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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(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, 2006
-------------
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the transition period from __________ to ____________.
Commission file number 000-30248
---------
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.)
4086 Del Rey Avenue, Marina Del Rey, California 90292
------------------------------------------------------
(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 |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 126-2 of the Exchange Act).
Yes |_| No |X|
Transitional Small Business Disclosure Format (Check one):
Yes |_| No |X|
As of June 30, 2006, 46,182,330 shares of the Small Business Issuer's common
stock, $.001 par value, were issued and outstanding.
1
TABLE OF CONTENTS
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Page
PART I -FINANCIAL INFORMATION
Item 1. Unaudited Interim Financial Statements
Consolidated Balance Sheet ............................................................. 3
Consolidated Statements of Operations .................................................. 4
Consolidated Statements of Cash Flows .................................................. 5
Footnotes to Consolidated Financial Statements ......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 21
Item 3. Controls and Procedures............................................................ 28
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................................. 28
Item 2. Unregistered Sales of Equity Securities............................................ 28
Item 3. Defaults Upon Senior Securities.................................................... 29
Item 4. Submission of Matters to a Vote of Security Holders................................ 29
Item 5. Other Information.................................................................. 29
Item 6. Exhibits........................................................................... 29
SIGNATURES ........................................................................................... 32
2
PART I - FINANCIAL INFORMATION
Item 1: Unaudited Interim Financial Statements
INFOSEARCH MEDIA, INC.
CONSOLIDATED BALANCE SHEET
(unaudited)
[Download Table]
June 30, December 31,
2006 2005
ASSETS:
CURRENT ASSETS:
Cash $ 1,527,618 $ 4,828,560
Accounts receivable $ 127,329 $ 4,449
Due from related parties $ -- $ 25,000
Prepaid expenses and other current assets $ 337,127 $ 25,000
------------ ------------
Total Current Assets $ 1,992,074 $ 5,067,771
Employee advance $ -- $ 2,500
Content development $ 91,027 $ 394,054
Property and equipment $ 210,152 $ 285,021
Security deposit $ 37,500 $ 37,500
Intangibles
$ 466,025 $ --
------------ ------------
Total Assets $ 2,796,778 $ 5,741,846
============ ============
LIABILITIES and SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 267,311 $ 276,704
Accrued bonuses $ 36,459 $ 176,505
Accrued expenses $ 433,525 $ 268,645
Liquidated damages $ 359,378 $ --
Current portion capital leases $ 33,015 $ 33,004
Deferred revenue $ 754,516 $ 2,074,103
Provisions for refunds payable/bad debt $ 28,798 $ 44,151
------------ ------------
Total Current Liabilities $ 1,913,001 $ 2,873,112
Capital leases, net of current portion $ 1,680 $ 17,621
Deferred revenue $ -- $ 553,943
Fair value of warrant liability $ 511,289 $ 2,526,272
------------ ------------
Total Liabilities $ 2,425,970 $ 5,970,948
============ ============
SHAREHOLDERS' EQUITY:
Preferred stock, undesignated, par value $0.001
per share, 25,000,000 shares authorized; no
shares issued and outstanding; $ -- $ --
Common stock, $0.001 par value, authorized
200,000,000 shares; issued and outstanding 46,182,330
and 42,277,775 for 2006 and 2005, respectively $ 46,183 $ 42,278
Additional Paid in Capital $ 10,795,098 $ 6,056,291
Accumulated Deficit $(10,470,473) $ (6,327,671)
------------ ------------
Total Shareholders Deficit $ 370,808 $ (229,102)
Total Liabilities and Shareholders Deficit $ 2,796,778 $ 5,741,846
============ ============
The accompanying notes are an integral part of the unaudited
financialstatements.
3
INFOSEARCH MEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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For the Three Months Ended June 30, For the Six Months Ended June 30,
------------ ------------ ------------ ------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Net Sales $ 1,677,218 $ 2,197,041 $ 4,530,783 $ 3,810,734
Cost of Sales $ 593,557 $ 581,521 $ 1,808,173 $ 812,917
------------ ------------ ------------ ------------
Gross Profit $ 1,083,661 $ 1,615,520 $ 2,722,610 $ 2,997,817
Operating Expenses:
General & Administrative $ 5,598,027 $ 1,257,592 $ 7,817,208 $ 2,441,155
Sales & Marketing $ 669,118 $ 610,238 $ 1,084,034 $ 1,053,981
------------ ------------ ------------ ------------
Total Costs and Expenses $ 6,267,145 $ 1,867,830 $ 8,901,242 $ 3,495,136
Loss from Operations $ (5,183,484) $ (252,310) $ (6,178,632) $ (497,319)
Change in Fair Value of Warrants $ 1,348,209 $ -- $ 2,014,983 $ --
Other Expenses $ (25,000) $ -- $ (25,000) $ --
Interest Income $ 15,293 $ 8,926 $ 47,583 $ 28,343
------------ ------------ ------------ ------------
Earnings (Loss) before Taxes $ (3,844,982) $ (243,384) $ (4,141,066) $ (468,976)
Provision for Taxes $ 1,735 $ -- $ 1,735 $ --
------------ ------------ ------------ ------------
Net Earnings (Loss) for the
Period $ (3,846,717) $ (243,384) $ (4,142,801) $ (468,976)
============ ============ ============ ============
Loss per Share - Basic and
Diluted $ (0.08) $ (0.01) $ (0.09) $ (0.01)
============ ============ ============ ============
Weighted Average Shares
Outstanding 46,169,256 33,851,580 45,882,067 33,834,191
============ ============ ============ ============
The accompanying notes are an integral part of the unaudited
financial statements.
4
INFOSEARCH MEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
[Download Table]
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $(4,142,801) $ (468,976)
Adjustment to reconcile net income(loss) to net cash
Provided by/(Used for) operating activities
Depreciation and Amortization $ 429,919 $ 108,083
Stock based compensation $ 4,505,680 $ 395,017
Disposals - fixed assets $ 9,462 $ --
Change in fair value of warrants $(2,014,983) $ --
Changes in assets and liabilities:
Accounts receivable $ (122,880) $ 45,892
Prepaid expenses and other current assets $ (99,865) $ (263,399)
Accounts payable and accrued expenses $ 374,754 $ (45,376)
Amounts refunded to customers $ (15,351) $ (470,944)
Deferred revenue $(1,873,531) $(1,046,806)
----------- -----------
Total adjustments $ 1,193,203 $(1,277,533)
NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES $(2,949,597) $(1,746,509)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures - fixed assets $ (31,632) $ (139,703)
Capital expenditures - content development $ (49,361) $ (283,589)
Intangible assets $ (254,420) $ --
----------- -----------
NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES $ (335,413) $ (423,292)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of capital lease obligations $ (15,930) $ (15,970)
Gross proceeds from private placement $ -- $ 3,699,868
Employee advances $ -- $ 1,000
Gross proceeds from the sale of common stock $ -- $ 250,000
----------- -----------
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES $ (15,930) $ 3,934,898
Net Increase (Decrease) in cash $(3,300,941) $ 1,765,097
Cash - Beginning of Period $ 4,828,560 $ 1,328,958
----------- -----------
Cash - End of Period $ 1,527,618 $ 3,094,055
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 3,866 $ 7,246
=========== ===========
Income tax paid $ 1,735 $ --
=========== ===========
NON-CASH SUPPLEMENTAL DISCLOSURE OF INVESTING AND
FINANCING ACTIVITIES:
Stock issuances for acquisition of Answerbag $ 237,031 $ --
=========== ===========
The accompanying notes are an integral part of the unaudited
financial statements.
5
INFOSEARCH MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED June 30, 2006
(unaudited)
1. Basis of Presentation
Certain account balances in the prior year have been reclassified to permit
comparison with the current year.
The accompanying unaudited consolidated financial statements for the three
months and six months ended June 30, 2006 and 2005 have been prepared by
InfoSearch Media, Inc. in accordance with the instructions to Form 10-QSB and
the rules and regulations of the Securities and Exchange Commission including
Regulation S-B 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 for the year ended December 31, 2005
filed with the Securities and Exchange Commission on March 23, 2006.
The results of the three and six months ended June 30, 2006 are not necessarily
indicative of the results to be expected for the full year ending December 31,
2006.
2. Organization and Nature of Operations
InfoSearch Media, Inc. ("InfoSearch") is a Los Angeles-based developer of search
marketing solutions involving online content that support the non-paid
(otherwise known as organic, which refers to the search results that the search
engines find on the world wide web as opposed to those listings for which
companies pay for placement) search marketing initiatives of its clients. We
have two primary operating groups, ContentLogic and Web Properties.
