Annual Report — Form 10-K Filing Table of Contents
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(Exact
name of registrant as specified in its charter)
Nevada
20-0987069
(State
or other jurisdiction of
incorporation
or organization)
(I.R.S.
Employer
Identification
No.)
1201
Main Street, Suite 980, Columbia, SC
29201
(Address
of principal executive offices)
(Zip
Code)
Registrant’s
telephone number, including area code: (803)
727-1113
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $0.001 value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes o
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o
No x
Indicate
by check mark whether the registrant (1) has 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 registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes o No
x
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of large
accelerated filer,” “accelerated filer,” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
Accelerated
filer o
Non-accelerated
filer o
(Do not check if a smaller reporting company)
Smaller
reporting company x
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes o
No
x
The
estimated aggregate market value of the common stock held by non-affiliates
of
the registrant on December31, 2007
was
$21,284,796. This calculation is based upon the closing sale price of $0.73
as
reported on the Over-the-Counter Bulletin Board on December31, 2007, the last business day of the registrant’s most recently completed
second fiscal quarter. The shares of common stock held by each officer, director
and each person known to the registrant who owns 5% or more of the outstanding
common stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
10
PART
II
ITEM
5.
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
10
ITEM
6.
SELECTED
FINANCIAL DATA
11
ITEM
7.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
11
ITEM
7A.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
18
ITEM
8.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
18
ITEM
9.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON
ACCOUNTING AND FINANCIAL DISCLOSURE
18
ITEM
9A(T)
CONTROLS
AND PROCEDURES
18
ITEM
9B.
OTHER
INFORMATION
19
PART
III
ITEM
10.
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
19
ITEM
11.
EXECUTIVE
COMPENSATION
22
ITEM
12.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
28
ITEM
13.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS,
AND
DIRECTOR INDEPENDENCE
31
ITEM
14.
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
32
PART
IV
ITEM
15.
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
32
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K for the fiscal year ended June 30, 2008 contains
forward-looking statements that involve a number of risks and uncertainties.
Such forward-looking statements are made pursuant to the “safe-harbor”
provisions of the Private Securities Litigation Reform Act of 1995. Although
our
forward-looking statements reflect the good faith judgment of our management,
these statements can be based only on facts and factors of which we are
currently aware. Consequently, forward-looking statements are inherently subject
to risks and uncertainties. Actual results and outcomes may differ materially
from results and outcomes discussed in the forward-looking
statements.
Forward-looking
statements can be identified by the use of forward-looking words such as “may,”“will,”“should,”“anticipate,”“believe,”“expect,”“plan,”“future,”“intend,”“could,”“estimate,”“predict,”“hope,”“potential,”“continue,” or the negative
of these terms or other similar expressions. These statements include, but
are
not limited to, statements under the captions “Risk Factors,”“Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
“Business,” as well as other sections in this report. Such forward-looking
statements are based on our management’s current plans and expectations and are
subject to risks, uncertainties and changes in plans that could cause actual
results to differ materially from those anticipated in the forward-looking
statements. You should be aware that, as a result of any of these factors
materializing, the trading price of our common stock could decline, and you
could lose all or part of the value of your shares of our common stock. These
factors include, but are not limited to, the following:
·
the
availability and adequacy of capital to pay the deferred payment
obligations we owe and to support and grow our
business;
·
changes
in economic conditions in the U.S. and in other countries in which
we
currently do business;
·
currency
exchange rates;
·
failure
to integrate new products and newly acquired companies and the diversion
of management resources relating to acquisitions, and the negative
effect
on our earnings relating to the amortization or potential write-down
of
acquired assets or goodwill;
·
fluctuations
in operating results and earnings, including timing of cash flows
and
company performance;
·
market
acceptance of new products or the failure of new products to operate
as
anticipated;
·
actions
taken or not taken by others, including competitors, as well as
legislative, regulatory, judicial and other governmental
authorities;
·
competition
in our industry;
·
changes
in our business and growth strategy, capital improvements or development
plans;
·
disputes
regarding our intellectual property;
and
·
other
factors discussed under the section entitled “Risk Factors” or elsewhere
in this report.
These
and
additional factors are set forth in Item 1A. of this report. You should
carefully review these risks and additional risks described in other documents
we file from time to time with the Securities and Exchange Commission (“SEC”),
including the Quarterly Reports on Form 10-Q. The cautionary statements
made in this report are intended to be applicable to all related forward-looking
statements wherever they may appear in this report.
We
urge
you not to place undue reliance on these forward-looking statements, which
speak
only as of the date of this report. We undertake no obligation to publicly
update any forward looking-statements, whether as a result of new information,
future events or otherwise.
PART
I
ITEM
1.BUSINESS.
Overview
Collexis
Holdings, Inc., sometimes referred to as “Collexis,”“we,”“us,” or “our” in
this report, is a global software company headquartered in Columbia, South
Carolina with major operations in Cincinnati, Ohio, Geldermalsen, the
Netherlands and Cologne, Germany. We develop software that supports the
knowledge intensive market, building tools to search and mine large sets of
information. Our software enables search, aggregation, navigation and discovery
of information. Using public as well as proprietary thesauri of industry
specific language, we can create “fingerprints” of texts – such as articles, web
pages, books and internal and external databases – that can be used in turn to
find the most relevant information for a researcher, analyst or business
professional. We generate our revenues primarily from licensing our software
and
content, providing services to the users of our software, maintaining and
supporting our software, selling related hardware and hosting software on an
application service provider basis.
We
operate several subsidiaries that support our core technology sales in the
government, enterprise and life science markets. In October 2007, we
acquired SyynX Solutions GmbH, this expanded our application solutions in health
sciences. In February 2008, we acquired an industry-dedicated subsidiary,
Lawriter LLC, that provides online legal research services to lawyers in the
United States primarily through state bar associations. In addition, we now
offer the world’s first pre-populated professional social network for life
science researchers, www.biomedexperts.com.
Our
technology is based on the principle of fingerprinting or the semantic profiling
of a document. The Collexis software can create a fingerprint for any piece
of
text containing relevant information. This process makes use of a structure
of
professional terminology in a particular field, including thesaurus, taxonomies
or ontologies. A thesaurus contains selected words, terms and concepts and
their
semantic relationships in a hierarchical structure also reflecting synonyms
and
homonyms. The profiled fingerprint of a document is the starting point for
industry applications that we use in our primary markets. The document
fingerprint depends not only on the capabilities of the resulting application,
but also on the underlying functionality and scalability of the system
architecture to perform in industries as diverse as the legal, life sciences,
and defense/government markets.
Our
system architecture has three tiers. We configure the first tier, an application
interface, according to customer specifications and made available only to
authorized users via intranet or extranet for specialized database searches.
A
proprietary interface arranges for communications between the user and our
technology, thus providing easy integration in existing environments. The second
tier, Collexis Engine, is a core data processing engine that executes commands
that extract, match and relate pieces of text. Our third tier of architecture
is
a permanent storage layer, which stores the location of all information used
by
the Collexis Engine for later retrieval; however, actual source material is
not
typically stored on our system.
We
have
four related sales strategies:
·
a
full service strategy in which we provide access to public or private
content through our customized software search and mining
applications;
·
a
subscription/application service provider (ASP) service in which
we
function as an ASP with little or no customization;
·
a
hybrid of these two strategies – mixing internal and external content in
pre-built interfaces as a hosted or onsite solution;
and
·
providing
portal or community platforms/networks for key
markets.
For
our
full service customer, generally large government and business users, we offer
customized software search and mining applications on a licensed basis with
add-on service contracts and software development tools. In the United States,
we have licensed our software to the National Institutes of Health for work
in
connection with its analysis of grant applications. In Europe, we have entered
into similar arrangements with the World Health Organization, Wellcomes Trust,
the Royal Dutch Academy of Arts and Science, and the University of Rotterdam,
among others.
