UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
|
|
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF
1934
|
For
the
quarterly period ended June 30, 2008
|
|
o
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
|
For
the
transition period from __________ to ____________.
Commission
file number
333-97385
INFOSEARCH
MEDIA, INC.
(Exact
name of Small Business Issuer as specified in its charter)
|
Delaware
|
|
90-0002618
|
|
(State
or other jurisdiction of
|
|
(IRS
Employer
|
|
incorporation
or organization)
|
|
Identification
No.)
|
6041
Bristol Parkway, Culver City, California 90230
(Address
of principal executive offices)
(310)
437-7380
(Small
Business Issuer’s telephone number)
Check
whether the Small Business Issuer (1) filed all reports required to be filed
by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the small business issuer was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes
x
No
o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
126-2 of the Exchange Act).
Yes
o
No
x
Transitional
Small Business Disclosure Format (Check one):
Yes
o
No
x
As
of
August 19, 2008, 52,493,592 shares of the Small Business Issuer’s common stock,
$.001 par value, were issued and outstanding.
TABLE
OF CONTENTS
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Page
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PART
I -FINANCIAL INFORMATION
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Item
1. Financial Statements
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Consolidated
Balance Sheet
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3
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Consolidated
Statements of Operations
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4
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Consolidated
Statements of Cash Flows
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5
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Footnotes
to Consolidated Financial Statements
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6
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Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
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11
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Item
3. Controls and Procedures
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17
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PART
II - OTHER INFORMATION
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Item
1. Legal Proceedings
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18
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Item
6. Exhibits
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18
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SIGNATURES
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19
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PART
I - FINANCIAL INFORMATION
Item
1: Financial Statements
INFOSEARCH
MEDIA, INC.
CONSOLIDATED
BALANCE SHEETS
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June
30,
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December
31,
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2008
|
|
2007
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(Unaudited)
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(Audited)
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CURRENT
ASSETS:
|
|
|
|
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Cash
and cash equivalents
|
|
$
|
130,585
|
|
$
|
787,239
|
|
|
Restricted
cash
|
|
|
-
|
|
|
20,000
|
|
|
Accounts
receivable
|
|
|
333,248
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215,518
|
|
|
Prepaid
and other current assets
|
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102,228
|
|
|
141,745
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TOTAL
CURRENT ASSETS
|
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566,061
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1,164,202
|
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EMPLOYEE
ADVANCE
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2,300
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|
1,800
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PROPERTY
AND EQUIPMENT, NET
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110,708
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130,650
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EQUITY
WARRANT ASSET
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108,014
|
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112,049
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TOTAL
ASSETS
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$
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787,083
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$
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1,408,701
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LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
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CURRENT
LIABILITIES:
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Accounts
payable
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$
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135,198
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$
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228,308
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Accrued
salaries and bonuses and expenses
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44,314
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12,553
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Accrued
expenses
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36,320
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170,882
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Deferred
revenue
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359,375
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526,868
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Provision
for refunds payable/chargebacks
|
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15,842
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15,842
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Current
Tax Liability
|
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1,250
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1,250
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TOTAL
CURRENT LIABILITIES
|
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592,299
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955,703
|
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FAIR
VALUE OF WARRANT LIABILITY
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147,003
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967,651
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DEPOSIT
ON SUBSCRIPTION
|
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230,000
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-
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STOCKHOLDERS'
EQUITY (DEFICIT):
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Common
stock, $.001 par value, 200,000,000 shares authorized; 52,493,592
shares
issued and outstanding for the periods ending June 30, 2008 and
December
31, 2007
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52,494
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52,494
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Additional
paid in capital
|
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11,426,111
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11,336,742
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Accumulated
deficit
|
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(11,660,824
|
)
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(11,903,889
|
)
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TOTAL
STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
(182,219
|
)
|
|
(514,
653
|
)
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TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
$
|
787,083
|
|
$
|
1,408,701
|
|
|
See
accompanying notes to financial
statements.