Through our ContentLogic program we deliver, through sale or license agreements,
branded original content for use by our client's on their web sites. Utilizing
sophisticated content and keywords analytics, content developed in the
ContentLogic program drives traffic to the client's website through improved
search engine rankings. The ContentLogic content provides an environment
engineered to stimulate a sale through the use of content highly 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 month-to-month licensing 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. We have also initiated a
Value-Added Reseller (VAR) program to extend the reach of our sales efforts, and
have introduced related products, including web analytics through our
partnership with Load and links through our partnership with LinkWorth. The
analytics and links products are both sold on a month-to-month basis.
With the acquisition of Answerbag.com in March 2006, we have combined our
ArticleInsider and Answerbag websites into our Web Properties group. 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. Answerbag is in
the early stages of growth and does not currently provide a significant amount
of revenues for InfoSearch. However, it has grown from approximately 500,000
unique users in January 2006 to approximately 1,000,000 unique users in June
2006 and is well positioned to take advantage of the power of user-generated
online content. We generate revenue through Answerbag through the deployment of
Google Adsense advertisements placed on Answerbag pages, from which we receive
revenue on a cost-per-click ("CPC") basis in return for delivering web visitors
to Google's advertisers.
6
ArticleInsider is a collection of general information articles focused on
various business topics. In May 2005, InfoSearch began selling visitor traffic
to its web sites through a bidding system wherein the traffic was allocated and
sold to our advertisers through our proprietary algorithm according to relative
bid rates. Also as part of its ArticleInsider program, InfoSearch established an
affiliate program during the second quarter of 2005 wherein we purchased traffic
from other online advertising companies, tested the traffic with our new
click-fraud prevention algorithm and resold that traffic to our customers
through the same bidding system. As we began experiencing declining margins on
traffic we sold to our customers, we discontinued bringing on new advertising
customers for ArticleInsider and wound down the ArticleInsider affiliate
program. We continue to generate revenue through ArticleInsider through the
deployment of Google Adsense advertisements placed on ArticleInsider pages, from
which we receive revenue on a CPC basis in return for delivering web visitors to
Google's advertisers. We have found that generating revenue through the Adsense
program is more efficient and allows us to deploy our sales force to sell our
ContentLogic product.
3. Significant 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 Securities and
Exchange Commission 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 ContentLogic program or the
sale of advertising on a CPC basis traffic to one of the websites in the Web
Properties group.
For the ContentLogic program, the Company derives revenue through the licensing
and sale of content to third party web site 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 ContentLogic program, the Company
also earns revenue from web analytics and advertising link sales. Revenue earned
from these services is recognized when the service is complete. 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.
7
The Company derives revenue from the websites in the Web Properties group on a
CPC basis as traffic is distributed to Google Adsense advertisers. The Company
has established a partnership with Google through which Google pays InfoSearch
fees for clicks on advertisements sponsored by Google and displayed on the
Answerbag and ArticleInsider web sites. 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
A significant portion of the Company's cost of sales is related to content
developed under the ContentLogic program and management of the Answerbag.com and
ArticleInsider.com websites as part of the Web Properties group.
For the ContentLogic 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. In late September, 2005 the Company added a month-to-month
ContentLogic licensing option, with content development costs for the
month-to-month agreements expensed when incurred.
For the Web Properties group, the Company has incurred minimal cost of sales
associated with Answerbag. Cost of sales for Answerbag primarily result from
expenses associated with the management of the Answerbag website.
Costs related to the content developed for the Company's ArticleInsider web site
are capitalized. Content developed pursuant to InfoSearch's ArticleInsider
product increase the value of the network and yield revenue to InfoSearch over a
period of years, which led to the decision to capitalize the development costs.
Through December 31, 2004, the Company's practice was to expense the cost of
content developed for ArticleInsider as the costs were incurred. However, with
the ongoing management of the ArticleInsider product, it became apparent to
InfoSearch management that the average lifespan of an article on the network,
i.e. how long it continued to draw traffic from individuals performing keyword
searches, was well in excess of three years. Earlier expectations were that the
lifespan would be shorter. It became apparent to InfoSearch management that it
was not uncommon that an article would not begin drawing traffic until some
number of months after it was posted on the network. With the advice of
InfoSearch's previous auditors, as of January 1, 2005, to better match costs to
revenues, and recognize the increased value of the network, the Company began
amortizing ArticleInsider related content development costs over the expected
life of thirty-six months, which resulted in an increase in the Company's gross
margins. The Company continued to review this estimate during the year and
determined that the estimated useful life should be reduced to two years as of
December 31, 2005 and further reduced to one year for the three months ended
March 31, 2006. The total value of amortized content as of June 30, 2006 was
$91,027.
Cash and Cash Equivalents
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. We also have
restricted cash of $74,643 held at various financial institutions and online
payment processing firms, which is shown in other current assets.
8
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.
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, 2006, the cash balances held at
financial institutions were either 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.
Fair Value of Financial Instruments
The Company considers its financial instruments, which are carried at cost, to
approximate fair value due to their near-term maturities.
Long-Lived Assets
Property and equipment is stated at cost and depreciation is provided for by the
straight-line method over the related assets' estimated economic lives ranging
from three to five years. Amortization of leasehold improvements is provided for
by 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 the
ContentLogic program. In addition, a small amount of the deferred revenue is
associated with the ArticleInsider program. This deferred revenue results from
payments received from customers as deposits in excess of revenue earned based
on click-through activity (web site visitations) for our ArticleInsider product
and will be recognized as traffic is delivered.
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.
Accounting for Stock-Based Compensation
Effective January 1, 2006, the Company adopted Statement of Financial Accounting
Standards (SFAS) 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. SFAS 123(R) supersedes Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25), which the Company
previously followed in accounting for stock-based awards. 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).
9
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 three and six months ended June 30, 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.
In conjunction with the adoption of SFAS 123(R), the Company elected to
attribute the value of share-based compensation to expense using the
straight-line method, which was previously used for its pro forma information
required under SFAS 123. Share-based compensation expense related to stock
options was $1,209,030 and $1,684,276 for the three and six months ended June
30, 2006, and was recorded in the financial statements as follows:
Three Months Six Months
Ended June 30, 2006 Ended June 30, 2006
Selling and marketing $ 131,331 $ 386,657
General and administration 1,077,699 1,297,619
---------- ----------
Total share-based compensation expense for
stock options $1,209,030 $1,684,276
========== ==========
As all of the stock option grants issued to employees 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 964,728
shares and 953,281 shares, respectively. Grants for all employees employed as of
the close of business on June 30, 2006, as well as those for Ning Ning Yu were
accelerated as of June 30, 2006. This resulted in a share-based compensation
expense of $1,159,949 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 $3,275,295 for the
three months ended June 30, 2006.
During the three and six months ended June 30, 2005, there was no share-based
compensation expense related to stock options recognized under the intrinsic
value method in accordance with APB 25. Had compensation cost for the Company's
stock options been recognized based upon the estimated fair value on the grant
date under the fair value methodology prescribed by SFAS No. 123, as amended by
SFAS No. 148, the Company's net loss and loss per share would have been as
follows (in thousands):
10
Three Months Six Months
Ended Ended
June 30, 2005 June 30, 2005
Net loss, as reported $(243,384) $(468,975)
Add: total stock based compensation 280,170 459,701
--------- ---------
Net loss, as adjusted $(523,554) $(928,677)
========= =========
Net loss per common share
Basic and diluted, as reported $ (0.01) $ (0.01)
========= =========
Basic and diluted, pro forma $ (0.02) $ (0.03)
========= =========
The Company's calculations were made using the Black-Scholes option pricing
model with the following weighted average assumptions for the six months ended
June 30, 2006 and 2005: expected life, five years following the grant date;
stock volatility, 133.05% and 140.63%, respectively; risk-free interest rates of
4.79% and 3.94%, 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:
Weighted Average Aggregate
# of Shares Exercise Price Intrinsic Value
---------------
Outstanding as of December
31, 2005 3,278,141 $ 0.93
Granted 748,500 $ 0.48
Cancelled / Forfeited 1,580,790 $ 0.92
--------- -------- ---------
Outstanding as of June 30,
A2006 2,445,851 $ 0.87 $ 0
--------- -------- ---------
Exercisable as of June 30,
A2006 2,445,851 $ 0.87 $ 0
========= ======== =========
Additional information regarding options outstanding as of June 30, 2006 is as
follows:
[Enlarge/Download Table]
Options outstanding Options exercisable
---------------------------------- ----------------------------------
Weighted
average
remaining Weighted Weighted
Range of Number contractual Average Number Average
exercise prices outstanding Life (Years) Exercise Price Exercisable Exercise Price
----------------- --------------- --------------- --------------- --------------- ---------------
$0.39 365,000 9.76 0.39 365,000 0.39
$0.41 31,000 9.86 0.41 31,000 0.41
$0.50 200,000 9.61 0.50 200,000 0.50
$0.67 82,500 9.58 0.67 82,500 0.67
11
[Enlarge/Download Table]
$0.68 5,000 9.47 0.68 5,000 0.68
$0.76 262,500 8.65 0.76 262,500 0.76
$0.78 127,941 9.34 0.78 127,941 0.78
$0.81 155,119 7.85 0.81 155,119 0.81
$1.00 1,216,791 7.60 1.00 1,216,791 1.00
----------------- --------------- --------------- --------------- --------------- ---------------
Total Options 2,445,851 8.51 0.87 2,445,851 0.87
================= =============== =============== =============== =============== ===============
At June 30, 2006, 540,208 shares (remaining balance reflects issuance of
restricted stock) were available for future grants under the Stock Issuance /
Stock Option Plan.
