
future minimum lease payments for the years ending December 31 are as
follows:
|
2008
|
|
|
130,750
|
|
|
Total
Minimum Lease Payments
|
|
$
|
130,750
|
|
The
Company had capital leases for equipment that ended in 2006. The leases were
for
24 and 36 months and contained bargain purchase provisions so that the Company
could purchase the equipment at the end of each lease. The capitalized lease
payments for the years ended December 31, 2007 and 2006 were $17,621 and
$39,949, respectively. Total interest expense for the years ended December
31,
2007 and 2006 was $1,165 and $5,793, respectively.
Employment
Agreements
We
entered into an employment agreement effective August 23, 2005 with George
Lichter as Chief Executive Officer, which was subsequently amended effective
July 1, 2006 (as amended,
the
“Lichter Employment Agreement”). The Lichter Employment Agreement, as amended,
provides for an annual base salary of $250,000,
subject
to annual increases, and an annual performance-based bonus of up to $150,000.
In
addition, Mr. Lichter receives an automobile allowance of $600 per
month.
Pursuant
to the Lichter Employment Agreement, Mr. Lichter was granted, under the Stock
Option Plan, a restricted stock award representing 675,000 shares of our common
stock, of which 225,000 shares vested on January 4, 2006 and the remaining
shares vested in three installments of 150,000 shares each on February 23,
2006,
April 23, 2006 and August 23, 2006.
Mr.
Lichter may participate, as a selling stockholder, in any financing transaction
undertaken by us for the purpose of satisfying the tax liability incurred by
Mr.
Lichter as a result of the restricted stock award. Pursuant to the Lichter
Employment Agreement, the Company paid Mr. Lichter’s tax liability in connection
with his restricted stock grant.
Lichter
was also subsequently granted an additional stock award representing 675,000
shares of our common stock, of which 225,000 shares vested on January 4, 2006
and the remaining shares vested in three installments of 150,000 shares each
on
February 23, 2006, April 23, 2006 and August 23, 2006.
Pursuant
to the decision by the board of directors to accelerate the vesting of
outstanding options and shares of restricted stock, all of these options and
shares of restricted stock became fully exercisable as of June 30, 2006.
Mr.
Lichter may terminate the Lichter Employment Agreement and his employment with
the Company for Good Reason (as defined in the Lichter Employment Agreement),
including in connection with a Change of Control (as defined in the Lichter
Employment Agreement) that results in the termination of Mr. Lichter’s
employment with the Company or a material adverse change in Mr. Lichter’s duties
and responsibilities. If Mr. Lichter terminates the Lichter Employment Agreement
and his employment with the Company for Good Reason or in connection with a
Change of Control as described above, or if the Company terminates the Lichter
Employment Agreement and Mr. Lichter’s employment with the Company without Cause
(as defined in the Lichter Employment Agreement) (and, with respect to (ii),
(iii) and (iv) below, so long as Mr. Lichter has not and does not violate
certain provisions of the Lichter Employment Agreement), the Company will
pay
or
provide to Mr. Lichter: (i) any earned but unpaid base salary, unpaid pro rata
annual bonus and unused vacation days accrued through his last day of employment
with the
Company,
including any carryover days; (ii) Mr. Lichter’s full base salary for six
months; (iii) Mr. Lichter’s annual bonuses that he would have been awarded
during the same six month period; and (iv) continued coverage, at the Company’s
expense, under all benefits plans in which Mr. Lichter was a participant
immediately prior to his last date of employment with the Company. In addition,
any unvested shares of restricted common stock granted pursuant to the Lichter
Employment Agreement will automatically vest.
Employment
under the Lichter Employment Agreement is at will and therefore InfoSearch
may
terminate Mr. Lichter’s employment at any time and for any reason subject to the
provisions set forth above.
See
reports of independent registered public accounting firms.