|
INFOSEARCH
MEDIA, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
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For
the three months
ended
June 30,
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For
six months
ended
June 30,
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|
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2008
|
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2007
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|
2008
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2007
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CONTENT
SALES
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$
|
572,594
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$
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1,120,194
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$
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1,605,023
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$
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2,396,109
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WEB
PROPERTIES SALES
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9,116
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39,799
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25,973
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70,749
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NET
SALES
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581,710
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1,159,993
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1,630,996
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2,466,858
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CONTENT
COST OF SALES
|
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234,806
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438,752
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588,401
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899,927
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WEB
PROPERTIES COST OF SALES
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26,493
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16,900
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46,452
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32,221
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COST
OF SALES
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261,299
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455,652
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634,853
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932,148
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GROSS
PROFIT
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320,411
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704,341
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996,143
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1,534,710
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OPERATING
EXPENSES
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General & Administrative
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467,230
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1,349,193
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1,126,520
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2,371,469
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Selling
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208,052
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427,384
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448,137
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961,511
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TOTAL OPERATING EXPENSES
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675,282
|
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1,776,577
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1,574,657
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3,332,979
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LOSS
FROM OPERATIONS
|
|
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(354,871
|
)
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(1,072,236
|
)
|
|
(578,514
|
)
|
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(1,798,269
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)
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CHANGE
IN FAIR VALUE OF WARRANTS
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326,551
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(61,745
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)
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816,613
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234,458
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|
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INTEREST
INCOME, NET
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|
655
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18,186
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5,228
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34,966
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INCOME
(LOSS) FROM CONTINUING OPERATIONS BEFORE TAX
|
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(27,665
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)
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(1,115,796
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)
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243,327
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(1,528,846
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)
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TAXES
FROM CONTINUING OPERATIONS
|
|
|
800
|
|
|
825
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|
262
|
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|
2,875
|
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NET
INCOME (LOSS) FROM CONTINUING OPERATIONS
|
|
|
(28,465
|
)
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|
(1,116,621
|
)
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243,065
|
|
|
(1,531,721
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$
|
(28,465
|
)
|
$
|
(1,116,621
|
)
|
$
|
243,065
|
|
$
|
(1,531,721
|
)
|
|
|
|
|
|
|
|
|
|
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|
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EARNINGS
(LOSS) PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
BASIC
|
|
$
|
(0.00
|
)
|
$
|
(0.02
|
)
|
$
|
0.00
|
|
$
|
(0.03
|
)
|
|
DILUTED
|
|
$
|
(0.00
|
)
|
$
|
(0.02
|
)
|
$
|
0.00
|
|
$
|
(0.03
|
)
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING - BASIC
|
|
|
52,493,592
|
|
|
52,547,662
|
|
|
52,493,592
|
|
|
52,132,276
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING - DILUTED
|
|
|
52,493,592
|
|
|
52,547,662
|
|
|
52,493,592
|
|
|
52,132,276
|
|
See
accompanying notes to financial statements.
INFOSEARCH
MEDIA, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
Six Months Ended June
30,
|
|
|
|
|
2008
|
|
2007
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
Income (loss)
|
|
$
|
243,065
|
|
$
|
(1,531,721
|
)
|
|
|
|
|
|
|
|
|
|
|
Adjustment
to reconcile net earnings (loss) to net cash
|
|
|
|
|
|
|
|
|
used
in operating activities
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
23,832
|
|
|
60,038
|
|
|
Equity
based compensation
|
|
|
89,369
|
|
|
169,718
|
|
|
Change
in fair value of warrant liability
|
|
|
(820,648
|
)
|
|
(232,949
|
)
|
|
Change
in fair value of equity warrant asset
|
|
|
4,035
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(118,030
|
)
|
|
19,183
|
|
|
Due
from related parties
|
|
|
(500
|
)
|
|
34,423
|
|
|
Prepaid
expenses and other current assets
|
|
|
2,017
|
|
|
49,852
|
|
|
Employee
Advances
|
|
|
-
|
|
|
(3,700
|
)
|
|
Security
Deposit
|
|
|
37,500
|
|
|
-
|
|
|
Accounts
payable, accrued expenses and other liabilities
|
|
|
(195,911
|
)
|
|
(352,964
|
)
|
|
Current
tax liability
|
|
|
-
|
|
|
1,250
|
|
|
Provision
for refunds
|
|
|
-
|
|
|
(16,482
|
)
|
|
Deferred
revenue
|
|
|
(167,493
|
)
|
|
(37,325
|
)
|
|
Total
adjustments
|
|
|
(1,145,829
|
)
|
|
(305,763
|
)
|
|
|
|
|
|
|
|
|
|
|
NET
CASH USED IN OPERATING ACTIVITIES:
|
|
|
(902,764
|
)
|
|
(1,840,677
|
)
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
20,000
|
|
|
288
|
|
|
Capital
expenditures - fixed assets
|
|
|
(3,890
|
)
|
|
(68,250
|
)
|
|
NET
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
|
|
16,110
|
|
|
(67,962
|
)
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Principal
payments of capital lease obligations
|
|
|
-
|
|
|
(17,162
|
)
|
|
Warrant
exercise
|
|
|
-
|
|
|
3,600
|
|
|
Deposit
on Subscription
|
|
|
230,000
|
|
|
-
|
|
|
NET
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
|
|
230,000
|
|
|
(13,652
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(656,654
|
)
|
|
(1,922,201
|
)
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - BEGINNING OF PERIOD
|
|
|
787,239
|
|
|
2,495,654
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - END OF PERIOD
|
|
$
|
130,585
|
|
$
|
573,453
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
0
|
|
$
|
292
|
|
|
Income
tax paid
|
|
$
|
0
|
|
$
|
2,875
|
|
See
accompanying notes to financial statements.