Use of Estimates
The preparation of financial statements in conformity with GAAP 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.
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 significant components of the provision for income taxes for the six months
ended June 30, 2006 and 2005 were $1,735 and $0, respectively, for the current
state provision. There was no state deferred and 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.
Recently Issued Accounting Pronouncements
In May 2005, the FASB issued Statement No. 154, "Accounting Changes and Error
Corrections" ("SFAS 154"). SFAS No. 154 replaces Accounting Principles Board
Opinion No. 20, "Accounting Changes" ("APB 20") and SFAS No. 3, "Reporting
Accounting Changes in Interim Financial Statements", and changes the
requirements for the accounting for and reporting of a change in accounting
principle. SFAS 154 No. applies to all voluntary changes in accounting
principle. It also applies to changes required by an accounting pronouncement in
the unusual instance that the pronouncement does not include specific transition
provisions. When a pronouncement includes specific transition provisions, those
provisions should be followed.
12
APB 20 previously required that most voluntary changes in accounting principle
be recognized by including in net income of the period of the change the
cumulative effect of changing to the new accounting principle. SFAS No. 154
requires retrospective application to prior periods' financial statements of
changes in accounting principle, unless it is impracticable to determine either
the period-specific effects or the cumulative effect of the change. When it is
impracticable to determine the period-specific effects of an accounting change
on one or more individual prior periods presented, SFAS No. 154 requires that
the new accounting principle be applied to the balances of assets and
liabilities as of the beginning of the earliest period for which retrospective
application is practicable and that a corresponding adjustment be made to the
opening balance of retained earnings (or other appropriate components of equity
or net assets in the statement of financial position) for that period rather
than being reported in an income statement. When it is impracticable to
determine the cumulative effect of applying a change in accounting principle to
all prior periods, SFAS No. 154 requires that the new accounting principle be
applied as if it were adopted prospectively from the earliest date practicable.
The correction of an error in previously issued financial statements is not an
accounting change. However, the reporting of an error correction involves
adjustments to previously issued financial statements similar to those generally
applicable to reporting an accounting change retrospectively. Therefore, the
reporting of a correction of an error by restating previously issued financial
statements is also addressed by SFAS No. 154.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments", which amends SFAS No. 133, "Accounting for Derivatives
Instruments and Hedging Activities" and SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities". 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 principle cash flows. SFAS No. 155 also amends SFAS No. 140 to allow
qualifying special-purpose entities to hold a passive derivative financial
instrument pertaining to beneficial interests that itself is a derivative
instrument. The Company is currently evaluating the impact this new Standard but
believes that it will not have a material impact on the Company's financial
position, results of operations, or cash flows.
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 FASB
Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities", with respect to the accounting for
separately recognized servicing assets and servicing liabilities. The Statement
(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 Company does
not believe that SFAS No. 156 will have a material impact on its financial
position, results of operations or cash flows.
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 Company is
currently in the process of evaluating the expected effect of FIN 48 on its
results of operations and financial position.
13
4. Accounts Receivable
At June 30, 2006, the Company's Google partnership and customer relationship
with eBay accounted for all of the Company's accounts receivable. The Company
has not experienced any problem with collectibility of receivables from either
firm.
5. Deferred Revenue
As of June 30, 2006 the current portion of the deferred revenue is $754,516. The
Company allocates between the current portion and the long term portion based
upon its historical experience and its estimate of delivery time for
ContentLogic and related products and click through activity for Web Properties.
6. Net Income per Share
Net income (loss) per share is computed as net income (loss) divided by the
weighted average number of common shares outstanding for the period. For the
three months ended June 30, 2006 and 2005, there were 7,075,537 and 982,000
potentially dilutive shares, respectively, which were excluded from the
computation.
7. Stockholders' 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 our Board of Directors. As of June 30, 2006, there were
46,182,330 shares of our Common Stock issued and outstanding and options
exercisable, warrants exercisable or restricted stock representing 7,075,537
shares of Common Stock. No other securities, including without limitation any
preferred stock, convertible securities, options, warrants, promissory notes or
debentures are outstanding.
Common Stock
On November 7, 2005, the Company issued 8,359,375 shares of our common stock in
a private placement transaction to fifteen (15) accredited investor for the
purchase price of $0.64 per share (representing a 20% discount to the closing
price of our common stock on November 2, 2005) for total proceeds of $5.35
million. In addition, the Investors received 4,179,686 warrants to purchase
4,179,686 shares of our 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 the registration statement was not declared effective by
the SEC within the timeframe set forth in the Registration Rights Agreement, the
Company accrued a charge for liquidated damages and related interest of $359,378
for the six months ended June 30, 2006. The Company and investors are currently
in discussions regarding the issuance of shares of common stock in lieu of cash
payments.
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
fair value of the warrants was calculated as of November 7, 2005 using the
Black-Scholes pricing model with the following assumptions: expected life, 60
months following the grant date; stock volatility, 152.00%; risk-free interest
rates of 4.5%; and no dividends during the expected term.
14
The fair value of the warrants at the date of issuance was recorded as a warrant
liability on the balance sheet date and the change in fair value was included in
other income on the income statement under change in FV of warrant liability.
The value of the warrants on the date of the transaction and as of December 31,
2005 was $3,063,172 and $2,526,272, respectively. In addition, the fair value
decreased from December 31, 2005 through June 30, 2006 by $2,014,983. The change
in fair value was calculated by using the Black-Scholes pricing model with the
following assumptions: expected life, 52 months as of June 30, 2006; stock
volatility, 104.46%; risk-free interest rates of 5.1%; and no dividends during
the expected term.
As all of the stock option grants issued to employees 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 964,728
shares and 953,281 shares, respectively. Grants for all employees employed as of
the close of business on June 30, 2006, as well as those for Ning Ning Yu were
accelerated as of June 30, 2006. This resulted in a share-based compensation
expense of $1,159,949,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 $3,275,295 for the
three months ended June 30, 2006.
Preferred Stock
Our 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. The issuance of preferred stock may have the effect of
delaying or preventing a change in control of us. The issuance of preferred
stock could decrease the amount of earnings and assets available for
distribution to the holders of Common Stock or could adversely affect the rights
and powers, including voting rights, of the holders of Common Stock. At present,
we have no plans to issue any shares of our preferred stock.
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.
8. Related Party Transactions.
As of December 31, 2005, the Company had a loan due from Walter Lazuka, an
InfoSearch stockholder, 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 is payable on demand. As we do not expect to recover this
amount, we wrote off the loan as of June 30, 2006.
15
We have 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 provides for an annual consulting fee of $100,000 to be
paid in semi-monthly payments. The Pinkus Consulting Agreement also provides for
a quarterly bonus payment of up to $25,000 for each quarter, as determined by
the Company's Board of Directors. The Pinkus Consulting Agreement expires on
August 23, 2006, subject to early termination.
Mr. Pinkus was also granted 1,350,000 shares of restricted stock, of which
450,000 shares will vest on January 4, 2006 and the remaining shares will vest
in three installments of 300,000 shares each on February 23, 2006, April 23,
2006 and August 23, 2006, provided that the Pinkus Consulting Agreement has not
been terminated by the Company for cause under the Pinkus Consulting Agreement
or Mr. Pinkus has not terminated his service for "convenience" as defined in the
Pinkus Consulting Agreement and under circumstances where he has also resigned
from the Board. If we fail to complete an "approved financing" by August 23,
2006, all shares vest at that time. Furthermore, if Mr. Pinkus terminates his
service for good reason, or his service is terminated without cause, the Company
will pay an amount in cash equal to the sum of the semi-monthly payments due
through the end of the Agreement's term, and any unvested shares will
automatically vest. Mr. Pinkus may participate, as a selling stockholder, in any
financing transaction undertaken by us for the purpose of satisfying the tax
liability incurred by Mr. Pinkus as a result of the restricted stock award. In
the event that we have not completed a financing transaction in which Mr. Pinkus
participates by the due date of such tax liability, we have agreed to pay such
liability on Mr. Pinkus behalf by January 13, 2006. Our obligations related to
such tax liability are conditioned on Mr. Pinkus filing of a Section 83(b)
election within 15 business days of the date of the restricted stock award.