On
May 1,
2007, the Company, entered into a Second Amendment to Employment Agreement
(the
“Second Amendment”) with George Lichter, the Company's Chief Executive Officer
and a director of the Company. The Second Amendment, effective as of January
12,
2007, amends Mr. Lichter's Employment Agreement dated January 4, 2006 and
effective as of August 23, 2005, as amended by the Amendment to Employment
Agreement, effective as of July 1, 2006 (as amended by the Amendment to
Employment Agreement, the “Employment Agreement”) and among other things, that
Mr. Lichter is eligible to receive a quarterly bonus in an amount not to exceed
25% of his then current base salary for each calendar quarter (or a pro-rata
portion of such bonus in the case of a period of less than three months) within
the board of directors' sole discretion and also revises the definition of
a
“Change of Control” so that a change of ownership in the outstanding voting
securities of the Company constituting a “Change of Control” is determined based
on the outstanding voting securities owned collectively by the common
stockholders and warrant holders of the Company as of January 12, 2007, rather
than August 23, 2005 as provided for in the Employment Agreement prior to the
Second Amendment.
On
June
9, 2007, the Company entered into an employment agreement with Scott Brogi,
the
Company's Chief Financial Officer with an annual base salary of $200,000.
Additionally Mr. Brogi is eligible for a bonus of 40% of his base salary. The
basis for this bonus is revenue and operating income goals and individual goals
to be determined. Mr. Brogi also received an option to purchase 1,000,000 shares
of the Company's Common stock at $0.14 per share, the closing price as of June
11, 2007. These options were granted on June l1, 2007, expire ten years after
the grant date and vest on an equal monthly basis over a 36 month period. In
the
event Mr. Brogi’s employment is terminated or his responsibilities are
materially reduced within 12 months of a change of control of the Company,
Mr.
Brogi will receive six months of base salary and a 6 month acceleration of
vesting of these stock options. Change of control is defined as the acquisition
by a single shareholder (or beneficial owner) of a minimum of 51% of the then
outstanding ordinary shares of the Company. Upon termination, death or long
term
disability, Mr. Brogi receives additional benefits under the agreement. If
termination is without cause, he is entitled to 3 months salary, any bonus
earned through the date of termination and 3 months acceleration of vesting
of
his stock options.
We
entered into an executive employment agreement with Frank Knuettel II, dated
March 8, 2005
(the
“Knuettel Employment Agreement”). The Knuettel Employment Agreement provides for
an initial annual base salary of $175,000, provided that if Mr. Knuettel remains
in the employment of the Company in the month following the second consecutive
quarter that the Company is profitable on a GAAP basis, his
a
nnual
base salary will be increased to $185,000. The Knuettel Employment Agreement
further provides for a potential target bonus equal to 30% of
his
then
current annual base salary, contingent on the Company’s achieving revenue and
operating income goals and Mr. Knuettel’s attaining individual goals established
by the board
of
directors. Under the Knuettel Employment Agreement, Mr. Knuettel received
options to purchase up to 262,500 shares of our common stock at an exercise
price of $0.76 per share pursuant to the Stock Option Plan, which vest over
a
four-year period. Additionally, Mr. Knuettel received an award of 352,500
restricted shares of our common stock, which also vest over a four-year period
of his employment with the Company. Mr. Knuettel was also subsequently granted
an additional stock award representing 167,500 shares, under which 25% of the
shares vested on January 4, 2006, 12.5% of the shares vested
on
July
7, 2006 and the remaining shares will vest over three years in equal, monthly
installments, ending on January 4,
2009.
Mr.
Knuettel was granted an additional option award representing 82,500 shares,
under which 25% of the shares vested on January 4, 2006, 12.5% of the shares
vested on July 7, 2006 and the remaining shares will vest over three years
in
equal, monthly installments, ending on January 4, 2009. Pursuant to the decision
by the board of directors to accelerate the vesting of outstanding options
and
shares of restricted stock, all of these options and shares of restricted stock
became fully exercisable as of June 30, 2006. Mr. Frank Knuettel, II, resigned
as Chief Financial Officer of the Company effective June 15, 2007. Thereafter
Mr. Knuettel was party to a consulting agreement whereby he provided certain
ongoing services to the Company through September 15, 2007 for which he received
cash compensation as well as 100,000 shares of restricted stock which have
fully
vested in three essentially equal monthly installments through September 15,
2007.
See
reports of independent registered public accounting firms.