INFOSEARCH
MEDIA, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(Unaudited)
1. Basis
of Presentation
The
accompanying unaudited consolidated financial statements for the three and
six
months ended June 30, 2008 have been prepared by InfoSearch Media, Inc. (the
“Company” or “InfoSearch”) in accordance with the instructions to Form 10-Q and
the rules and regulations of the Securities and Exchange Commission (the “SEC”)
and accounting principles generally accepted in the United States (“GAAP”). The
information furnished herein reflects all adjustments (consisting of normal
recurring accruals and other adjustments), which are, in the opinion of
management, necessary to fairly present the operating results for the respective
periods. Certain information and footnote disclosures normally present in annual
financial statements prepared in accordance with GAAP have been omitted pursuant
to such instructions, rules and regulations. The Company believes that the
disclosures provided are adequate to make the information presented clear and
straightforward. For a more complete understanding of the Company’s financial
position, these financial statements should be read in conjunction with the
audited financial statements and explanatory notes in the Company’s Annual
Report on Form 10-KSB/A for the year ended December 31, 2007 filed with the
SEC
on April 17, 2008. Operating results for the period ended June 30, 2008 are
not
necessarily indicative of the results to be expected for the year ending
December 31, 2008.
2. Organization
and Nature of Operations
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.
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 ending 2007 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, with operating losses and
negative cash flows from operations continuing in the six months of 2008. In
view of these conditions, the Company’s ability to continue as a going concern
is contingent upon its ability to ultimately achieve and 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.
3. Significant
Accounting Policies
Significant
Clients
One
of
our clients, Demand Media, represented approximately 19.6% of total revenues
for
the six months ended June 30, 2008 as opposed to 25.4% for the six months ended
June 30, 2007.
Concentrations
of Credit Risk
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 June 30, 2008, the cash balances held at financial
institutions were either not in excess of federally insured limits or not
subject to the federal insurance system.
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.
Recently
Issued Accounting Pronouncements
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 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
adopted 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
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.
4. Equity
Warrant Asset
We
account for the equity warrant asset with net settlement terms to purchase
preferred stock of Demand Media, a privately held company, 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
$3.851 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. For the six months
ended June 30, 2008, we valued the warrant using the Black-Scholes option
pricing model, which incorporates the following material
assumptions:
|
|
·
|
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 a publicly-listed equity similar in nature
to
the business in which Demand Media operates and yielded a volatility
of
23.45%.
|
|
|
·
|
The
risk-free interest rate was 3.34%.
|
|
|
·
|
Expected
life of 39 months based on the contractual term of the
warrant.
|
Any
changes from the grant date fair value of the equity warrant asset are
recognized as increases or decreases to the equity warrant asset on our
consolidated balance sheet and as net gains or losses on derivative investments
within non-operating expenses in the consolidated statement of operations.
As
of
June 30, 2008, there was a $4,035 decrease in the grant date fair value of
the
equity warrant asset from the valuation at December 31, 2007.