9. Commitments and Contingencies
The Company has entered into a non-cancelable operating lease for facilities
through May 31, 2009. Rental expense was $44,980 and $85,480 for the three and
six months ended June 30, 2006, respectively and $38,500 and $80,128 for the
three and six months ended June 30, 2005, respectively. At June 30, 2006, the
future minimum lease payments for the years ending December 31 are as follows:
2006 $107,880
2007 219,540
2008 226,125
2009 95,375
--------
Total Minimum Lease Payments $648,920
--------
The Company has entered into capital leases for equipment. The leases are for 24
and 36 months and contain bargain purchase provisions so that the Company can
purchase the equipment at the end of each lease. At June 30, 2006, the following
sets forth the minimum future lease payments and present values of the net
minimum lease payments under these capital leases for the years ending December
31 are as follows:
2006 $19,677
2007 18,633
-------
Total Minimum Lease Payments 38,310
Less: Imputed Interest 3,615
-------
Present Value of Total Minimum Lease Payments $34,695
-------
The capitalized lease payments for the six months ended June 30, 2006 and 2005
were $20,118 and $90,348, respectively.
16
Employment Agreements
We made an offer of employment, which may be deemed an employment agreement, to
Ning Ning Yu, our Chief Technical Officer (the "Yu Employment Agreement") on
December 17, 2005. The Yu Employment Agreement does not have a termination date
and provides for an initial annual base salary of $160,000 and further provides
for a potential target bonus equal to 35% of base salary, contingent on Ms. Yu
attaining goals established by the CEO. Under the Yu Employment Agreement, Ms.
Yu received options to purchase up to 200,000 shares of our common stock made
available under the Plan, which shall vest monthly over three years. The Yu
Employment Agreement also provides that in the event that Ms. Yu's position is
eliminated or her responsibilities are materially reduced for any reason other
than cause or permanent disability, she will receive severance payment equal to
six months of her base salary and six months of acceleration of her unvested
stock options. Ms. Yu's employment was terminated as of June 30, 2006.
We made an offer of employment, which may be deemed an employment agreement, to
Joel Downs, our Vice President, Product Marketing (the "Downs Employment
Agreement") on February 15, 2006. The Downs Employment Agreement does not have a
termination date and provides for an initial annual base salary of $125,000 and
further provides for a potential target bonus equal to 40% of base salary,
contingent on Mr. Downs attaining goals established by the CEO. Under the Downs
Employment Agreement, Mr. Downs received options to purchase up to 100,000
shares of our common stock made available under the Plan, which shall vest
monthly over four years with a one year cliff. The Downs Employment Agreement
also provides that in the event the Mr. Down's position is eliminated or his
responsibilities are materially reduced within twelve months following a change
in control, he will receive severance payment equal to six months of his base
salary and six months of acceleration of his unvested stock options. In
addition, pursuant to the Merger Agreement between InfoSearch and Answerbag,
which Mr. Downs founded, Mr. Downs has agreed during his employment with the
Company and for a period of three (3) years after his termination, that he will
not, as an employee, agent, consultant, advisor, independent contractor, general
partner, officer, director, shareholder, investor, lender or guarantor of any
corporation, partnership or other entity, or in any other capacity directly or
indirectly in the United States of America compete against the Company. In
addition Mr. Downs further agreed that while employed by the Company and for a
period of one (1) year following his termination of employment with the Company,
that he will not directly or indirectly solicit or attempt to solicit away
employees or consultants of the Company or Answerbag (now our wholly-owned
subsidiary) for his own benefit or for the benefit of any other person or
entity.
We made an offer of employment, which may be deemed an employment agreement, to
Edan Portaro, our Vice President of Sales (the "Portaro Employment Agreement")
on March 14, 2006. The Portaro Employment Agreement does not have a termination
date and provides for an initial annual base salary of $150,000 and further
provides for a potential target bonus equal to 150% of base salary, contingent
on Mr. Portaro attaining goals established by the CEO. Under the Portaro
Employment Agreement, Mr. Portaro received options to purchase up to 200,000
shares of our common stock made available under the Plan, which shall vest
monthly over four years with a one year cliff. The Portaro Employment Agreement
also provides that in the event that Mr. Portaro's position is eliminated or his
responsibilities are materially reduced within six months following a change in
control, he will receive severance payment equal to six months of his base
salary and full acceleration of his unvested stock options. Further, the Portaro
Employment Agreement provides that in the event that Mr. Portaro's position is
eliminated or his responsibilities are materially reduced for any reason other
than cause or permanent disability, he will receive severance payment equal to
six months of his base salary and six months of acceleration of his unvested
stock options.
17
Effective on June 30, 2006, Mr. Averill's employment with InfoSearch was
terminated. Mr. Averill was the General Manager of our ContentLogic product.
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. While we are not
currently a party to any litigation, we have received a demand letter from
Gemini Partners, Inc. for unpaid finder's fees and additional warrants to be
granted in relation to the PIPE fundraising closed in November 2005. On July 6,
2006, we agreed to a settlement with Gemini, pursuant to which we will issue
Gemini a warrant to purchase 300,000 shares of our common stock with an exercise
price of $0.01 per share and Gemini will cancel its existing warrant to purchase
300,000 shares of our common stock at $1.00 and will provide a full release of
all claims. We have performed an EITF 00-19 analysis of the warrants issued
pursuant to the settlement agreement and determined that they will be treated as
equity. Except for this, we are not a party to any other 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.
Income taxes
Prior to 2004, the Company reported its income and deductions utilizing the cash
method of accounting for Federal income tax purposes. Accordingly, certain items
of income and expense were recognized in different years for income tax purposes
than they were for financial statement purposes. Effective, January 1, 2004, the
Company, under procedures established by the Internal Revenue Service ("IRS"),
will be changing its method of accounting from the cash method to the accrual
method. Simultaneously, the Company will be seeking to defer the recognition of
income on its deferred revenue. The Company is not assured that the IRS will
agree to allow the Company to defer such recognition. If the IRS does not permit
the deferral, the Company could be liable for $450,000 in current income taxes
for the year ended December 31, 2004.
10. Acquisition of Answerbag
On February 22, 2006, InfoSearch Media, Inc. ("InfoSearch Media") 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 Media ("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 Media (the "Merger").
The transaction closed on March 3, 2006. Under the terms of the transaction, the
Company acquired 100% of the issued and outstanding capital stock of Answerbag,
Inc. 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, mostly legal services.
Pursuant to 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.
Based on the average closing price of $0.46 per share for the five days prior to
the consummation of the transaction, the shares had 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
contingent payment and issuance of common stock pursuant to the Merger Agreement
on June 9, 2006. The amount of the payment was $75,156.25 and the Company issued
164,282 shares of common stock.
18
The Merger Agreement contains non-competition and non-solicitation clauses
wherein Mr. Downs has agreed during his employment with the Company and for a
period of three (3) years after his termination, that he will not, as an
employee, agent, consultant, advisor, independent contractor, general partner,
officer, director, shareholder, investor, lender or guarantor of any
corporation, partnership or other entity, or in any other capacity directly or
indirectly in the United States of America compete against the Company. In
addition Mr. Downs further agreed that while employed by the Company and for a
period of one (1) year following his termination of employment with the Company,
that he will not directly or indirectly solicit or attempt to solicit away
employees or consultants of the Company for Joel Downs' own benefit or for the
benefit of any other person or entity. As part of the acquisition, InfoSearch
acquired the website and related group of registered users, negligible amounts
of fixed assets.
The results of operations of the business acquired have been included in the
Company's consolidated financial statements from the date of acquisition. The
Proforma table below summarizes the 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.
[Enlarge/Download Table]
Six Months Ended June 30, 2006 Six Months Ended June 30, 2005
Historical Proforma Historical Proforma
------------ ------------ ------------ ------------
Net Revenues 4,530,783 4,539,789 3,810,734 3,825,747
============ ============ ============ ============
Net Loss (4,117,801) (4,121,413) (468,976) (468,025)
============ ============ ============ ============
Net Income per share
Basic and Diluted (0.09) (0.09) (0.01) (0.01)
============ ============ ============ ============
Weighted Average shares
outstanding -
Basic 45,882,067 45,882,067 33,834,191 33,834,191
============ ============ ============ ============
The total purchase price is summarized as follows:
Cash consideration $ 161,875
Common stock 161,875
Acquisition related costs 27,460
------------
Total purchase price $ 351,210
The valuation of Answerbag's performance over the next nine months was estimated
as of the acquisition date and the purchase price is subject to future
adjustments. If the final net calculation is less than the minimum amount
specified in the purchase agreement, the purchase price will be adjusted
downward accordingly. Any such adjustment will be recorded as an adjustment to
the cost of Answerbag, Inc. and reflected in the final purchase price
allocation.
19
The Company's allocation of the purchase price is summarized as follows:
Assets:
Accounts Receivable, net $ 14,935
Intangible assets 336,275
----------
Total Assets $ 351,210
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
obtained a valuation analysis from a third party, including the purchase price
allocation and determination of the useful life of the intangible assets. The
valuation report concluded that there was no goodwill acquired as part of the
purchase transaction. The report further concluded that the amortizable life of
the acquired definite-lived intangible assets is five years.