We
made
an offer of employment, which was accepted and may be deemed an employment
agreement, to Robert Myers, our Vice President of Production on January 8,
2008
(the
“Myers Employment Agreement”). The Myers Employment Agreement does not have a
termination date and sets forth the following terms and conditions: During
the
Term, the Company shall pay, and the Executive agrees to accept, in
consideration for the Executive’s services hereunder,
pro
rata
semi-monthly payments of the annual salary of $140,000.00, less all applicable
taxes and other appropriate deductions. The Executive’s base salary will be
subject to further adjustment pursuant to the Company’s employee compensation
policies in effect from time to time. The Executive shall be entitled to a
potential target bonus of thirty-five percent (35%) of Executive’s annual base
salary. Subject to the Board’s consent, the Company shall issue to the Executive
an option to acquire 250,000 shares of the Company’s common stock (the “Common
Stock”) pursuant to the Company’s 2004 Stock Option Plan, as amended on December
12, 2006 (the “Plan”).
The
exercise
price of the option to be granted pursuant to this paragraph 9(a) shall be
equal
to the fair market value per share of the Common Stock as determined by the
closing price on the date of the grant. Such grant shall be evidenced by and
subject to the terms and conditions of an option agreement in a form
substantially similar to that attached hereto as Exhibit A. The vesting period
of the grant shall be four years, with vesting commencing on the Effective
Date.
One-eighth of the shares shall vest on the six month anniversary of the
Effective Date with the balance of the shares vesting in equal monthly
installments over the following forty-two months. On each of the first two
anniversaries of the Effective Date, subject to determination of merit during
an
annual performance review and Board’s consent, and provided that Executive
continues to be employed by the Company on each of the anniversary dates,
Executive shall be entitled to an additional grant of 62,500 shares on each
anniversary.
At
any
time during the Term, the Company may terminate this Agreement and the
Executive’s employment hereunder for Cause. For purposes of this Agreement,
“Cause” shall mean: (a) the willful and continued failure of the Executive to
perform substantially his duties and responsibilities for the Company (other
than any such failure resulting from a Disability) after a written demand by
the
Board for substantial performance is delivered to the Executive by the Company,
which specifically identifies the manner in which the Board believes that the
Executive has not substantially performed his duties and responsibilities,
which
willful and continued failure is not cured by the Executive within thirty (30)
days of his receipt of such written demand; (b) the conviction of, or plea
of
guilty or
nolo
contendere
to a
felony, after the exhaustion of all available appeals; or (c)
fraud,
dishonesty, competition with the Company, unauthorized use of any of the
Company’s or any of its subsidiary’s trade secrets or confidential
information,
or gross
misconduct which is materially and demonstratively injurious to the Company.
Termination under [for cause] shall not be subject to cure. Termination of
the
Executive for Cause pursuant to [subsection (a) ] shall be made by delivery
to
the Executive of a copy of the written demand referred to in [subsection (a),
or
pursuant to [subsection] (b) or (c) by delivery to the Executive of a written
notice from the Board, either of which shall specify the basis of such
termination, the conduct justifying such termination, and the particulars
thereof and finding that in the reasonable judgment of the Board, the conduct
set forth in [subsection] (a), [subsection] (b) or [subsection] (c), as
applicable, has occurred and that such occurrence warrants the Executive’s
termination of employment. Upon receipt of such demand or notice, the Executive,
shall be entitled to appear before the Board for the purpose of demonstrating
that Cause for termination does not exist or that the circumstances which may
have constituted Cause have been cured in accordance with the provisions of
[subsection] (a). No termination shall be final until the Board has reached
a
determination regarding “Cause” following such appearance. Upon termination of
this Agreement for Cause, the Company shall have no further obligations or
liability to the Executive or his heirs, administrators or executors with
respect to compensation and benefits thereafter, except for the obligation
to
pay the Executive any earned but unpaid base salary. The Company shall deduct,
from all payments made hereunder, all applicable taxes, including income tax,
FICA and FUTA, and other appropriate deductions.
See
reports of independent registered public accounting firms.
At
any
time during the Term, the either Party shall be entitled to terminate this
Agreement and the Executive’s employment with the Company without cause. If the
Executive terminates this Agreement, the Executive shall provide prior written
notice of at least 30 days to the Company. Upon termination of this Agreement
and the Executive’s employment with the Company pursuant to this paragraph
10(d)(i) by the Company, the Company shall have no further obligations to the
Executive or his heirs, administrators or executors with respect to compensation
and benefits thereafter, except for the obligation to pay to the Executive
any
earned but unpaid base salary, any unpaid expenses and base salary and
acceleration of stock option vesting according to the following schedule: If
the
Company terminates this Agreement between January 8, 2007 and January 7, 2008,
Executive will receive base salary for three (3) months after the date of
termination and will forward vest an additional three (3) months after the
date
of termination. If the Company terminates this Agreement between January 8,
2008
and January 7, 2009, Executive will receive base salary for four (4) months
after the date of termination and will forward vest an additional four (4)
months after the date of termination. If the Company terminates this Agreement
between January 8, 2009 and January 7, 2010, Executive will receive base salary
for five (5) months after the date of termination and will forward vest an
additional five (5) months after the date of termination. If the Company
terminates this Agreement between January 8, 2010 and January 7, 2011, Executive
will receive base salary for six (6) months after the date of termination and
will forward vest an additional six (6) months after the date of termination.