5. Net
Earnings (Loss) per Share
Net
earnings (loss) per share is computed as net earnings (loss) divided by the
basic or diluted weighted average number of common shares outstanding for the
period. As of June 30, 2008, 14,298,522 potential shares exercisable from stock
options and warrants were excluded from the computation of diluted net
earnings (loss) per share as their effect would be anti-dilutive.
6.
Income
Taxes
The
Company and its subsidiaries files income tax returns in the U.S. federal
jurisdiction, various states and foreign jurisdiction and the Company is not
currently under examination by any taxing jurisdiction. Management believes
that its accrual for tax liabilities is adequate for all open audit years based
on its assessment of many factors including past experience and interpretation
of tax law. This assessment relies on estimates and assumptions and may involve
a series of complex judgments about future events. With a few exceptions, the
Company is no longer subject to U.S. federal, state and local, or non-U.S.
income tax examinations by tax authorities for the years before 2002. If
any of the unrecognized tax benefits are settled with tax
authorities within the next twelve months, the Company would make any
necessary adjustments to the accrual for uncertain tax benefits. The Company
adopted the provisions of FIN 48 effective January 1, 2007. On the basis of
present information, it is the opinion of the Company’s management that any
assessment resulting from any future audits will not have a material adverse
effect on the Company’s consolidated financial statements.
7. Stockholders’
Equity
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 our board of directors. As of June 30, 2008, there
were 52,493,592 shares of our Common Stock issued and outstanding; and
options and warrants exercisable representing 14,298,522 shares of Common Stock.
No other securities, including without limitation any preferred stock,
convertible securities, options, warrants, promissory notes or debentures are
outstanding as of June 30, 2008.
Warrants
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 shareholders 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. The fair value of the warrants was
calculated as of November 7, 2005 using the Black-Scholes pricing model and
was
recorded as a warrant liability on the balance sheet date. The change in fair
value was included in other income on the income statement under change in
fair
value of warrant liability. The value of these 4,179,606 warrants on June 30,
2008 and December 31, 2007 was $42,412 and $309,567, respectively. In addition,
the fair value decreased from December 31, 2007 through June 30, 2008 by
$267,155. The change in fair value from December 31, 2007 was calculated by
using the Black-Scholes pricing model with the following assumptions: expected
weighted average life, 28 months as of June 30, 2008; stock volatility, 167.49%;
risk-free interest rates of 2.91%; and no dividends during the expected
term.
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. We have performed an EITF
00-19 analysis of the warrants issued pursuant to the Asset Purchase Agreement
and determined that they 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 decreased from December 31, 2007 through June 30, 2008
by
$553,493. The fair value of $104,591 at June 30, 2008 was calculated by using
the Black-Scholes pricing model with the following assumptions: expected life,
38 months as of June 30, 2008; stock volatility, 167.49%; risk-free interest
rates of 2.91%; and no dividends during the expected term. The warrant was
offered and sold by the Company in reliance on exemptions provided by Section
4(2) of the Securities Act as such transaction did not involve any public
offering.
8. Stock
Options
The
Company’s estimates of the fair value of stock options were made using
the Black-Scholes option pricing model with the following weighted average
assumptions for the three months ended June 30, 2008 and 2007: expected
life, ten years following the grant date; stock volatility, 167.49% and 114.23%,
respectively; risk-free interest rates of 3.34% and 4.92%, respectively; and
no
dividends during the expected term. As stock-based compensation
expense recognized in the consolidated statement 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.
A
summary
of the Company’s stock option activity is as follows:
|
|
|
# of Shares
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
|
Outstanding
as of December 31, 2007
|
|
|
3,897,150
|
|
|
|
|
$
|
0.18
|
|
|
|
|
|
Granted
|
|
|
2,450,000
|
|
|
|
|
$
|
0.04
|
|
|
|
|
|
Cancelled
/ Forfeited
|
|
|
470,000
|
|
|
|
|
$
|
0.22
|
|
|
|
|
|
Outstanding
as of June 30, 2008
|
|
|
5,877,150
|
|
|
9.14
years
|
|
$
|
0.12
|
|
$
|
157,361
|
|
|
Exercisable
as of June 30, 2008
|
|
|
4,158,555
|
|
|
9.09
years
|
|
$
|
0.18
|
|
$
|
81,554
|
|
|
Expected
to vest in future years
|
|
|
1,718,595
|
|
|
9.13
years
|
|
$
|
0.18
|
|
$
|
75,807
|
|
The
weighted average grant date fair value of options granted during the three
months ended June 30, 2008 was $0.04.