Our
second sales strategy is a subscription service for our Collexis Engine,
proprietary content, or other relevant applications, in which we function
as an application service provider. In this sales approach we provide little
or
no customization of our software. Subscribers can purchase access on a daily,
monthly, or annual basis, price based on the number of users. For example,
in
the life sciences field, our clients can use the Collexis Engine to search
and
mine patent literature, grant applications, clinical trials, medical literature
and other databases. Representative clients using our software in this manner
include Mayo Clinic, Johns Hopkins University and the University of South
Carolina. This is also the model that is employed for Lawriter, which serves
state bar associations, through a subscription for an outsourced application
and
content.
1
Our
third
sales approach provides customers with some customizations of our basic search
and mining technology, but we still serve primarily as an ASP.
Our
fourth and newest sales strategy is based on the development of a community
portal (Biomed Experts) that allows our target markets to communicate and
collaborate with experts and broaden their knowledge in their respective fields.
Currently
we are transitioning from being a traditional license and maintenance software
company to a subscription based application provider. Working with internal
and
external development resources, we believe that recurring subscription
application solutions will enhance our future growth opportunities and financial
performance. We intend to offer our solutions on an annual per-user basis or
priced based on enterprise access.
History
Collexis
was formed when, on February 13, 2007, Collexis Holdings, Inc., a Delaware
corporation, merged with and into Technology Holdings, Inc., a Nevada
corporation. As the surviving company, Technology Holdings, Inc. changed its
name to Collexis Holdings, Inc. Immediately before the merger, Collexis
Holdings, Inc. had acquired through a share exchange approximately 99.5% of
the
outstanding capital stock of Collexis B.V. On June 27, 2008, we acquired the
remaining 0.5% of Collexis B.V. stock we did not previously own in exchange
for
183,333 shares of our common stock. Before the merger, Technology Holdings,
Inc.
was a development stage company with no operations. Collexis B.V. was founded
in
1999 in the Netherlands and through these transactions became the operating
subsidiary of Collexis Holdings and acquirer for accounting
purposes.
On
October 19, 2007, we acquired our long-time software development partner, SyynX
WebSolutions GmbH, a privately-held software company based in Cologne, Germany.
Additionally, on February 1, 2008, we acquired Lawriter, LLC, an Ohio based
company that provides online legal research services to bar associations under
the name Casemaker®
via
monthly database subscription fees. Currently, Lawriter has 28 state bar
associations as customers. See “Financial Statements – Note 3, Acquisitions” for
more information. To further expand our offerings to legal industry clients,
on
January 18, 2008, we entered into a licensing and publishing agreement with
VersusLaw, Inc., under which we acquired a perpetual, non-exclusive,
transferable license to use VersusLaw’s legal-related collection of judicial
opinions.
Sales
and Distribution of Products and Services
We
have
19 sales and marketing staff of which 14 are employees and five are independent
contractors. We operate primarily using a direct sales model through these
employees. We also conduct indirect sales through partners, such as Lockheed
Martin, that incorporate our products into their bids and technologies. We
grant
limited, royalty-free licenses to selected projects supporting healthcare
advancement in developing countries . We have sales representation, either
through sales representatives or through indirect partners, in the United
States, Europe, South America and in the Asian-Pacific region.
We
generally deliver our software through the internet via our secure File Transfer
Protocol or we can deliver by CD. We do not offer any customers or resellers
a
right of return.
Customers
For
the
year ended June 30, 2008, we had approximately 100 customers of which seven
represented approximately 50% of our total gross revenues. One customer, the
National Institutes of Health, represented approximately 21% of our gross
revenues and no other customer represented 10% or more of our revenues.
Overall,
our number of clients expanded in fiscal 2008. The largest expansion has been
in
sales to universities and medical research centers in the United States, in
international sales of our scientific management and grant analysis solutions,
and in the U.S. legal (with the acquisition of Lawriter LLC) and defense
markets. We announced relationships and engagements with the National Institutes
of Health, Mayo Clinic, Johns Hopkins University, the University of South
Carolina, Asklepios Hospitals and Wellcomes Trust, among others.
Our
increased presence in the defense and intelligence markets has proven valuable,
with incremental engagements with several U.S. defense contractors and related
clients. These clients fall into our traditional license and maintenance sales
model, and the defense contractor generally provides ongoing maintenance
services – increasing our margins on the engagements.
2
Technology
and Intellectual Property
We
recently filed international and domestic patent applications, respectively
,
directed to multiple improvements we have made to the version 6.0 release of
the
Collexis Engine. We believe these patent applications substantially strengthen
our ability to protect our technology, particularly as it relates to our
enhanced Collexis Engine. While intellectual property rights are governed by
a
variety of laws in numerous countries and there is a risk that our business
could infringe on the intellectual property rights of third parties, we have
confidence that we have the ability to conduct our business without infringing
on the intellectual property rights of others.
A
patent
has been registered in the Netherlands, which expires on May 9, 2020 and covers
a method, including apparatus and software, for generating knowledge profiles
from textual information in at least one structured datafile, resulting in
a
list containing a cluster of related concepts that can be used interactively
to
find other datafiles containing similar clusters.
Market
and Competition
We
focus
on three key markets:
·
life
sciences (university and medical research, healthcare,
biopharma);
·
government
(defense and intelligence, and enterprise business intelligence);
and
·
legal.
(specifically the U.S. legal
market)
We
believe that each of these markets represents a software applications
opportunity of more than $1 billion according to Outsell, Inc. These
markets are highly competitive, however, and are served by many companies with
significantly greater capital resources than those available to us. Our
competitors include Google, Yahoo, FAST search, Autonomy, Convera and others.
In
our Lawriter online legal research business, we face strong competition from
Reed LexisNexis®
and
Westlaw®.
These
organizations span from large search providers like Google, who continue to
move
into broad groups of commercial and government sectors, to smaller competitors
like Convera that compete with us in specific markets, like defense and
intelligence.
Employees
As
of
October 9, 2008, we had 59 employees and 8 independent contractors. All of
our
employees are full-time employees. We consider our relationship with our
employees to be good. In the U.S., we had 33
employees,
and 26
of our employees are based in Europe.
ITEM
1A.
RISK FACTORS.
Our
auditors have substantial doubt as to our ability to continue as a going
concern.
Our
independent registered public accounting firm issued its report dated October14, 2008 on our financial statements for the year ended June 30, 2008, which
included an explanatory paragraph that expressed substantial doubt about
Collexis’ ability to continue as a going concern. As discussed in Note 2 to the
Financial Statements, as of June 30, 2008, we have incurred substantial
operating losses, net cash outflows from operations and we have a working
capital deficiency. We anticipate that such conditions will continue in the
foreseeable future. Because we have been issued an opinion by our auditors
that
includes an explanatory paragraph that substantial doubt exists as to whether
we
can continue as a going concern, it may be more difficult for us to attract
investors. Our future is dependent upon our ability to obtain financing and
upon
future profitable operations from the development and commercialization of
our
products. We intend to seek additional funds through private placements of
equity or the incurrence of debt. Our financial statements have been prepared
on
a going concern basis and do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts of and
classification of liabilities that might be necessary in the event we cannot
continue in existence.
We
need additional capital, and it may not be available on acceptable terms, or
at
all. If we do not receive the additional capital we need, our financial
condition and future prospects will suffer, and our business could
fail.
As
of
October 14, 2008, we had cash and cash equivalents of approximately $200,000.