11. Subsequent Events
On July 27, 2006, the Board of Directors approved the grant of stock options for
the purchase of 149,000 shares of common stock to certain employees. Pursuant to
SFAS 123(R), the grant and inception date are set as of April 5, 2006, or a
later date, as determined according to the terms and conditions of the stock
option grants. Such terms and conditions generally provide for a three months
grace period after inception date for the onset of vesting.
20
Item 2: Management's Discussion and Analysis of Operations and Financial
Condition
This Quarterly Report on Form 10-QSB includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended and Section
21E of the Exchange Act of 1934. These forward-looking statements are based
largely on our current expectations and projections as they relate to our future
results, prospects, developments, and business strategies. These forward-looking
statements may be identified by the use of terms and phrases such as "expects",
"anticipates", "intends", "plans", "believes", "estimate", "predict", "target",
"may", "could", "will" and variations of these terms including references to
assumptions. These forward-looking statements are subject to known and unknown
risks, business, economic and other risks and uncertainties that may cause
actual results to be materially different from those discussed in thee
forward-looking statements. The cautionary statements made in this report should
be read as being applicable to all forward-looking statements wherever they
appear in this report. The following discussion should be read in conjunction
with the attached financial statements and notes thereto. If one or more of
these risks or uncertainties materialize, or if underlying assumptions prove to
be incorrect, our actual results may vary materially from those expected or
projected. We assume no obligation to update the matters discussed in this
report except as required by applicable law or regulation.
CRITICAL ACCOUNTING POLICIES
The Company described its critical accounting policies in Note 2, "Summary of
Significant Accounting Policies" of the Notes to the Financial Statements for
the Years Ended December 31, 2005 and 2004 included in the Company's Annual
Report on Form 10-KSB filed with the Securities and Exchange Commission on March
23, 2006. The critical accounting policies are those that are most important to
the portrayal of the financial condition and results of operations, and require
management's significant judgments and estimates. The application of such
critical accounting policies fairly depicts the financial condition and results
of operations for all periods presented.
Revenues from ContentLogic and Web Properties are derived principally from the
licensing or sale of unique content developed for its clients under the
ContentLogic program or the sale on a CPC basis of advertising traffic to one of
the websites in the Web Properties group.
The Company derives revenue through the licensing and sale of content in the
ContentLogic program. If a client deposit is received in advance of work being
completed, a deferred revenue liability account entry is created until the
revenue is recognized. 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 ContentLogic program, the Company also earns revenue from
web analytics and advertising link sales. Revenue earned from these services is
recognized when the service is complete. 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.
The Company derives revenue from the websites in the Web Properties group on a
CPC basis as traffic is distributed to Google Adsense advertisers. The Company
has established a partnership with Google through which Google pays InfoSearch
fees for clicks on advertisements sponsored by Google and displayed on the
Answerbag and ArticleInsider web sites. The Company recognizes revenue
associated with the Google Adsense program as reported by Google to the Company
at the end of each month.
21
A significant portion of the Company's cost of sales is related to content
developed under the ContentLogic program and management of the Answerbag.com and
ArticleInsider.com websites as part of the Web Properties group.
For the ContentLogic 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. In late September, 2005 the Company added a month-to-month
ContentLogic licensing option, with content development costs for the
month-to-month agreements expensed when incurred.
For the Web Properties group, the Company has incurred minimal cost of sales
associated with Answerbag. Cost of sales for Answerbag primarily result from
expenses associated with the management of the Answerbag website.
Costs related to the content developed for the Company's ArticleInsider web site
are capitalized. Content developed pursuant to InfoSearch's ArticleInsider
product increase the value of the network and yield revenue to InfoSearch over a
period of years, which led to the decision to capitalize the development costs.
Through December 31, 2004, the Company's practice was to expense the cost of
content developed for ArticleInsider as the costs were incurred. However, with
the ongoing management of the ArticleInsider product, it became apparent to
InfoSearch management that the average lifespan of an article on the network,
i.e. how long it continued to draw traffic from individuals performing keyword
searches, was well in excess of three years. Earlier expectations were that the
lifespan would be shorter. It became apparent to InfoSearch management that it
was not uncommon that an article would not begin drawing traffic until some
number of months after it was posted on the network. With the advice of
InfoSearch's previous auditors, as of January 1, 2005, to better match costs to
revenues, and recognize the increased value of the network, the Company began
amortizing ArticleInsider related content development costs over the expected
life of thirty-six months, which resulted in an increase in the Company's gross
margins. The Company continued to review this estimate during the year and
determined that the estimated useful life should be reduced to two years as of
December 31, 2005 and further reduced to one year for the three months ended
March 31, 2006. The total value of amortized content as of June 30, 2006 was
$91,027.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2005, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 154, "Accounting Changes and Error Corrections" ("SFAS No. 154"),
an amendment to Accounting Principles Bulletin Opinion No. 20, "Accounting
Changes" ("APB No. 20"), and SFAS No. 3, "Reporting Accounting Changes in
Interim Financial Statements". Though SFAS No. 154 carries forward the guidance
in APB No.20 and SFAS No.3 with respect to accounting for changes in estimates,
changes in reporting entity, and the correction of errors, SFAS No. 154
establishes new standards on accounting for changes in accounting principles,
whereby all such changes must be accounted for by retrospective application to
the financial statements of prior periods unless it is impracticable to do so.
SFAS No. 154 is effective for accounting changes and error corrections made in
fiscal years beginning after December 15, 2005, with early adoption permitted
for changes and corrections made in years beginning after May 2005. InfoSearch
will implement SFAS No. 154 in its fiscal year beginning January 1, 2006. We are
currently evaluating the impact of this new standard but believe that it will
not have a material impact on InfoSearch's financial position, results of
operations, or cash flows.
22
APB Opinion 20 previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period of the change
the cumulative effect of changing to the new accounting principle. SFAS 154
requires retrospective application to prior periods' financial statements of
changes in accounting principle, unless it is impracticable to determine either
the period-specific effects or the cumulative effect of the change. When it is
impracticable to determine the period-specific effects of an accounting change
on one or more individual prior periods presented, SFAS 154 requires that the
new accounting principle be applied to the balances of assets and liabilities as
of the beginning of the earliest period for which retrospective application is
practicable and that a corresponding adjustment be made to the opening balance
of retained earnings (or other appropriate components of equity or net assets in
the statement of financial position) for that period rather than being reported
in an income statement. When it is impracticable to determine the cumulative
effect of applying a change in accounting principle to all prior periods, SFAS
154 requires that the new accounting principle be applied as if it were adopted
prospectively from the earliest date practicable.
The correction of an error in previously issued financial statements is not an
accounting change. However, the reporting of an error correction involves
adjustments to previously issued financial statements similar to those generally
applicable to reporting an accounting change retrospectively. Therefore, the
reporting of a correction of an error by restating previously issued financial
statements is also addressed by SFAS 154.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments", which amends SFAS No. 133, "Accounting for Derivatives
Instruments and Hedging Activities" and SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities". 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 principle cash flows. SFAS No. 155 also amends SFAS No. 140 to allow
qualifying special-purpose entities to hold a passive derivative financial
instrument pertaining to beneficial interests that itself is a derivative
instrument. InfoSearch is currently evaluating the impact this new Standard but
believes that it will not have a material impact on InfoSearch's financial
position, results of operations, or cash flows.
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 FASB
Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities", with respect to the accounting for
separately recognized servicing assets and servicing liabilities. The Statement
(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 Company does
not believe that SFAS No. 156 will have a material impact on its financial
position, results of operations or cash flows.
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 Company is
currently in the process of evaluating the expected effect of FIN 48 on its
results of operations and financial position.
23
PLAN OF OPERATION
InfoSearch Media, Inc. ("InfoSearch") is a Los Angeles-based developer of search
marketing solutions involving online content that support the non-paid
(otherwise known as organic, which refers to the search results that the search
engines find on the world wide web as opposed to those listings for which
companies pay for placement) search marketing initiatives of its clients. We
have two primary revenue producing programs, ContentLogic and Web Properties.
ContentLogic - We launched ContentLogic to provide our clients the ability to
license or purchase original content created by our team of professional
copywriters with expert knowledge in search. High quality content has the
following three benefits to online businesses:
1. Higher Conversion Rates. High quality content builds trust and gives
people a reason to repeatedly visit a specific site. Studies show
that trust is one of the most important factors people consider when
making a purchase online. Repeat visitors also result in more sales.
2. More Advertising Revenue. By driving additional traffic to a
website, content provides clients an opportunity to further monetize
the value of their websites through programs like Google Adsense or
Yahoo Content Match.
3. Free Search Engine Traffic. The goal in utilizing content about the
topics for which people are searching is to drive more non-paid
traffic to the clients' websites as a result of higher rankings in
the search engine results.
Web Properties - We operate two content-based web sites, Answerbag and
ArticleInsider, through which we distribute traffic to advertisers.