Additional
information regarding options outstanding as of June 30, 2008 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
|
|
|
$
|
0.03
|
|
|
250,000
|
|
|
9.88
|
|
$
|
0.03
|
|
|
250,000
|
|
$
|
0.03
|
|
|
$
|
0.04
|
|
|
2,200,000
|
|
|
9.88
|
|
|
0.04
|
|
|
2,200,000
|
|
|
0.04
|
|
|
$
|
0.13
|
|
|
15,000
|
|
|
9.38
|
|
$
|
0.13
|
|
|
0
|
|
$
|
0.10
|
|
|
$
|
0.14
|
|
|
1,000,000
|
|
|
8.95
|
|
$
|
0.14
|
|
|
121,616
|
|
$
|
0.14
|
|
|
$
|
0.15
|
|
|
185,000
|
|
|
8.25
|
|
$
|
0.15
|
|
|
4,374
|
|
$
|
0.15
|
|
|
$
|
0.17
|
|
|
345,000
|
|
|
8.45
|
|
$
|
0.17
|
|
|
342,670
|
|
$
|
0.17
|
|
|
$
|
0.19
|
|
|
35,000
|
|
|
8.73
|
|
$
|
0.19
|
|
|
0
|
|
$
|
0.19
|
|
|
$
|
0.20
|
|
|
1,772,150
|
|
|
9.52
|
|
$
|
0.20
|
|
|
486,531
|
|
$
|
0.20
|
|
|
$
|
0.22
|
|
|
5,000
|
|
|
8.07
|
|
$
|
0.22
|
|
|
0
|
|
$
|
0.22
|
|
|
$
|
0.23
|
|
|
5,000
|
|
|
8.34
|
|
$
|
0.23
|
|
|
0
|
|
$
|
0.23
|
|
|
$
|
0.39
|
|
|
15,000
|
|
|
7.76
|
|
$
|
0.39
|
|
|
240,000
|
|
$
|
0.39
|
|
|
$
|
0.41
|
|
|
5,000
|
|
|
7.86
|
|
$
|
0.41
|
|
|
|
|
|
|
|
|
$
|
0.78
|
|
|
35,000
|
|
|
7.34
|
|
$
|
0.78
|
|
|
45,000
|
|
$
|
0.78
|
|
|
$
|
0.81
|
|
|
10,000
|
|
|
6.96
|
|
$
|
0.81
|
|
|
22,500
|
|
$
|
0.81
|
|
|
Total
Options
|
|
|
5,877,150
|
|
|
9.14
|
|
$
|
0.12
|
|
|
4,158,555
|
|
$
|
0.18
|
|
At
June
30, 2008, 4,592,850 shares (remaining balance reflects issuance of restricted
stock) were available for future grants under the Company’s Stock Option Plan
(the “Stock Option Plan”).
As
of
June 30, 2008, we had 742,857 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
|
|
|
N
Non Vested Shares as of December 31, 2007
|
|
|
742,857
|
|
$
|
0.14
|
|
|
Granted
|
|
|
-
|
|
|
0.00
|
|
|
Forfeited
|
|
|
-
|
|
|
0.00
|
|
|
Vested
|
|
|
-
|
|
|
0.00
|
|
|
N
Non Vested Shares as of June 30, 2008
|
|
|
742,857
|
|
|
0.14
|
|
Additionally,
during the second quarter the Company granted a total of 3,018,750 retention
options to the Chief Executive Officer and the Chief Financial Officer outside
of the Plan at exercise prices ranging from $0.04 to $0.06 per
share.
9. Related
Party Transactions.
Mr.
Warthen, former Chief Technology Officer, is a shareholder and was the Chief
Technology Officer of Global Streams, a digital video processing company, from
2000 to 2002. At June 30, 2008, accounts receivable from related parties of
$14,385 was due from David Warthen to repay the Company for income taxes paid
on
his behalf.