We
believe our current balance of cash and cash equivalents combined with any
funds
generated from our operations will be sufficient to meet our working capital
and
capital expenditure requirements for at least the next two weeks based upon
our
estimates of funds required to operate our business during that period.
3
In
order
to meet our short-term working capital needs, we are currently conducting a
private placement of our common stock for up to $4.05 million. As of the date
of
this report, we have accepted subscriptions for $1.0 million from an investor
who has orally agreed to finance our working capital needs through the purchase
of shares of our common stock, up to the amount of this private placement,
on an
as needed basis until this offering is fully subscribed. The investor is not
contractually obligated to purchase additional shares of our common stock,
therefore, there can be no assurance that we will receive additional funding
through the private placement of our common stock and failure to achieve such
funding will result in a significant negative impact to our business and our
operating results.
We
will
need to raise additional funds for the following purposes:
·
to
fund our operations, including sales, marketing and research and
development programs;
·
to
fund our deferred payments on
acquisitions;
·
to
fund any growth we may experience;
·
to
enhance and/or expand the range of products and services we
offer;
·
to
increase our promotional and marketing activities;
and
·
to
respond to competitive pressures and/or perceived opportunities,
such as
investment, acquisition and international expansion
activities.
We
cannot
be sure additional capital will be available, and if it is, it will be on terms
beneficial to us. Historically, we obtained external financing primarily from
sales of our common stock. To the extent we raise additional capital by issuing
equity securities, our stockholders may experience substantial dilution. If
we
are unable to obtain additional capital, we may then attempt to preserve our
available resources by various methods including deferring the creation or
satisfaction of commitments, reducing expenditures on our research and
development programs or otherwise scaling back our operations. If we are unable
to raise additional capital or defer costs, that inability would have a material
adverse effect on our financial position, result of operations, prospects and
our business could fail. See further discussion under Item 7, “Management
Discussion and Analysis of Plan of Operation – Liquidity and Capital Resources.”
We
have a history of operating losses and will likely incur future losses. If
our
losses continue, and we are unable to achieve profitability, our stock price
will likely suffer.
We
have
operated at a loss since our inception. For the fiscal year ended June 30,2008,
and the six months ended June30,2007, our net losses were $11,259,758 and $4,092,748, respectively. These losses
include expenditures associated with developing and selling software products,
including our Collexis Engine. We expect that our losses will continue for
the
foreseeable future as we continue to invest in Collexis Engine enhancements
and
other programs.
Accordingly,
we cannot assure you that we will be able to achieve or maintain profitability
in the future. If we do not achieve and sustain profitability, it will likely
have a material adverse effect on the market price of our common stock and
our
financial condition.
Our
ability to achieve profitability depends on the Collexis Engine and other
product offerings. If our products fail to achieve market acceptance, we will
be
unable to grow our business and achieve
profitability.
We
have
expended significant financial resources, as well as management attention,
on
the Collexis Engine and related product offerings and expect our expenditures
will continue to be significant. We believe that our future profitability will
depend on our ability to successfully market and achieve market acceptance
for
these products. The degree of market acceptance of the Collexis Engine and
related products will depend upon a number of factors, including:
·
the
advantages of the Collexis Engine over competing
products;
·
our
ability to innovate and develop new features for the Collexis
Engine;
·
customer
needs for search products and knowledge
discovery;
·
the
price and cost-effectiveness of the Collexis Engine;
and
·
the
strength of sales, marketing and distribution
support.
We
are
aware of a significant number of competing well-established search products
offered by companies with significantly greater financial and marketing
resources than us, such as Google, Yahoo, FASTsearch, Autonomy and Convera.
Even
if the Collexis Engine achieves market acceptance, we may not be able to
maintain that market acceptance over time if competing products are introduced
that are viewed as more effective or are more favorably received than ours.
If
the Collexis Engine does not achieve and maintain market acceptance, we believe
that we will not be able to generate sufficient revenue to attain
profitability.
4
We
depend heavily on sales to our significant customers, and our business could
be
adversely affected if any of them reduce or terminate their purchases from
us.
Seven
customers represented approximately 50% of our total gross revenues for the
year
ended June 30, 2008. One customer, National Institutes of Health, represented
21% of our gross revenues for the fiscal year ended June 30, 2008. We may
continue to depend on a limited number of companies for a significant portion
of
our revenue. If a significant customer reduces or delays orders from us,
terminates its relationship with us or fails to pay its obligations to us,
our
revenues could decrease significantly.
We
are at an early stage of development, which makes it difficult to evaluate
our
future prospects and may increase the risk that we will not be
successful.
We
are a
company in the early stages of development, with a short operating history
to
use in assessing our future prospects. We will encounter risks and challenges
as
an early-stage company in a new and rapidly evolving market. Our inability
to
address these challenges successfully could materially harm our business,
operating results and financial condition.
We
have limited marketing experience and capacity.
We
currently have 19 sales and marketing employees and independent contractors.
We
anticipate committing significant additional resources to develop and grow
a
marketing and sales force. If we decide to license or sell our products to
distributors, those licensees or distributors, rather than us, may realize
a
significant portion of the profits from those products.
We
are in extremely competitive markets, and if we fail to compete effectively
or
respond to rapid technological change, our revenues and market share will be
adversely affected.
Our
business environment and the search and software industries in general are
characterized by intense competition, rapid technological changes, changes
in
customer requirements and emerging new market segments. Our competitors include
many companies that are larger and more established and have substantially
more
resources than we do, such as Google, Yahoo, FASTsearch, Autonomy and Convera.
In our Lawriter online legal research business, we face strong competition
from
Reed LexisNexis®
and
Westlaw®.
Current
and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability
of
their products to address the needs of the markets that we serve. Accordingly,
new competitors or alliances among existing competitors may emerge and rapidly
acquire significant market share. Increased competition may result in price
reductions, reduced gross margins and loss of market share, any of which could
have a material adverse effect on our business, financial condition or results
of operations.
For
our
strategy to succeed and to remain competitive, we must leverage our core
technology to develop new product offerings, update existing features and add
new components to our current products such as support for new data types and
taxonomies for specific vertical markets. These development efforts are
expensive, and we plan to fund these developments with our existing capital
resources, and other sources, such as equity issuances and borrowings that
may
be available to us. If these developments do not generate substantial revenues,
or we are unable to access other sources of capital on acceptable terms, our
business and results of operations will be adversely affected. We cannot assure
you that we will successfully develop any new products, complete them on a
timely basis or at all, achieve market acceptance or generate significant
revenues with them.
We
design our products to work with certain systems, and changes to these systems
may render our products incompatible with these systems. As a result, we may
be
unable to sell our products.
Our
ability to sell our products depends on the compatibility of our products with
other software and hardware products. These products may change or new products
may appear that are incompatible with our products. If we fail to adapt our
products to remain compatible with other vendors’ software and hardware products
or fail to adapt our products as quickly as our competitors, we may be unable
to
sell our products.
Our
software products are complex and may contain errors that could damage our
reputation and decrease sales.
Our
complex software products may contain errors that people may detect at any
point
in the products’ life cycles. We cannot be assured that, despite our testing and
quality assurance efforts and similar efforts by current and potential
customers, errors will not be found in our products. The discovery of an error
may result in loss of or delay in market acceptance and sales.
5
Because
of the technical nature of our business, our intellectual property is extremely
important to our business, and adverse changes to our intellectual property
could harm our competitive position.
We
believe that our success depends, in part, on our ability to protect our
proprietary rights and technology. Historically, we have relied on a combination
of copyright, patents, trademark and trade secret laws, employee confidentiality
and invention assignment agreements, distribution and OEM software protection
agreements and other methods to safeguard our technology and software products.