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.
Answerbag is in the early stages of growth and does not currently provide a
significant amount of revenues to InfoSearch. However, it has grown from
approximately 500,000 unique users in January to approximately 1,000,000 unique
users at June 30, 2006. Registration and use of the website is free. The growth
in registered users is the result of the viral growth of the user community and
we anticipate product enhancements, promotions, potential partnerships and the
existing internal growth during the remainder of 2006 to facilitate the
continued growth in registered users. We believe that if the number of
registered users grows, the amount of revenue from Answerbag will grow more as
users will click on the advertisements on the Answerbag pages. We generate
revenue from Answerbag through the deployment of Google Adsense advertisements
placed on Answerbag pages, from which we receive revenue on a CPC basis in
return for delivering web visitors to Google's advertisers.
ArticleInsider is a collection of general informational articles focused on
various business topics. Our clients sponsor a prominent link on those pages and
pay on a CPC basis. In May 2005, InfoSearch began selling visitor traffic to its
web sites through a bidding system wherein the traffic was allocated and sold
through the Company's proprietary algorithm according to relative bid rates.
Also as part of its ArticleInsider program, InfoSearch established an affiliate
program during the quarter wherein the Company purchased traffic from other
online advertising companies, tested the traffic with the Company's new
click-fraud prevention algorithm and resold that traffic to its customers
through the same bidding system. InfoSearch is no longer bringing on new
customers for the ArticleInsider website and is harvesting the deferred revenues
associated with this product. We continue to generate revenue from
ArticleInsider through the deployment of Google Adsense advertisements placed on
ArticleInsider pages, from which we receive revenue on a CPC basis in return for
delivering web visitors to Google's advertisers.
24
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
REVENUES
Revenues decreased 23.7% to $1,677,218 for the three months ended June 30, 2006
from $2,197,041 for the three months ended June 30, 2005. Revenues increased
18.9% to $4,530,783 for the six months ended June 30, 2006 compared to
$3,810,734 for the six months ended June 30, 2005.
The decrease in revenue during the three months ended June 30, 2006 is due to
the decline in revenue associated with the ArticleInsider program, which
involved the cessation of the ArticleInsider affiliate program and depletion of
the CPC deferred revenue. We no longer bring on new clients for the
ArticleInsider program. Revenues for the Web Properties group for the three
months ended June 30, 2006 were $105,077 versus $1,259,367 for the three months
ended June 30, 2005. Revenues for the ContentLogic group for the three months
ended June 30, 2006 were $1,572,141 versus $937,673 for the three months ended
June 30, 2005.
The increase in revenue over the six months ended June 30, 2006 is due to
increased sales and license of ContentLogic and to a lesser extent, the addition
of revenues from Answerbag.com, which contributed $45,041 in revenue for the
three months ended June 30, 2006. Revenues for the Web Properties group for the
six months ended June 30, 2006 were $1,495,558 versus $2,280,683 for the six
months ended June 30, 2005. Revenues for the ContentLogic group for the six
months ended June 30, 2006 were $3,035,225 versus $1,530,051 for the six months
ended June 30, 2005.
The increase in revenues, sales and licenses under the ContentLogic program in
2006 versus 2005 is attributable to an increased focus on the ContentLogic
program driven by strategic changes and related alterations to the compensation
plan for our sales team. These changes included restrictions on the sale of the
ArticleInsider program, improved commission structures for selling the
ContentLogic program and a shift towards Google Adsense on our Web Property
websites.
COST OF SALES AND GROSS PROFIT
The Company had a gross profit of $1,083,661 and a gross margin of 64.6% for the
three months ended June 30, 2006 versus a gross profit of $1,615,520 and a gross
margin of 73.5% for the three months ended June 30, 2005. For the six months
ended June 30, 2006, the Company had a gross profit of $2,722,610 and a gross
margin of 60.0% versus a gross profit of $2,997,818 and a gross margin of 78.7%
for the six months ended June 30, 2005.
Gross profits and margins for the Web Properties group were ($32,849) and
(31.2%) for the three months ended June 30, 2006, and $574,506 and 38.4% for the
six months ended June 30, 2006 versus $957,443 and 76.0% for the three months
ended June 30, 2005 and $1,954,702 and 85.7% for the six months ended June 30,
2005. The deterioration of the gross margins is attributable to the amortization
cost of content developed for the ArticleInsider website and the increased cost
of our affiliate traffic relative to the bidded CPC rates for the ArticleInsider
clients as we continued to harvest this product group's revenue. As of June 30,
2006, the deferred revenue associated with our ArticleInsider product had
largely been recognized and at the same time, the higher margins expected with
the Answerbag revenue have not yet had a meaningful impact.
25
Gross profits and margins for the ContentLogic program group were $1,116,510 and
71.0% for the three months ended June 30, 2006 and $2,148,103 and 70.8% for the
six months ended June 30, 2006 versus $658,077 and 70.2% for the three months
ended June 30, 2005and $1,043,116 and 68.2% for the six months ended June 30,
2005. The improvement in margins is primarily related to the increased volume of
content we are producing with our existing editorial staff and the effect of the
license model wherein we recognize the production costs up front, but experience
revenue over a period of time.
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, including ContentLogic and Web
Properties. 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 increased from $610,238 for the three months ended June 30, 2005 to
$669,118 for the three months ended June 30, 2006 and increased from $1,053,981
for the six months ended June 30, 2005 to $1,084,034 for the six months ended
June 30, 2006. The increase in expenses is attributable to increased trade show
costs and a promotion campaign we initiated in March which ran through early
June.
General and administrative expenses include senior management, accounting,
legal, business development consulting, rent, administrative personnel,
depreciation and amortization and other overhead related costs. These costs
increased from $1,257,592 for the three months ended June 30, 2005 to
$5,598,028 for the three months ended June 30, 2006 including $359,378 in
accrued liquidated damages expenses and $2,441,155 for the six months ended June
30, 2005 to $7,817,208 for the six months ended June 30, 2006.
This increase is attributed to the hiring of new personnel to address the
regulatory requirement of being a public company, hiring of additional personnel
to develop the Answerbag website, an increase in directors fees and non-cash
equity compensation expenses associated with normal vesting and the acceleration
of vesting on June 30, 2006 of stock option grants and restricted stock grants
issued prior to the second quarter of 2006. Share-based compensation expenses
for the three and six months ended June 30, 2006 were $3,275,295 and 4,505,680,
respectively versus $251,937 and $395,017 share-based compensation expense for
the comparable periods in 2005, respectively.
OTHER NON-OPERATING INCOME/EXPENSE
Other non-operating net income is substantially comprised of interest income
received on the cash balances the Company maintains in money market accounts.
Interest income, net of interest expense, was $15,293 in the three months ended
June 30, 2006 as compared to $8,926 in interest income, net of interest expense,
in the three months ended June 30, 2005. Interest income, net of interest
expense, was $47,583 in the six months ended June 30, 2006 as compared to
$28,343 in interest income, net of interest expense, in the six months ended
June 30, 2005. This improvement is due to the increased cash balances following
the private placement of common stock as well as higher interest rates on
balances.
26
We also experienced an increase in non-operating income of $1,348,209 and
$2,014,983 for the three and six months ended June 30, 2006 associated with the
change in fair value of the warrants we issued in conjunction with the financing
we completed in November 2005.
NET LOSS
Our net loss increased to $3,846,717 or $(0.08) per share in the three months
ended June 30, 2006 as compared to a net loss of $243,384 or $(0.01) per share
in the three months ended June 30, 2005. A decrease in our gross profit and an
increase in our sales and marketing and general and administrative expenses,
depreciation and amortization charges and non-cash equity compensation expenses
for employees, consultants and board members was partially offset by a gain on
the decline of the fair value of warrants. Non-cash equity compensation expenses
were $3,275,295 for the three months ended June 30, 2006 compared to $251,937
for the comparable period in 2005. Expenses for depreciation and amortization
increased to $224,745 for the three months through June 30, 2006 from $63,628
for the same period in 2005.
LIQUIDITY AND CAPITAL RESOURCES
Cash decreased by $3,300,942 to $1,527,618 in the six months ended June 30, 2006
relative to the Company's fiscal year ending December 31, 2005. This is mainly
due to a decrease of $1,873,533 in deferred revenue and a net loss of
$4,142,801.
Cash used in operating activities of $2,949,599 in the six months ended June 30,
2006, consisted principally of the use of cash in the net loss of $3,846,717 and
the reduction of $1,873,533 in deferred revenue, and other items enumerated
below. The net loss was derived from increased operating expenses and the
non-cash $2,014,983 warrant valuation income, offset primarily by non-cash
charges of $4,505,680 in stock based compensation to employees and Board of
Directors and $429,919 in depreciation and amortization.