Under no circumstances shall the salary continuation or the forward vesting
exceed six (6) months, regardless of length of service. The Company shall
deduct, from all payments made hereunder, all applicable taxes, including income
tax, FICA and FUTA, and other appropriate deductions. The amounts described
in
paragraph 10(d)(i) shall be paid to the Executive in the same manner as they
would have been paid, in accordance with the provisions of paragraph 5(a),
had
the Executive remained employed by the Company.
We
made
an offer of employment, which was accepted and may be deemed an employment
agreement, to Heather Gore, our Vice President of Marketing on January 2,
2008
(the
“Gore Employment Agreement”). The Gore Employment Agreement does not have a
termination date and provides for the following terms and conditions: to
provide
Ms. Gore with an annual salary of $130,000 ($5,416.66 per pay period) less
payroll deductions and all required withholdings; a bonus plan - 35% of base
pay, paid out quarterly, with metrics objectives developed and mutually agreed
upon within the first 90 days of her employment. No bonus will be payable until
such time as the metrics objectives are identified and agreed upon. Upon the
commencement of Ms. Gore’s employment and subject to Board approval, the Company
will grant her an option to purchase 125,000 shares of the Company’s Common
Stock (the “Option”) at an exercise price equal to the fair market value on the
date of grant. The Option shall be subject to the vesting restrictions and
all
other terms of the Company’s current Stock Option Plan and your Stock Option
Agreement. However, we will propose to the Board that her initial cliff vesting
period be reduced from twelve (12) months to six (6) months. Ms. Gore’s regular
place of employment will be Austin, Texas. However, she will also work out
of
the Los Angeles area office at least one week per month. Reasonable travel
expenses will be reimbursed to her according to the company’s travel and expense
reimbursement policies. Ms. Gore’s employment with the company is “at-will.” The
terms of her employment with the Company; however, does not constitute an
employment contract for a specified duration. Ms. Gore’s employment may be
terminated with our without cause or notice at any time, at the option of either
her or the Company. Ms. Gore has executed the Company’s Employee Proprietary
Information and Inventions Agreement, Insider Trading Agreement.
We
made
an offer of employment, which was accepted and may be deemed an employment
agreement, to David Warthen, our Chief Technology Officer on June 11, 2006
(the
“Warthen Employment Agreement”)
.
The
Warthen Employment Agreement does not have a termination date. Mr. Warthen
also
currently serves as the Chief Executive Officer of Eye Games, Inc., a developer
of web-cam, interactive video games. We do not have any relationship with Eye
Games, Inc., and we have never been a party to any transaction or agreement
with
Eye Games, Inc. The Warthen Employment Agreement provides for an initial annual
base salary of $180,000, which shall be paid in cash or shares of InfoSearch
common stock issued, at the Company’s option. The Company has the right to pay
Mr. Warthen in cash or stock for the first year of his employment, which began
on July 1, 2006. The Company elected to pay Mr. Warthen with stock for the
first
year and Mr. Warthen is receiving his base salary in the form of common stock,
which amounts to 107,143 shares per month, or portion thereof, for a total
of
1,285,714 shares through the one year anniversary date of his employment with
the Company. The number of shares was determined based on the fair market value
of the Company’s common stock on September 30, 2006. Through March 31, 2007, Mr.
Warthen earned 964,286 shares of our common stock. Under the Warthen
Employment Agreement, Mr. Warthen received options to purchase up to 400,000
share of our common stock pursuant to the Stock Option
Plan,
which shall vest in equal monthly installments over three years. Mr. Warthen’s
employment with InfoSearch was on an “at will” basis, and Mr. Warthen resigned
as of June 2007.
See
reports of independent registered public accounting firms.