10. Commitments
and Contingencies
The
Company has entered into a non-cancelable operating lease for facilities through
July 31, 2008. Rental expense was $126,335 and $117,357 for the six months
ended
June 30, 2008 and 2007, respectively. At June 30, 2008, the future minimum
lease
payments for the years ending June 30, 2008 are as follows:
|
Remainder
of 2008
|
|
|
19,530
|
|
|
Total
Minimum Lease Payments
|
|
$
|
19,530
|
|
Litigation
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 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.
Item
2. Management’s Discussion and Analysis of Operations and Financial
Condition
This
Quarterly Report on Form 10-Q includes forward-looking statements within the
meaning of Section 27A of 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 “expect”, “anticipate”, “intend”, “plan”, “believe”,
“estimate”, “predict”, “target”, “may”, “could”, “will”, “should”, “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, and 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-Q. In evaluating our business, you should
give careful consideration to the information set forth herein and the risks,
uncertainties and assumptions that are more fully discussed in “Item 1.A Risk
Factors” of our Annual Report on Form 10-KSB/A for the fiscal year ended
December 31, 2007.
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.
CRITICAL
ACCOUNTING POLICIES
These
financial statements have been prepared in accordance with GAAP. The significant
accounting policies used in the preparation of these financial statements are
summarized below.
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 and sale of unique
content developed under its TrafficBuilder program for clients who operate
electronic commerce or publishing web sites.
Content
licensing and sales revenue is recognized when the content is delivered to
and
accepted by the client. Revenue earned under month-to-month licensing agreements
is recognized on a monthly basis. Client deposits received in advance of work
being completed for such services are deferred by creation of a revenue
liability account entry until the revenue is recognized.
Cost
of Sales
The
majority of the Company’s cost of sales is related to content developed under
the TrafficBuilder program in support of purchased and licensed
content.
For
the
TrafficBuilder program, content developed pursuant to outright sales and
licensing is developed through editors, keyword analysts and independent
contractors who write and edit the copy and analyze the keywords. 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.
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.
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 Statements of
Operations during the six months ended June 30, 2008 and 2007 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:
|
|
|
Six
Months
Ended
June 30,
2008
|
|
Six
Months
Ended
June
30,
2007
|
|
Three
Months
Ended
June
30,
2008
|
|
Three
Months
Ended
June 30,
2007
|
|
|
Selling
and marketing
|
|
$
|
68,746
|
|
$
|
991
|
|
$
|
68,517
|
|
$
|
542
|
|
|
General
and administration
|
|
|
20,622
|
|
|
75,274
|
|
|
6,800
|
|
|
11,244
|
|
|
Total
share-based compensation expense for stock options
|
|
$
|
89,368
|
|
$
|
76,265
|
|
$
|
75,317
|
|
$
|
11,786
|
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RECENT
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 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
adopted 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
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.
RESULTS
OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
REVENUES
Revenues
decreased 33.9% or $835,862 to $1,630,996 for the six months ended June 30,
2008
from $2,466,858 for the six months ended June 30, 2007, primarily due to a
reduction of $791,086 in sales for the Content Group. Revenues decreased 49.9%
or $578,283 to $581,710 for the three months ended June 30, 2008 from $1,159,993
for the three months ended June 30, 2007, primarily due to a reduction of
$547,600 in sales for the Content Group. The Content decrease was largely due
to
a $299,306 decrease in legacy license revenue year over year being partially
offset by sales of a new license program launched in January 2008 as well as
a
decrease of approximately $280,000 in quarterly revenue from one major client.
Revenues
associated with our Web Properties group fell to $25,973 from $70,749 for the
six months ended June 30, 2008 and 2007, respectively, and to $9,116 from
$39,799 for the three months ended June 30, 2008 and 2007, respectively, due
primarily to the continued decline in revenue from owned domains such as
ArticleInsider and Popdex which are no longer being actively developed by the
Company.
COST
OF SALES AND GROSS PROFIT
Cost
of
Sales decreased by 31.9% or $297,295 to $634,853 from $932,148 for the six
months ended June 30, 2008 and 2007, respectively, as expense levels were
adjusted to offset declines in revenue. Cost of Sales decreased by 42.7% to
$261,299 from $455,652 for the three months ended June 30, 2008 and 2007,
respectively.