Risks associated with our intellectual property include the
following:
·
pending
patent applications may not be
issued;
·
intellectual
property laws may not protect our intellectual property
rights;
·
others
may challenge, invalidate, or circumvent any patent issued to
us;
·
rights
granted under patents issued to us may not provide competitive advantages
to us;
·
unauthorized
parties may attempt to obtain and use information that we regard
as
proprietary despite our efforts to protect our proprietary
rights;
·
others
may independently develop similar technology or design around any
patents
issued to us; and
·
effective
protection of intellectual property rights may be limited or unavailable
in some foreign countries in which we
operate.
We
may be subject to intellectual property rights claims, which are costly to
defend, could require us to pay damages and could limit our ability to use
certain technologies in the future.
Companies
in the software and technology industries own large numbers of patents,
copyrights, trademarks and trade secrets and frequently enter into litigation
based on allegations of infringement or other violations of intellectual
property rights. We face the possibility of intellectual property rights claims
against us. Our technologies may not be able to withstand any third-party claims
or rights against their use. Any intellectual property claims, with or without
merit, could be time-consuming, expensive to litigate or settle and could divert
management resources and attention.
With
respect to any intellectual property rights claim, we may have to pay damages
or
stop using technology if it is ultimately found by a court to be in violation
of
a third party’s rights. We may have to seek a license for the technology, which
may not be available on reasonable terms and may significantly increase our
operating expenses. The technology also may not be available for license to
us
at all. As a result, we may also be required to develop alternative,
non-infringing technology, which could require significant effort and expense.
If we cannot license or develop technology for the infringing aspects of our
business, we may be forced to limit our product and service offerings and may
be
unable to compete effectively. Any of these results could harm our operating
results and financial condition.
We
depend on key personnel.
Our
ability to develop our business depends upon our attracting and retaining
qualified management, marketing and technical personnel, including consultants.
Because the number of qualified technical personnel, including software
developers, is limited and competition for such personnel is intense, there
can
be no assurance that we will be able to attract or retain such persons. The
loss
of key personnel or the failure to recruit additional key personnel could
significantly impede attainment of our objectives and have a material adverse
effect on our financial condition and results of operations.
We
may not be able to manage the growth of our staff
effectively.
Our
business plan calls for increasing our staffing levels in the future. Our
ability to execute our strategies will depend in part upon our ability to
integrate such new employees into our operations and fund such added costs.
Our
planned activities will require the addition of new personnel, including
management, accounting, marketing and technical personnel, and the development
of additional expertise by existing personnel. The inability to acquire such
services or to develop such expertise could have a material adverse impact
on
our operations.
The
costs of being an SEC registered company are proportionately higher for small
companies like us.
The
Sarbanes-Oxley Act of 2002 and the related SEC rules and regulations have
increased the scope, complexity and cost of corporate governance, reporting
and
disclosure practices. We expect to experience increasing compliance costs,
including costs related to internal controls, as a result of the Sarbanes-Oxley
Act. These necessary costs are proportionately higher for a company of our
size
and will affect our profitability more than that of some of our larger
competitors.
6
We
have concluded that as of June 30, 2008, our internal control systems over
disclosure controls and procedures and financial reporting were ineffective
and
may have significant deficiencies or material
weaknesses.If
we fail to meet our reporting obligations in a timely manner in the future
due
to ineffective internal control systems, our business could be
harmed.
We
have
evaluated our internal control systems over disclosure controls and procedures
and financial reporting as required by Section 404 of the Sarbanes-Oxley Act
for
the year ended June 30, 2008 and found them to be ineffective. If we identify
significant deficiencies or material weaknesses in our internal controls over
financial reporting that we cannot remediate in a timely manner, or if we are
unable to receive a positive attestation from our independent registered public
accounting firm with respect to our internal controls over financial reporting
for the year ending June 30, 2010, then we could be subject to scrutiny by
regulatory authorities, the trading price of our common stock could decline
and
our ability to obtain any necessary equity or debt financing could suffer.
See
discussion under Item 9A(T) “Controls and Procedures”.
In
addition, the new rules adopted as a result of the Sarbanes-Oxley Act could
make
it more difficult or more costly for us to obtain certain types of insurance,
including directors’ and officers’ liability insurance, which could make it more
difficult for us to attract and retain qualified persons to serve on our board
of directors or as executive officers.
Our
common stock is not listed on a stock exchange, and trading on the OTC Bulletin
Board lacks the depth, liquidity and orderliness necessary to maintain a liquid
market in our common stock.
Although
shares of our common stock sometimes trade on the OTC Bulletin Board, there
is
only limited trading in our common stock. Trading on the OTC Bulletin Board
lacks the depth, liquidity and orderliness necessary to maintain a liquid market
in our common stock. For these reasons, we do not expect a liquid market for
our
common stock to develop on the OTC Bulletin Board.
Our
common stock is not listed on a stock exchange, and the bid price for our common
stock remains below $5.00 per share. Our common stock is subject to additional
federal and state regulatory requirements that require, among other things,
broker-dealers to satisfy special sales practice requirements, including making
individualized written suitability determinations and receiving a purchaser’s
consent before consummating any transaction in the common stock. Our common
stock is considered a “penny stock” pursuant to the rules adopted under Section
15(g) of the Exchange Act. The penny stock rules require, among other things,
that brokers who trade penny stock to persons other than “established customers”
complete certain documentation, make suitability inquiries of investors and
provide investors with certain information concerning trading in the security,
including a risk disclosure document and quote information under certain
circumstances. Many brokers have decided not to trade penny stocks because
of
the requirements of the penny stock rules and, as a result, the number of
broker-dealers willing to act as market makers in such securities is limited.
If
our common stock are subject to the penny stock rules, investors will find
it
more difficult to dispose of their shares. Further, these restricted market
and
additional regulatory requirements limit the liquidity of our common stock,
and
they may adversely affect our ability to raise additional financing by issuing
our securities.
We
may issue shares of preferred stock in the future that could have superior
rights to our common stock.
Our
articles of incorporation permit our board of directors to authorize and issue
“blank check” preferred stock. Accordingly, our board of directors has the
authority to fix and determine the relative rights and preferences of preferred
shares, as well as the authority to issue such shares, without further
stockholder approval. As a result, our board of directors could authorize the
issuance of a series of preferred stock that would grant to holders preferred
rights to our assets upon liquidation, the right to receive dividend coupons
before dividends would be declared to common stockholders and the right to
the
redemption of such shares, together with a premium, prior to the redemption
of
the common stock. To the extent that we issue shares of preferred stock, the
rights of the holders of the common stock could be impaired, including with
respect to liquidation.
Our
stock price has been and may continue to be volatile.
The
securities of software companies, particularly those whose shares are traded
on
the OTC Bulletin Board, have experienced significant price and volume
fluctuations that have often been unrelated to the companies’ operating
performance. The trading prices and volumes of our shares of common stock have
fluctuated widely since the shares began trading on the OTC Bulletin Board
on
July 2, 2007. Announcements of technological innovations for new commercial
products by us or our competitors, developments concerning proprietary rights
or
general conditions in the information technology and software industries may
have a significant effect on our business and on the market price of our common
stock. Sales of shares of our common stock by existing security holders could
also have an adverse effect on the market price of our common stock, given
the
limited trading volume of our common stock.
7
We
do not intend to pay dividends on our common stock.
We
have
not declared any dividends or made any distributions on our common stock. We
currently intend to retain any future earnings and do not expect to pay any
dividends in the foreseeable future.
Our
acquisitions could result in integration difficulties, unexpected expenses,
diversion of management’s attention and other negative
consequences.