Acquisition
of Answerbag
On
February 22, 2006, InfoSearch entered into an Agreement and Plan of Merger
and
Reorganization ("Merger Agreement") with Answerbag, Inc., a privately held
California corporation ("Answerbag") and Apollo Acquisition Corp., a California
corporation and a wholly-owned subsidiary of InfoSearch ("Merger Sub"). Pursuant
to the terms of the Merger Agreement, Merger Sub merged with and into Answerbag,
with Answerbag surviving as a wholly-owned subsidiary of InfoSearch (the
"Answerbag
Merger").
The proforma results of operations for the current period and a comparable
prior
period as though the acquisition of Answerbag had been completed at the
beginning of the periods is not presented since the results of operations of
Answerbag for those periods is not material.
The
Merger closed on March 3, 2006. Under the terms of the transaction, the Company
acquired 100% of the issued and outstanding capital stock of Answerbag for
$161,875 in cash and issuance of 351,902 shares of InfoSearch common stock
with
a market value of $161,875, based on the five day average closing price of
$0.46
per share prior to the consummation of the transaction. Answerbag is a
user-generated question and answer content website, which can be found at
www.answerbag.com
.
Questions, answers and ranking of answers on the Answerbag website are supplied
by a growing community of registered users. In addition, the Company incurred
$27,460 in direct acquisition costs.
Per
the
Merger
Agreement,
the Company will pay up to an additional $300,625 in cash and issue up to
653,533 additional shares of common stock having a market value of
$300,625. These amounts will be issued in four installments at 90, 180, 270
and
360 days after the close based on performance contingencies as detailed in
the
Merger Agreement, which states that the purchase price will be adjusted if
Mr.
Joel Downs, founder of Answerbag, terminates his employment with the Company
or
if average traffic volume falls below certain levels. The Company made the
first
three contingent payments aggregating $225,469 pursuant to the agreement, one
third on each of
June
9,
2006, September 12, 2006 and December
7,
2006,
and
issued our common stock aggregating 492,846 shares, one third on each
of
June
9,
2006, September 7, 2006 and November 29, 2006.
As
a
result of the sale of substantially all of the assets of Answerbag to Demand
Media, Inc., the performance contingencies were removed and the final cash
payment of $15,156 was made as of September 30, 2007 and the issuance of 164,282
shares of common stock with a monetary value of $22,586 was made quarterly
through December 31, 2007.
.
The
total
purchase price is summarized as follows:
|
Cash
consideration
|
|
$
|
462,500
|
|
|
Common
stock
|
|
|
288,361
|
|
|
Acquisition
related costs
|
|
|
27,460
|
|
|
|
|
|
|
|
|
Total
purchase price
|
|
$
|
778,321
|
|
|
|
|
|
|
|
|
The
Company’s allocation of the purchase price is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
$
|
14,935
|
|
|
Intangible
assets
|
|
|
763,386
|
|
|
Total
Assets
|
|
$
|
778,321
|
|
The
intangible assets that the Company purchased were the Answerbag.com website,
Answerbag.com trade name and the website's registered users. The Company has
performed a valuation analysis, including the purchase price allocation and
determination of the useful life of the intangible assets. The valuation
analysis concluded that there was no goodwill acquired as part of the purchase
transaction. The analysis further concluded that the amortizable life of the
acquired definite-lived intangible assets is five years.
See
reports of independent registered public accounting firms.
Discontinued
Operations of Answerbag
Due
to
the rise in competition and the considerable investment that would be needed
to
bring Answerbag to fruition, the board of directors approved the sale of
Answerbag on September 30, 2006. On October 3, 2006, the Company entered into
an
Asset Purchase Agreement to sell substantially all of the assets of Answerbag
to
Demand Answers, Inc. and its parent, Demand Media, Inc. in exchange for cash
proceeds of $3,000,000. Of this amount, $300,000 was deposited into escrow
for a
period of up to 12
months
pending any unknown contingent liabilities.
The
board
of
directors approved the sale of substantially all of the assets of Answerbag
on
September 30, 2006. On October 3, 2006, the Company entered into an Asset
Purchase Agreement (the “Asset Purchase Agreement”)
to
sell
substantially all of the assets of Answerbag to Demand Answers, Inc. and its
parent, Demand Media. In conjunction with the agreement, Demand Media received
a
five year warrant to purchase 5,000,000 shares of the Company's common stock
at
a purchase price of $0.158 per share that expires on October 3, 2011 (refer
to
Note 8). Pursuant to the Asset Purchase Agreement, Demand Media also received
the right to appoint one member to the board of directors of the Company, which
they have not exercised.