Cash used in operating activities of $1,746,509 in the six months ended June 30,
2005, consisted principally of the use of cash in the net loss of $468,976. The
net loss was derived from increased operating expenses, offset primarily by
non-cash charges of $108,083 in depreciation and amortization and $395,017 in
equity compensation. Other operating activities that used cash were $1,277,533
in the net change of current assets and current liabilities. This decrease
resulted primarily from decreases in amounts refunded to customers of $470,944
and deferred revenue of $1,046,806 and increases in prepaid expenses and other
current assets of $263,399.
Cash used in investing activities for periods ended June 30, 2006 and 2005,
included $335,413 and $423,292, respectively, including $31,632, and $139,703
for capital expenditures-fixed assets, $49,361 and $283,589 for capital
expenditures-content development and $254,420 for the 2006 purchase of
Answerbag.
Cash used in financing activities for the six months ended June 30, 2006 was
$15,930 resulting from principal reductions in capital leases. Cash generated
from investing activities for the period ended June 30, 2005 was $3,934,898 from
the Gross Proceeds from a Private Placement. Cash used in financing activities
for the three months ended June 30, 2006 and 2005 was $7,959 and $8,082,
respectively, for principal payments of capital lease obligations.
As of June 30, 2006, the Company had cash and cash equivalents amounting to
$1,527,618, a decrease of $3,300,942 from the balance at December 31, 2005. The
Company has a net working capital surplus of $79,073 at June 30, 2006.
27
There are no material commitments for additional capital expenditures at June
30, 2006. The continuing commitment of capital is for the existing equipment
capital leases and the operating lease for the Company's offices. The capital
leases have future minimum lease payments of $19,677 in 2006 and $18,632 in
2007. The operating lease for the offices has future minimum lease payments of
$107,880 in 2006, $219,540 in 2007, $226,125 in 2008 and $95,375 in 2009.
While we expect the use of cash to decline in the coming quarters, we will
nonetheless seek additional financing to continue dedicating the resources to
both product groups necessary to maintain their growth.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements.
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 Securities Exchange Act of 1934, as amended (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 the end of the period covered by this report. They
have concluded that, as of that date, our disclosure controls and procedures
were effective at ensuring that required information will be disclosed on a
timely basis in our reports filed under the Exchange Act.
(b) Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the period
covered by this report that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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. While we are not
currently a party to any litigation, we received a demand letter from Gemini
Partners, Inc. for unpaid finder's fees and additional warrants to be granted in
relation to the PIPE fundraising closed in November 2005. On July 6, 2006, we
agreed to a settlement with Gemini, pursuant to which we have issued Gemini a
warrant to purchase 300,000 shares of our common stock with an exercise price of
$0.01 per share and Gemini has cancelled its existing warrant to purchase
300,000 shares of our common stock at $1.00 and has provided a full release of
all claims. We have performed an EITF 00-19 analysis of the warrants issued
pursuant to the settlement agreement and determined that they will be treated as
equity. Except for this, we are not a party to any other 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. Unregistered Sales of Equity Securities
None
28
Item 3. Defaults on Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
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:
[Enlarge/Download Table]
Incorporated by Reference to Filings
Exhibit No. Description Indicated
2.1 Agreement and Plan of Merger and Exhibit 2.1 to InfoSearch's Current Report
Reorganization dated as of December 30, on Form 8-K filed on January 4, 2005 File
2004 among TrafficLogic, Inc., MAC No. 333-97385
Worldwide, Inc. and TrafficLogic
Acquisition Corp.
2.2 Split Off Agreement dated December 30, Exhibit 2.2 to InfoSearch's Current Report
2004 among MAC Worldwide, Inc., Vincenzo on Form 8-K filed on January 4, 2005 File
Cavallo, Anthony Cavallo, Mimi & Coco, No. 333-97385
Inc. and TrafficLogic, Inc.
3.1.1 Certificate of Incorporation Exhibit 3.1 to InfoSearch's Form SB-2 filed
on July 31, 2002, File Number 333-97385)
3.1.2 Certificate of Amendment to Certificate Exhibit 3.1.2 to InfoSearch's Current
of Incorporation of MAC Worldwide, Inc. Report on Form 8-K filed on January 4, 2005
File No. 333-97385
3.1.3 Certificate of Amendment to Certificate Exhibit 3.1.3 to InfoSearch's Current
of Incorporation of MAC Worldwide, Inc. Report on Form 8-K filed on January 4, 2005
File No. 333-97385
3.2 By laws of MAC Worldwide, Inc. Exhibit 3.2 to InfoSearch's Form SB-2 filed
on July 31, 2002, File Number 333-97385
3.3 Amended and Restated Bylaws** Exhibit 3.3 to InfoSearch's Form SB-2/A
filed on March 23, 2006, File Number
333-130173
4.1 Form of Warrant filed in connection with Exhibit 4.1 to InfoSearch's Current Report
the Securities Purchase Agreement dated on Form 8-K filed on November 7, 2005 File
November 2, 2005 between InfoSearch No. 333-97385
Media, Inc. and the signatory Investors
thereto
10.1 Employment Agreement dated December 29, Exhibit 10.1 to InfoSearch's Current Report
2004 between InfoSearch Media, Inc. and on Form 8-K filed on January 4, 2005 File
Steve Lazuka No. 333-97385
29
[Enlarge/Download Table]
10.2 Engagement Agreement dated September 27, Exhibit 10.2 to InfoSearch's Current Report
2004 between TrafficLogic, Inc. and CFO on Form 8-K filed on January 4, 2005 File
911 No. 333-97385
10.3 Lock Up Agreements between MAC Worldwide, Exhibit 10.3 to InfoSearch's Current Report
Inc. and TrafficLogic, Inc. related to on Form 8-K filed on January 4, 2005 File
our common stock acquired in the Merger No. 333-97385
by Steve Lazuka, Charles Dargan, Kelly
Bakst and David Gagne
10.4 Indemnity Agreements dated December 31, Exhibit 10.4 to InfoSearch's Current Report
2004 between InfoSearch Media, Inc. and on Form 8-K filed on January 4, 2005 File
Steve Lazuka, Charles Dargan and Kelly No. 333-97385
Bakst
10.5 2004 Stock Option Plan Report on Form 4 Exhibit 10.5 to InfoSearch's Current 8-K
filed on January, 2005 File No. 333-97385
10.6 Subscription Agreement Report on Form 4 Exhibit 10.6 to InfoSearch's Current 8-K
filed on January, 2005 File No. 333-97385
10.7 Employment Agreement dated March 8, 2005 Exhibit 10.1 to InfoSearch's Current Report
between InfoSearch Media, Inc. and Frank on Form 8-K filed on March 14, 2005 File
Knuettel, II No. 333-97385
10.8 Indemnity Agreement dated March 8, 2005 Exhibit 10.8 to InfoSearch's Annual Report
between InfoSearch Media, Inc. and Frank on Form 10-KSB filed on April 2, 2005
Knuettel, II
10.9 Indemnity Agreement dated December 31, Exhibit 10.9 to InfoSearch's Annual Report
2004 between InfoSearch Media, Inc. and on Form 10-KSB filed April 12, 2005
Louis W. Zehil
10.10 Indemnity Agreement dated April 15, 2005 Exhibit 10.10 to InfoSearch's registration
between InfoSearch Media, Inc. and statement on Form SB-2/A (Registration
Martial Chaillet No. 333-122814) originally filed on April
22, 2005.
10.11 Employment Agreement dated August 23, Exhibit 10.1 to InfoSearch's Current Report
2005 between InfoSearch Media, Inc. and on Form 8-K filed on August 26, 2005 File
George Lichter No. 333-97385
10.12 Amendment to Employment Agreement between Exhibit 10.2 to InfoSearch's Current Report
InfoSearch Media, Inc. and Steve Lazuka on Form 8-K filed on August 26, 2005 File
which was originally executed on December No. 333-97385
29, 2004
10.13 Securities Purchase Agreement dated Exhibit 10.1 to InfoSearch's Current Report
November 2, 2005 between InfoSearch on Form 8-K filed on November 7, 2005 File
Media, Inc. and the signatory Investors No. 333-97385
thereto
10.14 Registration Rights Agreement dated Exhibit 10.2 to InfoSearch's Current Report
November 2, 2005 between InfoSearch on Form 8-K filed on November 7, 2005 File
Media, Inc. and the signatory Investors No. 333-97385
thereto
10.15 Agreement and Plan of Merger and Exhibit 2.1 to InfoSearch's Current Report
Reorganization among InfoSearch Media, on Form 8-K filed on February 27, 2006 File
Inc., Apollo Acquisition Corp., No. 333-97385
Answerbag, Inc. and Joel Downs, Sunny
Walia and Richard Gazan dated as of
February 21, 2006.