Our
growth strategy is based in part on making acquisitions. We recently acquired
SyynX and Lawriter, as described elsewhere in this report. We plan to continue
to acquire complementary businesses, products and services if we have the
capital resources to do so. We must integrate the technology, products and
services, operations, systems and personnel of acquired businesses with our
own
and attempt to grow the acquired businesses as part of our company. The
integration of other businesses is a complex process and places significant
demands on our management, financial, technical and other resources. The
successful integration of businesses we acquire is critical to our future
success, and if we are unsuccessful in integrating these
businesses, our financial and operating performance could suffer. The risks
and
challenges associated with acquisitions include:
·
the
inability to centralize and consolidate our financial, operational
and
administrative functions with those of the businesses we
acquire;
·
the
diversion of our management’s attention from other business
concerns;
·
our
inability to retain and motivate key employees of an acquired
company;
·
our
entrance into markets in which we have little or no prior direct
experience, such as Lawriter;
·
litigation,
indemnification claims and other unforeseen claims and liabilities
that
may arise from the acquisition or operation of acquired
businesses;
·
the
costs necessary to complete integration exceeding our expectations
or
outweighing some of the intended benefits of the acquisitions we
close;
·
the
inability to maintain the customer relationships of an acquired business;
and
·
the
costs necessary to improve or replace the operating systems, products
and
services of acquired businesses exceeding our
expectations.
We
may be
unable to integrate our acquisitions with our operations on schedule or at
all.
For example, we may be unable to enhance the service offerings of Lawriter
as we
intend. We cannot assure you that we will not incur large accounting charges
or
other expenses in connection with any of our acquisitions or that our
acquisitions will result in cost savings or sufficient revenues or earnings
to
justify our investment in, or our expenses related to, these
acquisitions.
Privacy
concerns relating to our technology could damage our reputation and deter
current and potential users from using our products and services.
While
we
strive to comply with all applicable data protection laws and regulations,
as
well as our own posted privacy policies, any failure or perceived failure to
comply may result in proceedings or actions against us by government entities
or
others, which could potentially have an adverse effect on our business.
Our
international operations are subject to risks that could harm our business,
operating results and financial condition.
We
conducted significant sales activity through our subsidiaries based in the
Netherlands and Germany. We have experienced foreign exchange gains and losses
to date without engaging in any hedging activities. Our ability to manage our
business and conduct our operations internationally requires considerable
management attention and resources and is subject to a number of risks,
including the following:
·
challenges
caused by distance, language and cultural differences and by doing
business with foreign agencies and
governments;
·
difficulties
in developing products and services in different languages and for
different cultures;
·
longer
payment cycles in some countries;
·
credit
risk and higher levels of payment
fraud;
·
currency
exchange rate fluctuations;
·
foreign
exchange controls that might prevent us from repatriating cash earned
in
countries outside the U.S.;
·
import
and export requirements that may prevent us from providing our products
or
services to a particular market and may increase our operating
costs;
8
·
political
and economic instability;
·
potentially
adverse tax consequences; and
·
higher
costs associated with doing business
internationally.
In
addition, compliance with complex foreign and U.S. laws and regulations that
apply to our international operations increase our cost of doing business in
international jurisdictions and could expose us to fines and penalties. These
laws and regulations include import and export requirements, U.S. laws such
as
the Foreign Corrupt Practices Act and local laws prohibiting corrupt payments
to
governmental officials. Any violations of such laws could include prohibitions
on our ability to offer our products and services to one or more countries,
and
could also materially damage our reputation, our brand, our international
expansion efforts, our business and our operating results.
To
the extent our revenues are paid in foreign currencies, and currency exchange
rates become unfavorable, we may lose some of the economic value of the revenues
in U.S. dollar terms.
Conducting
business in currencies other than U.S. dollars subjects us to fluctuations
in
currency exchange rates. If the currency exchange rates were to change
unfavorably, the value of net receivables we receive in foreign currencies
and
later convert to U.S. dollars after the unfavorable change would be diminished.
This could have a negative impact on our reported operating
results.
ITEM
1B.
UNRESOLVED STAFF COMMENTS.
Not
applicable.
ITEM
2.PROPERTIES.
We
do not
own any real property. We lease office space, vehicles and equipment under
non-cancelable operating leases. We lease approximately 4,500 square feet of
office space in Geldermalsen, the Netherlands, for €4,152 (approximately
US$5,970 at current exchange rates). The lease expires on June 30, 2011. Our
Dutch facility houses primarily research and development staff.
We
lease
approximately 3,300 square feet for our offices in Columbia, South Carolina,
for
approximately $5,500 per month. The lease expires on September 30, 2009. Our
Columbia location serves as our global headquarters and as an administrative
and
support facility for our United States operations.
We
lease
a small office (less than 500 square feet) in Cologne, Germany for approximately
$735 per month at current exchange rates. The core of our research and
development staff, located in Germany, work in virtual offices.
We
lease
approximately 5,200 square feet of office space in two facilities in Cincinnati,
Ohio for our Lawriter business for approximately $6,700 per month. Both leases
will expire within the next twelve months. We are in the process of negotiating
a new lease in one facility. We also lease an apartment in Cincinnati for $2,200
per month; this lease ends September 30, 2008 and will not be renewed.
We
believe these leases should provide sufficient space for our software
development, marketing and administrative functions during their remaining
terms. We have no plans to make any material improvements to any of the office
spaces we currently lease. In the opinion of our management, we adequately
insure our assets located at these properties.
ITEM
3.LEGAL
PROCEEDINGS.
Collexis
and its wholly-owned subsidiary Lawriter LLC are defendants in a case commenced
by JuriSearch Holdings LLC (“JuriSearch”), a vendor of content to Lawriter, in
the Superior Court for Los Angeles County, California. The case was commenced
on
April 10, 2008, and asserts claims based on breach of contract, conversion,
and
replevin (an act to recover goods by somebody who claims to own them).
JuriSearch alleges that it has been damaged in an amount exceeding $500,000
by
Lawriter’s termination of the contract and asserted failure to return property
belonging to JuriSearch. Lawriter believes that JuriSearch breached the contract
by failing to provide accurate and timely data, as well as by communicating
directly with Lawriter’s customers (the bar associations with whom Lawriter does
business) concerning the contract in violation of the terms of the contract.
9
Collexis
and Lawriter have filed papers in the United States District Court for the
Central District of California to remove the suit to that court, and have filed
an answer and counterclaim. In addition, Lawriter filed a case against
JuriSearch on April 14, 2008 in the Court of Common Pleas of Hamilton County,
Ohio. Lawriter’s case asserts claims against JuriSearch for defamation, tortuous
interference with contracts, and breach of contract based on JuriSearch’s
communications with Lawriter’s customers. We believe that JuriSearch’s claims
are without merit and intend to defend the California lawsuit vigorously and
prosecute the Ohio lawsuit vigorously.
ITEM
4.SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART
II
ITEM
5.MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES.
Market
Information
Our
common stock began trading on the Over-the-Counter Bulletin Board on July 2,2007 under the symbol “CLXS.OB.” The following table sets forth, for the periods
indicated, the high and low bid quotations for our common stock as reported
on
the Over-the-Counter Bulletin Board:
These
over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions. Further, we believe that a number of factors, including but not
limited to quarterly fluctuations in results of operations, may cause the market
price of our common stock to fluctuate significantly. See Part II, Item 7 of
this report.
Holders
of Our Common Stock
The
outstanding voting securities of Collexis Holdings, Inc. consist of shares
of
common stock, par value $0.001 per share. As of October 9, 2008, we had
approximately 77 holders of record of our common stock, with 109,743,727 shares
of common stock issued and outstanding.