In
accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long
Lived Assets”, the Company is accounting for the operations of Answerbag as a
discontinued operation. The results of operations of Answerbag are reflected
as
discontinued operations for the year ended December 31, 2006. The revenues
and
net loss of Answerbag for the year ended December 31, 2006 are summarized
below:
|
Revenues
|
|
$
|
59,777
|
|
|
Pretax
Loss
|
|
|
(412,132
|
)
|
|
Gain
on sale
|
|
|
1,919,962
|
|
|
Net Earnings
from Discontinued Operations
|
|
$
|
1,507,830
|
|
Demand
Media also agreed to purchase content from the Company for a total consideration
of $2,000,000. The purchase price for existing content will be paid in two
installments totaling $200,000 within five days of October 4, 2006 and the
amount related to new, original content will be paid in equal installments
of
$300,000 to be paid quarterly over six consecutive quarters, beginning October
1, 2006. In addition, as further discussed in Note 4, Demand Media issued
warrants to the Company to purchase 125,000 shares of Series C Preferred Stock
of Demand Media, which preferred stock represents less than one-tenth of a
percent of the outstanding capital stock of Demand Media. Upon the close of
the
transaction with Demand Media, Inc. InfoSearch received initial payments of
$3,200,000.
The
company entered into a Settlement Agreement dated as of December 11, 2007,
with
McGuire Woods LLP with respect to claims asserted by the Company arising from
acts or omissions by Mr. Louis Zehil, a former partner of McGuire Woods LLP
and
the Company’s former corporate secretary including transactions in Company
securities by an affiliate of Mr. Zehil. The Settlement Agreement provides
for:
(1) a cash payment to the Company of $450,000 by McGuire Woods LLP which has
been received by the Company, and (2) the mutual release of certain claims
by
the Company and McGuire Woods LLP. The proceeds of this settlement less certain
legal fees associated with the investigation have been displayed as Other Income
to differentiate them from recurring Operating Results.
See
reports of independent registered public accounting firms.
On
January 2, 2008, the Company dismissed Singer Lewak Greenbaum &
Goldstein, LLP ("SLGG") as its independent registered public accounting firm.
The decision to change independent registered public accounting firms was
approved by the Company’s Audit Committee. SLGG's reports on the Company's
financial statements for the last two fiscal years ended December 31, 2006
(collectively, the "Prior Fiscal Years"), did not contain an adverse opinion
or
disclaimer of opinion, nor were such reports qualified or modified as to
uncertainty, audit scope or accounting principles. There were no disagreements
("Disagreements") between the Company and SLGG during either (i) the Prior
Fiscal Years, or (ii) the period January 1, 2007 through January 2, 2008 (the
"Current Fiscal Year") on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
Disagreement, if not resolved to the satisfaction of SLGG, would have caused
SLGG to make reference to the subject matter of the Disagreement in connection
with its reports. There were no reportable events as defined under Item
304(a)(1) of Regulation S-B, during either (i) the Prior Fiscal Years or (ii)
the Current Fiscal Year. This was originally disclosed on Form 8-K on January
7,
2008 as amended by Form 8-K/A on January 23, 2008.
On
January 23, 2008, Claudio Pinkus, Chairman of the Board of Directors of
InfoSearch Media, Inc., a Delaware corporation (the “Company” or “Registrant”),
informed the Company that he was resigning as Chairman and as a director
effective as of January 23, 2008, for personal reasons, as originally disclosed
in Form 8-K filed on January 29, 2008.
On
March
7, 2008, Bob Myers, Vice President, Production was terminated.
On
March
10, 2008, Heather Gore, Vice President, Marketing resigned effective immediately
but entered into a consulting agreement to provide the Company with certain
ongoing marketing services.
The
Company’s contract with its largest single client, Demand Media, Inc. expired as
of March 31, 2008, and on April 9, 2008 the Company entered into a new contract
to provide similar content to Demand Media, Inc. in support of the one of its
high profile web properties - although discussed earlier in this report the
business levels and terms are not as advantageous to the Company as the previous
contract.
See
reports of independent registered public accounting firms.
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