10.16 Employment Agreement dated December 16, Exhibit 10.16 to InfoSearch's Quarterly
2005 between InfoSearch Media, Inc. and Report on Form 10-Q/A filed on July 11,
Ning Ning Yu 2006 File No. 333-7385
10.17 Employment Agreement dated February 15, Exhibit 10.17 to InfoSearch's Quarterly
2006 between InfoSearch Media, Inc. and Report on Form 10-Q/A filed on July 11,
Joel Downs 2006 File No. 333-7385
10.18 Employment Agreement dated March 14, Exhibit 10.18 to InfoSearch's Quarterly
2006 between InfoSearch Media, Inc. and Report on Form 10-Q/A filed on July 11,
Edan Portaro 2006 File No. 333-7385
10.19 Consulting Agreement dated August 23, Exhibit 10.19 to InfoSearch's Quarterly
2005 between InfoSearch Media, Inc. and Report on Form 10-Q/A filed on July 11,
Claudio Pinkus 2006 File No. 333-7385
10.20 Employment Agreement dated June 11, Exhibit 10.20 to InfoSearch's Registration
2006 between InfoSearch Media, Inc. and Statement on Form SB-2/A filed on July 12,
David Warthen 2006 File No. 333-130173
31.1 Chief Executive Officer Certification
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002*
30
[Download Table]
31.2 Chief Financial Officer Certification
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002*
32.1 Chief Executive Officer and Chief
Financial Officer Certification pursuant
to Section 906 of the Sarbanes-Oxley Act
of 2002*
* filed herewith
31
SIGNATURES
In accordance with the requirement 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.
INFOSEARCH MEDIA, INC.
Date: August 21, 2006 /s/ George Lichter
---------------------------
By: George Lichter
Its:Chief Executive Officer
Date: August 21, 2006 /s/ Frank Knuettel, II
---------------------------
By: Frank Knuettel, II
Its:Chief Financial Officer
32
EXHIBIT INDEX
[Enlarge/Download Table]
Incorporated by Reference to Filings
Exhibit No. Description Indicated
2.1 Agreement and Plan of Merger and Exhibit 2.1 to InfoSearch's Current Report
Reorganization dated as of December 30, on Form 8-K filed on January 4, 2005 File
2004 among TrafficLogic, Inc., MAC No. 333-97385
Worldwide, Inc. and TrafficLogic
Acquisition Corp.
2.2 Split Off Agreement dated December 30, Exhibit 2.2 to InfoSearch's Current Report
2004 among MAC Worldwide, Inc., Vincenzo on Form 8-K filed on January 4, 2005 File
Cavallo, Anthony Cavallo, Mimi & Coco, No. 333-97385
Inc. and TrafficLogic, Inc.
3.1.1 Certificate of Incorporation Exhibit 3.1 to InfoSearch's Form SB-2 filed
on July 31, 2002, File Number 333-97385)
3.1.2 Certificate of Amendment to Certificate Exhibit 3.1.2 to InfoSearch's Current
of Incorporation of MAC Worldwide, Inc. Report on Form 8-K filed on January 4, 2005
File No. 333-97385
3.1.3 Certificate of Amendment to Certificate Exhibit 3.1.3 to InfoSearch's Current
of Incorporation of MAC Worldwide, Inc. Report on Form 8-K filed on January 4, 2005
File No. 333-97385
3.2 By laws of MAC Worldwide, Inc. Exhibit 3.2 to InfoSearch's Form SB-2 filed
on July 31, 2002, File Number 333-97385
3.3 Amended and Restated Bylaws** Exhibit 3.3 to InfoSearch's Form SB-2/A
filed on March 23, 2006, File Number
333-130173
4.1 Form of Warrant filed in connection with Exhibit 4.1 to InfoSearch's Current Report
the Securities Purchase Agreement dated on Form 8-K filed on November 7, 2005 File
November 2, 2005 between InfoSearch No. 333-97385
Media, Inc. and the signatory Investors
thereto
10.1 Employment Agreement dated December 29, Exhibit 10.1 to InfoSearch's Current Report
2004 between InfoSearch Media, Inc. and on Form 8-K filed on January 4, 2005 File
Steve Lazuka No. 333-97385
10.2 Engagement Agreement dated September 27, Exhibit 10.2 to InfoSearch's Current Report
2004 between TrafficLogic, Inc. and CFO on Form 8-K filed on January 4, 2005 File
911 No. 333-97385
10.3 Lock Up Agreements between MAC Worldwide, Exhibit 10.3 to InfoSearch's Current Report
Inc. and TrafficLogic, Inc. related to on Form 8-K filed on January 4, 2005 File
our common stock acquired in the Merger No. 333-97385
by Steve Lazuka, Charles Dargan, Kelly
Bakst and David Gagne
10.4 Indemnity Agreements dated December 31, Exhibit 10.4 to InfoSearch's Current Report
2004 between InfoSearch Media, Inc. and on Form 8-K filed on January 4, 2005 File
Steve Lazuka, Charles Dargan and Kelly No. 333-97385
Bakst
10.5 2004 Stock Option Plan Report on Form 4 Exhibit 10.5 to InfoSearch's Current 8-K
filed on January, 2005 File No. 333-97385
10.6 Subscription Agreement Report on Form 4 Exhibit 10.6 to InfoSearch's Current 8-K
filed on January, 2005 File No. 333-97385
10.7 Employment Agreement dated March 8, 2005 Exhibit 10.1 to InfoSearch's Current Report
between InfoSearch Media, Inc. and Frank on Form 8-K filed on March 14, 2005 File
Knuettel, II No. 333-97385
[Enlarge/Download Table]
10.8 Indemnity Agreement dated March 8, 2005 Exhibit 10.8 to InfoSearch's Annual Report
between InfoSearch Media, Inc. and Frank on Form 10-KSB filed on April 2, 2005
Knuettel, II
10.9 Indemnity Agreement dated December 31, Exhibit 10.9 to InfoSearch's Annual Report
2004 between InfoSearch Media, Inc. and on Form 10-KSB filed April 12, 2005
Louis W. Zehil
10.10 Indemnity Agreement dated April 15, 2005 Exhibit 10.10 to InfoSearch's registration
between InfoSearch Media, Inc. and statement on Form SB-2/A (Registration
Martial Chaillet No. 333-122814) originally filed on April
22, 2005.
10.11 Employment Agreement dated August 23, Exhibit 10.1 to InfoSearch's Current Report
2005 between InfoSearch Media, Inc. and on Form 8-K filed on August 26, 2005 File
George Lichter No. 333-97385
10.12 Amendment to Employment Agreement between Exhibit 10.2 to InfoSearch's Current Report
InfoSearch Media, Inc. and Steve Lazuka on Form 8-K filed on August 26, 2005 File
which was originally executed on December No. 333-97385
29, 2004
10.13 Securities Purchase Agreement dated Exhibit 10.1 to InfoSearch's Current Report
November 2, 2005 between InfoSearch on Form 8-K filed on November 7, 2005 File
Media, Inc. and the signatory Investors No. 333-97385
thereto
10.14 Registration Rights Agreement dated Exhibit 10.2 to InfoSearch's Current Report
November 2, 2005 between InfoSearch on Form 8-K filed on November 7, 2005 File
Media, Inc. and the signatory Investors No. 333-97385
thereto
10.15 Agreement and Plan of Merger and Exhibit 2.1 to InfoSearch's Current Report
Reorganization among InfoSearch Media, on Form 8-K filed on February 27, 2006 File
Inc., Apollo Acquisition Corp., No. 333-97385
Answerbag, Inc. and Joel Downs, Sunny
Walia and Richard Gazan dated as of
February 21, 2006.
10.16 Employment Agreement dated December 16, Exhibit 10.16 to InfoSearch's Quarterly
2005 between InfoSearch Media, Inc. and Report on Form 10-Q/A filed on July 11,
Ning Ning Yu 2006 File No. 333-7385
10.17 Employment Agreement dated February 15, Exhibit 10.17 to InfoSearch's Quarterly
2006 between InfoSearch Media, Inc. and Report on Form 10-Q/A filed on July 11,
Joel Downs 2006 File No. 333-7385
10.18 Employment Agreement dated March 14, Exhibit 10.18 to InfoSearch's Quarterly
2006 between InfoSearch Media, Inc. and Report on Form 10-Q/A filed on July 11,
Edan Portaro 2006 File No. 333-7385
10.19 Consulting Agreement dated August 23, Exhibit 10.19 to InfoSearch's Quarterly
2005 between InfoSearch Media, Inc. and Report on Form 10-Q/A filed on July 11,
Claudio Pinkus 2006 File No. 333-7385
10.20 Employment Agreement dated June 11, Exhibit 10.20 to InfoSearch's Registration
2006 between InfoSearch Media, Inc. and Statement on Form SB-2/A filed on July 12,
David Warthen 2006 File No. 333-130173
31.1 Chief Executive Officer Certification
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002*
31.2 Chief Financial Officer Certification
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002*
32.1 Chief Executive Officer and Chief
Financial Officer Certification pursuant
to Section 906 of the Sarbanes-Oxley Act
of 2002*
Dates Referenced Herein and Documents Incorporated by Reference
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