Dividends
There
are
no restrictions in our articles of incorporation or bylaws that restrict us
from
declaring dividends. The Nevada Revised Statutes, however, do prohibit us from
declaring dividends where, after giving effect to the distribution of the
dividend: (1) we would not be able to pay our debts as they become due in the
usual course of business; or (2) our total assets would be less than the sum
of
our total liabilities, plus the amount that would be needed to satisfy the
rights of shareholders who have preferential rights superior to those receiving
the distribution.
We
have
not declared any dividends or made any distributions, and we do not plan to
declare any dividends or make any distributions in the foreseeable
future.
Equity
Compensation Plan Information
Information
regarding our equity compensation arrangements is contained in Item 11 of this
report.
10
Recent
Sales of Unregistered Securities
We
have
not issued securities without registration under the Securities Act of 1933
during the reporting period that were not previously included in a Quarterly
Report on Form 10-QSB or Current Report on Form 8-K.
ITEM
6.SELECTED
FINANCIAL DATA
Not
Applicable.
ITEM
7.MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Overview
We
are a
global software development company with worldwide headquarters in Columbia,
South Carolina. We develop software that supports the knowledge intensive
market, building tools to search and mine large sets of information. Our
Collexis Engine software enables discovery through identification, ordering
and
aggregation of ideas and concepts. We generate our revenues primarily from
licensing our software, providing services to the users of our software,
maintaining and supporting our software, selling related hardware and hosting
software on an application service provider basis.
Acquisition
of SyynX
Solutions GmbH.
On
October 19, 2007, we acquired our long-time software development partner, SyynX
Solutions GmbH. For the six months ended June 30, 2007, we paid SyynX
approximately $457,000 for software development services, customer support
and
related services. We purchased all of the capital stock of SyynX for an
aggregate cash consideration of €5,923,267, or $8,488,343 at then current
exchange rates. Our consolidated financial results reflect the financial results
of SyynX beginning on October 19, 2007.
Licensing
and Publishing Agreement with VersusLaw, Inc.
On
January 18, 2008, we entered into a licensing and publishing agreement with
VersusLaw, Inc., under which we acquired a perpetual, non-exclusive,
transferable license to use VersusLaw’s legal-related collection of judicial
opinions. In exchange for the rights granted to us, we paid VersusLaw a
licensing fee of $1,385,000, which was composed of: $100,000 in cash; a secured
promissory note for $650,000; and 846,666 shares of our common stock with an
agreed upon value of $0.75 per share, or $635,000. The principal of the note
was
due on February 18, 2008. We paid the note in two installments: $100,000 on
February 18, 2008 and the remaining $550,000 on April 14, 2008.
The
licensing and publishing agreement gives us the non-exclusive right to advertise
and distribute copies of the data to end users, and to permit our customers
to
download, print and electronically copy the data. The term of the license
granted to us is perpetual, without payment of any additional licensing
fees.
Acquisition
of Lawriter
LLC.
On
February 1, 2008, we acquired Lawriter LLC, an Ohio based company that provides
online legal research services to bar associations under the name
Casemaker®
via
monthly database subscription fees. We purchased all of the limited liability
company interests in Lawriter for an aggregate consideration of $9,000,000,
plus
an earn out, if any.
Results
of Operations
As
of
June 30, 2008, we have incurred substantial operating losses, net cash outflows
from operations and have a working capital deficiency. We anticipate that such
conditions will continue in the foreseeable future. These factors raise
substantial doubt about our ability to continue as a going concern. In order
to
alleviate our working capital deficiency and address our continued financing
concerns, management intends to take affirmative steps towards:
·
building
on the momentum established in the market with our profiling and
dashboard
products and cultivating our strategic alliances to increase our
market
presence;
·
developing
new products to address the demands in our core and legal markets;
and
·
identifying
sources of capital that will be sufficient to fund our operations
until
such time as we are cash flow positive.
11
To
guide
us in how to progress towards the above goals, we have retained an independent
consulting firm to objectively evaluate our markets and growth potential, assist
us with long range strategic planning, assist us in identifying capital and
other resource needs and the deployment of such resources to maximize our
product development and commercialization potential.
In
order
to meet our short-term working capital needs, we are currently conducting a
private placement of our common stock for up to $4.05 million. As of the date
of
this report, we have accepted subscriptions for $1.0 million from a private
investor who has orally agreed to finance our working capital needs through
the
purchase of shares of our common stock, up to the amount of this private
placement, on an as needed basis until this offering is fully subscribed. The
investor is not contractually obligated to purchase additional shares of our
common stock, therefore, there can be no assurance that we will receive
additional funding through the private placement of our common stock and failure
to achieve such funding will result in a significant negative impact to our
business and our operating results.
We
developed the table below to provide a comparison of our operating results
for
the years ending June 30, 2008 and 2007. In the prior year, our Form 10-KSB/A
transitional report filed on October 29, 2007 included Results of Operations
for
the six months ended June 30, 2007. Therefore, to make management’s discussion
and analysis of results more meaningful, comparable full year results are
presented below.
Total
Revenues.
Total
revenues increased approximately $2,297,000, or 127%, to approximately
$4,105,000 for the twelve months ended June 30, 2008 as compared to
approximately $1,808,000 for the twelve months ended June 30, 2007. This
increase was due to the expansion of efforts in the university and research
markets resulting in increases in license revenue, service revenue, and
maintenance and support revenue, and more notably, revenue contribution by
our
acquisitions of Lawriter and SyynX, of $1,251,000 and $428,000, respectively.
12
License
Revenue.
License
revenue increased approximately $314,000, or 76%, to approximately $728,000
for
the twelve months ended June 30, 2008 as compared to approximately $414,000
in
the twelve months ended June 30, 2007. This increase is primarily due to sales
of new licenses and subscriptions in the government, university and research
markets.
Service
Revenue.
Service
revenue increased approximately $550,000, or 52%, to approximately $1,614,000
for the twelve months ended June 30, 2008 versus approximately $1,063,000 for
the twelve months ended June 30, 2007. This increase arises from sales efforts
to deliver services to new clients, and to existing clients who seek to add
profiles and libraries to new and existing subscription applications.
Additionally, the SyynX acquisition contributed approximately $351,000 to such
growth.
Maintenance
& Support Revenue.
Maintenance and support revenue increased approximately $81,000, or 28%, to
approximately $369,000 for the twelve months ended June 30, 2008 compared to
approximately $288,000 for the twelve months ended June 30, 2007. This increase
is due primarily to sales of maintenance contracts to new and existing license
customers.
Hardware
& Hosting Revenue.
Hardware and hosting revenue increased approximately $100,000, or 236%, to
approximately $143,000 in the twelve months ended June 30, 2008 versus
approximately $43,000 in the twelve months ended June 30, 2007. This increase
is
due primarily to the SyynX acquisition, approximately $79,000, and an increase
in both Collexis, B.V. and Collexis, Inc. hosting activities.
Database
Subscription Revenue. Database
subscription revenue was approximately $1,251,000 in the twelve months ended
June 30, 2008. This was a new revenue line for us as a result of our acquisition
of Lawriter, LLC on February 1, 2008. Therefore, no revenue for this service
line existed in the twelve months ended June 30, 2007.
Cost
of License Revenue.
Cost of
license revenue was approximately $50,000 in the twelve months ended June 30,2008 as compared to approximately $28,000 in the twelve months ended June 30,2007 , an increase of approximately $22,000, or 79%. This increase was driven
by
increased license revenue year over year.
Cost
of Service Revenue.
Cost of
service revenue increased approximately $432,000, or 82%, to approximately
$956,000 for the twelve months ended June 30, 2008 versus approximately $524,000
for the twelve months ended June 30, 2007. This was due primarily to an increase
in service revenue and SyynX costs to support our services
contracts.
Cost
of Maintenance & Support Revenue.