The
Company had a gross profit of $996,143 and a gross margin of 61.1% for the
six
months ended June 30, 2008 versus a gross profit of $1,534,710 and a gross
margin of 62.2% for the six months ended June 30, 2007. The Company had a gross
profit of $320,411 and a gross margin of 55.1% for the three months ended June
30, 2008 versus a gross profit of $704,341and a gross margin of 60.7% for the
same period ended June 30, 2007.
Gross
profits and margins for the Content Group were $1,496,182 and 62.4% for the
six
months ended June 30, 2008 versus $681,442 and 60.8% for the three months ended
June 30, 2007. Gross profits and margins for the Content Group were $337,788
and
58.9% for the three months ended June 30, 2008 versus $681,442 and 60.8% for
the
three months ended June 30, 2007. Changes in our TrafficBuilder production
process to reduce the level of fixed expenses and replace them with variable
expenses in order to reduce the effect of changes in production volume on gross
margins had an impact.
The
Web
Properties group generated a negative gross profit of ($20,479) and (78.8%)
for
the six months ended June 30, 2008 versus a gross profit and margin of $38,528
and 54.5% for the six months ended June 30, 2007, as the level of revenues
now
approximate the cost of operating the Web Properties.
OPERATING
EXPENSES
Operating
expenses consist of general and administrative expenses as well as selling
expenses. Operating expenses decreased by $1,758,322 or 52.8% to $1,574,657
from
$3,332,979 for the six months ended June 30, 2008 and 2007, respectively, and
by
$1,101,295 or 62.0% to $675,282 from $1,776,577 for the three months ended
June
30, 2008 and 2007, respectively. These decreases were primarily attributed
to a
reduction in professional services fees and the number of personnel and
accompanying expenses.
General
and Administrative expenses include senior management, accounting, legal, rent,
benefits costs, administrative personnel, depreciation and amortization and
other overhead related costs. These costs decreased 52.5% to $1,126,520 from
$2,371,469 for the six months ended June 30, 2008 and 2007, respectively, and
$881,963 or 65.4% to $467,230 from $1,349,193 for the three months ended June
30, 2008 and 2007, respectively.
Selling
expenses consist of costs primarily incurred to develop and implement marketing
and sales programs for the Company’s Content product. 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 53.4% to
$448,137 from $961,511 for the six months ended June 30, 2008 and 2007,
respectively, as the Company reduced employee costs associated with sales and
marketing personnel as well as advertising expenses. Selling expenses decreased
$219,332 or 51.3% to $208,052 from $427,384 for the three months ended June
30,
2008 and 2007, respectively.
OTHER
NON-OPERATING INCOME
Other
non-operating net income is substantially comprised of changes in the fair
value
of certain financial instruments we have granted or currently hold.
Non-operating income of $821,841 for the six months ended June 30, 2008 was
higher than $269,424 for the six months ended June 30, 2007, was primarily
due
to decreases in the fair value of the warrant liabilities which results in
higher levels of reported income. The Company received less interest income
on
the cash balances the Company maintains in money market accounts due to lower
cash balances during the period ended June 30, 2008 relative to the same period
in 2007. Interest income, net of interest expense of $5,228 was $29,738 less
in
the six months ended June 30, 2008 as compared to $34,966 in interest income,
net of interest expense, in the six months ended June 30, 2007.
For
the
three months ended June 30, 2008, other operating income increased to $327,206
from other operating expense of ($43,599) for the same period ending June 30,
2007. This improvement was primarily due from a change in the value of warrants
of $326,551 for the three months ended June 30, 2008, compared to a loss of
($61,745) for the three months ended June 30, 2007. This was offset by a
decrease of $17,531 in net interest income for the three months ended June
30,
2008 compared to the same period for 2007.
NET
EARNINGS (LOSS)
Net
earnings for the six months ended June 30, 2008 of $243,065 was an improvement
of $1,774,786 from the net loss of ($1,531,721) for the six months ended June
30, 2007, due to a lower Loss from Operations as well as a decrease in the
warrant liability. The resulting Earnings Per Share of $0.00 was an improvement
from ($0.03) for the six months ended June 30, 2008 and 2007,
respectively.