Cost of
maintenance and support revenue decreased approximately $619,000, or 81%, to
approximately $148,000 for the twelve months ended June 30, 2008 compared to
approximately $767,000 for the twelve months ended June 30, 2007. Prior year
costs were primarily driven by increased staff, infrastructure and costs in
the
Netherlands. Since October 2007, management has undertaken an aggressive
approach to reduce the costs of our operations in the Netherlands, including
staff reductions.
Cost
of Hardware & Hosting Revenue.
Cost of
hardware and hosting revenue was approximately $105,000 in the twelve months
ended June 30, 2008 versus approximately $28,000 in the twelve months ended
June30, 2007, an increase of approximately $77,000, or 275%. This increase was
a
function of the SyynX acquisition which added approximately $73,000 of
incremental costs.
Cost
of Subscription Revenue.
Cost of
subscription revenue was approximately $395,000 in the twelve months ended
June30, 2008. This was a new expense for us due to the acquisition of Lawriter,
LLC
on February 1, 2008. Therefore, no comparable cost for this expense line existed
in the twelve months ended June 30, 2007.
General
& Administrative Expenses.
General
and administrative expenses increased to
approximately $9.5 million for the twelve months ended June 30, 2008
versus
approximately $4.8 million for the twelve months ended June 30, 2007, an
increase of $4.8 million, or 100%. This increase was due primarily to the
expansion of our business and product lines, including higher costs associated
with: compensation expense of approximately $452,000; increases in legal and
accounting fees of approximately $1,033,000 associated with the SyynX, Lawriter,
and VersusLaw license acquisitions as well as the costs of being a public
company; SyynX and Lawriter incremental general and administrative expenses
of
approximately $568,000; increased depreciation and amortization costs of
approximately $1,084,000 associated with intangibles and other assets acquired
from SyynX and Lawriter; increased insurance cost of approximately $192,000
primarily due to directors and officers insurance costs; increased interest
expense of approximately $553,000 due to deferred acquisition costs; increased
bad debts and travel costs of approximately $180,000 and $140,000, respectively;
and other costs including the impact of foreign exchange losses of approximately
$335,000.
13
Sales
& Marketing.
Sales
and marketing expenses increased to approximately $3.1 million for the twelve
months ended June 30, 2008 compared to approximately $1.4 million for the twelve
months ended June 30, 2007, an increase of approximately $1.7 million, or 121%.
The SyynX and Lawriter acquisitions contributed approximately $317,000 and
$138,000, respectively, to the increase. Additionally, due to our enhanced
efforts of an expanded sales and marketing staff, salaries, commissions and
travel costs increased approximately $535,000, $47,000 and $189,000,
respectively. Advertising and professional services relating to marketing
increased by approximately $314,000 and $222,000, respectively, as we expanded
marketing efforts to build our visibility in the marketplace. This increase
was
offset by a decrease of approximately $110,000 in miscellaneous sales and
marketing expenses primarily in the Netherlands.
Research
& Development.
Research and development costs increased from approximately $898,000 for the
twelve months ended June 30, 2007 to approximately $1,446,000 for the twelve
months ended June 30, 2008, an increase of approximately $548,000, or 61%.
This
increase is due primarily to the SyynX acquisition. Historically, Collexis
B.V.
would use SyynX as its third party development and support provider. Collexis
B.V. reflected all these costs as R&D in the twelve months ended June 30,2007, or approximately $782,000. In fiscal 2008, prior to the acquisition,
they
reflected approximately $60,000 as R&D. Since the acquisition, SyynX is the
primary provider of R&D type services to Collexis and we track these costs
based on a review of work performed.
Total
Expenses and Net Loss.
As a
result of the above factors, as well as our decision to fully reserve our
deferred tax asset in 2006, total expenses increased to approximately $15.7
million for the twelve months ended June 30, 2008 compared to approximately
$8.4
million for the twelve months ended June 30, 2007, an increase of approximately
$7.3 million, or 87%. Our net loss increased to approximately $11.6 million
for
the twelve months ended June 30, 2008 compared to approximately $6.5 million
for
the twelve months ended June 30, 2007, an increase of approximately $5.1
million, or 44%.
Liquidity
and Capital Resources
Our
principal cash requirements are for working capital and to make deferred
payments relating to the SyynX and Lawriter acquisitions. As of the date of
this
report, the deferred payments due on these acquisitions over the next twelve
months amount to approximately $5.7 million. See discussion under ”Financial
Statements – Note 3, “Acquisitions.”
In
the
year ended June 30, 2008, net cash used in operations was approximately $7.9
million. Our primary use of operating funds related to developing the Collexis
Engine, increasing our sales and marketing presence and the professional
services costs related to being a public company. Our working capital deficit
was approximately $4.2 million as of June 30, 2008 compared to a deficit of
approximately $544,000 as of June 30, 2007.
Our
investing activities during fiscal year 2007 reflected payments made to purchase
SyynX, Lawriter and the Versus Law license as well as the deferred payments
associated with such acquisitions. Net cash used in investing activities was
$5.1 million for the year ended June 30, 2008.
We
have
operating leases with future minimum lease payments of approximately $329,000
in
fiscal 2009 and approximately $140,000 in fiscal 20010.
Since
the
beginning of the fiscal year, we have conducted a number of private offerings
where we sold shares of our common stock for prices ranging from $0.15 to $0.75
per share. We sold approximately 15.4 million shares at $0.75 per share raising
gross proceeds of approximately $11.6 million and 33.3 million shares at $0.15
raising gross proceeds of $5.0 million. In one private offering in September
2007, we paid a $58,898, or 8%, placement agent fee to Northeast Securities,
Inc. (plus reimbursement of $7,500 of expenses), and we also granted Northeast
a
five-year warrant to purchase 97,964 shares of our common stock at an exercise
price of $0.75 per share. All other private placements were without any
placement fees or commissions.
As
discussed above under “Results of Operations”, on August 18, 2008 our board
approved an additional private placement offering for 9.0 million shares at
$0.45 per share for a total of $4,050,000, which, as of August 18, 2008, was
a
premium to the trading price of our common stock. We anticipate that the
offering will be fully subscribed for over the period August 2008 through
October 2008. As of October 9, 2008, we accepted subscriptions for approximately
2.2 million shares or $1.0 million.
As
of
October 14, 2008, we had cash and cash equivalents of approximately $200,000.
We
believe our current cash balance together with any funds generated from our
operations will be sufficient to meet our working capital needs for two weeks.
With the full subscription of our private placement referred to above, combined
with any funds generated from our operations, we believe we will have sufficient
cash to fund our operations through December 31, 2008. However, this will not
provide sufficient capital to pay our deferred purchase obligations of
approximately $2.7 million due over the next three months, or the $5.7 million
payable over the next twelve months.
14
We
expect
to raise additional capital through the sale of our common stock, mostly through
private placements, but we can provide no assurances in that regard. With our
present negative cash flows from operating activities and our current level
of
cash, we will require additional working capital to continue to grow our
operations, develop our products, pursue acquisitions, comply with our reporting
obligations as a public company and meet our deferred payment obligations.
As a
result, we may seek both debt and equity financings to satisfy these working
capital needs. There can be no assurance that external financing will be
available when needed, or if available, that it would be available on terms
acceptable to our management.
Off
Balance Sheet Arrangements
We
have
not entered into any transactions with unconsolidated entities in which we
have
financial guarantees, subordinated retained interests, derivative instruments
or
other contingent arrangements that expose us to material continuing risks,
contingent liabilities or any other obligations under a variable interest in
an
unconsolidated entity that provides us with financing, liquidity, market risk
or
credit risk support.