Net
Loss
of ($28,465) for the three months ended June 30, 2008 was an improvement of
97.5% from a net loss of ($1,116,621) for the three months ended June 30, 2007,
as the $578,283 decrease in revenues was more than offset by a $1,101,295
reduction in operating expenses, as well as additional non-operating income
from
a decrease in the warrant liability. The resulting Earnings Per Share improved
to ($0.00) from ($0.02) for the three months ended June 30, 2008 and 2007,
respectively.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
decreased by $656,654 to $130,585 in the six months ended June 30, 2008 relative
to the Company’s fiscal year ending December 31, 2007.
Cash
used
in operating activities totaled $902,764 for the six months ended June 30,
2008,
as increases in accounts receivable of $118,030 due to the aforementioned new
license programs and a decrease of $167,493 in deferred revenue primarily
associated with the final quarterly delivery under the first Demand Media
contract which expired March 31, 2008 but was prepaid in December 2007.
For
the
six months ended June 30, 2008, cash provided from investing activities was
$16,110 compared to cash used of $31,378 for the six months ended June 30,
2007.
Cash used for capital expenditures - fixed assets was $3,890 and $68,250,
respectively.
For
the
six months ended June 30, 2008, cash provided by financing activities was
$230,000 all relating to a deposit on an equity subscription round compared
to
$13,652 in cash used for the comparable period of the prior year. Cash used
for
principal reductions in capital leases was $0 and $17,162 and cash received
from
the exercise of a warrant was $0 and $3,600 for the six months ended June 30
2008 and 2007, respectively.
There
are
no material commitments for additional capital expenditures and the Company
had
no debt at June 30, 2008.
OFF-BALANCE
SHEET ARRANGEMENTS
The
Company has no off-balance sheet arrangements.
SUBSEQUENT
EVENTS
During
July 2008 the Company entered into a sublease for its new offices and moved
into
its new location at 6041 Bristol Parkway, Culver City, California 90230. This
space affords the Company more modern and centrally located facilities, as
well
as significantly reducing its going forward operating expense
levels.
Item
3. 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 June 30, 2008.
As
a result of the material weakness described below, they have concluded that
our
disclosure controls and procedures were not effective as of June 30, 2008 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, the Company 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, the Company
determined that the cancelled stock options should not have been expensed and
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 transactions that involve the
application of highly specialized accounting principles so that as of June
30,
2008 this was no longer a material weakness.
The
Sarbanes-Oxley Act of 2002 imposed many new requirements on public companies,
the most significant of which involve the documentation, testing and reporting
of the effectiveness of our internal control over financial reporting. We expect
this effort will involve substantial time and expense. Because we have limited
resources we can devote to this effort we cannot be sure that we will be able
to
complete the task in a timely manner or that our internal controls will meet
the
standards that are currently required. We are also reviewing other procedures
with respect to equity issuances in connection with the internal investigation
that we announced on March 9, 2007, of the potentially improper issuance of
share certificates without legends restricting transfer that may have been
facilitated by Mr. Louis Zehil, a partner of our former external legal
counsel, McGuire Woods LLP, and our former corporate secretary. Although we
are
not yet required to report on our assessment of the effectiveness of our
internal controls over financial reporting until at least the end of the next
fiscal year or provide auditor attestation until the end of fiscal 2009, it
is
possible that we may identify one or more material weaknesses before we complete
our compliance and remediation efforts.
(b)
Changes in Internal Control over Financial Reporting
There
were no significant changes made in our internal controls over financial
reporting during the six months ended June 30, 2008 that have materially
affected or are reasonably likely to materially affect our internal control
over
financial reporting as all the remedial measures have not been fully implemented
or have not operated for a significant period of time. Although we have
addressed several of the internal control weaknesses that existed during earlier
reporting periods, the remaining weaknesses are significant and continue to
materially affect our internal control over financial reporting. However, we
do
intend to take additional remedial action related to our material weakness
described above, which may result in a significant change to our internal
controls over financial reporting in the future.
PART
II - OTHER INFORMATION
Item
1.
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 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.
Item
6.
Exhibits
The
following exhibits are filed or incorporated by reference as part of this report
as required by Item 601 of Regulation S-B:
|
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
|
|
|
|
|
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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
|
SIGNATURES
In
accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
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INFOSEARCH
MEDIA, INC.
|
|
|
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Date:
August 19, 2008
|
|
/s/
George Lichter
|
|
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By:
George Lichter
|
|
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Its:
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Its:
Chief Financial Officer
|
EXHIBIT
INDEX
|
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
|
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