Critical
Accounting Policies
Management
has based this discussion and analysis of financial condition and results of
operations on our consolidated financial statements. The preparation of these
consolidated financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the dates of the financial statements,
and
the reported amounts of revenues and expenses during the reporting periods.
Management evaluates its critical accounting policies and estimates on a
periodic basis.
A
“critical accounting policy” is one that is both important to the understanding
of the company’s financial condition and results of operations and requires
management’s most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain. Management believes the following accounting policies fit this
definition:
Revenue
Recognition.
We
recognize revenue in accordance with Statement of Position 97-2, “Software
Revenue Recognition,” and Statement of Position 98-9, “Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions.” We
recognize revenue from non-cancelable software licenses when the license
agreement has been signed, delivery has occurred, the fee is fixed or
determinable and collectability is probable. We recognize license revenue from
resellers when an end user has placed an order with the reseller and the
reseller has met the above revenue recognition criteria. In multiple element
arrangements, we defer the vendor-specific objective evidence of fair value
(“VSOE”) related to the undelivered elements and recognize revenue on the
delivered elements using the percentage-of-completion method.
The
most
commonly deferred elements are initial maintenance and consulting services.
We
recognize initial maintenance on a straight-line basis over the initial
maintenance term. We determine the VSOE of maintenance by using a consistent
percentage of maintenance fees to license fee based on renewal rates. We
recognize maintenance fees in subsequent years on a straight-line basis over
the
life of the applicable agreement. Maintenance contracts entitle the customer
to
hot-line support and all unspecified product upgrades released during the term
of the maintenance contract. Upgrades include any and all unspecified patches
or
releases related to a licensed software product. Maintenance does not include
implementation services to install these upgrades. We determine the VSOE of
services by using an average consulting rate per hour for consulting services
sold separately multiplied by the estimate of hours required to complete the
consulting engagement.
Delivery
of software generally occurs when the product on CD is delivered to a common
carrier for shipment. Occasionally, delivery occurs through electronic means
in
which we make the software available through our secure FTP (File Transfer
Protocol) site or via a website-based download. We do not offer any customers
or
resellers a right of return.
For
software license, services and maintenance revenue, we assess whether the fee
is
fixed and determinable and whether or not collection is probable. We assess
whether the fee is fixed and determinable based on the payment terms associated
with the transaction. If a significant portion of a fee is due after our normal
payment terms, which are 30 to 90 days from invoice date, the fee is considered
not fixed and determinable. In these cases, we recognize revenue as the fees
become due.
We
assess
assuredness of collection based on a number of factors, including past
transaction history with the customer and the credit-worthiness of the customer.
We do not request collateral from customers. If we determine that collection
of
a fee is not probable, we defer the fee and recognize revenue when collection
becomes probable, which is generally upon receipt of cash.
15
Our
arrangements do not generally include acceptance clauses. If an arrangement
includes an acceptance provision, however, acceptance occurs upon the earlier
of
receipt of a written customer acceptance or expiration of the acceptance
period.
We
bill
the majority of our training and consulting services based on hourly rates.
We
generally recognize revenue as we perform these services. When we have an
arrangement that is based on a fixed fee or requires significant work either
to
alter the underlying software or to build additional complex interfaces so
that
the software performs as the customer requests, however, we recognize the
related revenue using the percentage of completion method of accounting. This
method applies to our custom programming services, which are generally
contracted on a fixed fee basis. We charge anticipated losses, if any, to
operations in the period that we determine those losses to be
probable.
We
recognize revenues from transaction fees associated with subscription
arrangements, which are billable on a per transaction basis and included in
services revenue on the Consolidated Statements of Operations, based on the
actual number of transactions processed during the period. The
Company’s Lawriter subsidiary, invoices its subscription customers in advance of
the month for which the subscription services are being provided. Recognition
of
revenue associated with such billing is recognized by Lawriter in the month
the
services are actually provided.
In
accordance with EITF Issue No. 01-14, “Income Statement Characterization of
Reimbursement Received for ‘Out of Pocket’ Expenses Incurred,” we classify
reimbursements received for out-of-pocket expenses incurred as services revenue
in the Consolidated Statements of Operations.
Development
Costs.
Our
policy is to charge the costs of software development to the year in which
these
costs occurred. We established technological feasibility on completion of the
Collexis Engine. Generally, costs related to projects that reach technological
feasibility upon completion of a working model are not capitalized, because
the
period between establishment of the working model and general availability
is of
a short duration. The nature of our current development for software products
is
generally such that we can measure technological feasibility most effectively
using the working model method, in which the time between establishment of
a
working model and general availability is short, which results in no costs
that
qualify for capitalization.
Allowance
for Doubtful Accounts.
We
evaluate the collectability of accounts receivable based on a combination of
factors. When we are aware of circumstances that may impair a specific
customer’s ability to meet its financial obligations, we record a specific
allowance against amounts due, thereby reducing the net receivable to the amount
our management believes is probable of collection. For all other customers,
we
recognize allowances for doubtful accounts based on the length of time the
receivables are outstanding, the current business environment and historical
experience.
Income
Taxes.
We
account for income taxes under the asset and liability method. The asset and
liability method requires that deferred tax assets be reduced by a valuation
allowance if, based on the weight of available evidence, it is more likely
than
not that some portion or all of such assets will not be realized. We recognize
deferred tax assets and liabilities for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing
assets and liabilities, and their respective tax bases and operating loss and
tax credit carryforwards. We measure deferred tax assets and liabilities using
enacted tax rates we expect to apply to taxable income in the years in which
we
expect those temporary differences to be recovered or settled. We recognize
the
effect on deferred tax assets and liabilities of a change in tax rates in
operations in the period that includes the enactment date.
Recent
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”
(“SFAS 157”), which clarifies that fair value is the amount that would be
exchanged to sell an asset or transfer a liability in an orderly transaction
between market participants. Further, the standard establishes a framework
for
measuring fair value in generally accepted accounting principles and expands
certain disclosures about fair value investments. SFAS 157 is effective for
fiscal years beginning after November 15, 2007. We do not expect the adoption
of
SFAS 157 to have a material impact on our consolidated financial position,
results of operations or cash flows.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits
entities to choose to measure many financial instruments and certain other
items
at fair value. SFAS 159 is effective for fiscal years beginning after November15, 2007. We do not expect the adoption of SFAS 159 to have a material impact
on
our consolidated financial position, results of operations or cash
flows.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” (“SFAS
141(R)”) which replaces SFAS 141. SFAS 141(R) establishes principles and
requirements for how an acquirer in a business combination recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any controlling interest; recognizes and measures
goodwill acquired in the business combination or a gain from a bargain purchase;
and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. FAS 141(R) is effective for acquisitions by us taking place on
or
after July 1, 2009. Early adoption is prohibited. We will assess the impact
of
SFAS 141(R) if and when we make a future acquisition.
16
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS 160”).
SFAS 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Before this statement, limited guidance existed for reporting
noncontrolling interests (minority interest). As a result, diversity in practice
exists. In some cases minority interest is reported as a liability and in others
it is reported in the mezzanine section between liabilities and equity.
Specifically, SFAS 160 requires the recognition of a noncontrolling interest
(minority interest) as equity in the consolidated financials statements and
separate from the parent’s equity. The amount of net income attributable to the
noncontrolling interest will be included in consolidated net income on the
face
of the income statement. SFAS 160 clarifies that changes in a parent’s ownership
interest in a subsidiary that do not result in deconsolidation are equity
transactions if the parent retains its controlling financial interest. In
addition, this statement requires that a parent recognize gain or loss in net
income when a subsidiary is deconsolidated. Such gain or loss will be measured
using the fair value of the noncontrolling equity investment on the
deconsolidation date. SFAS 160 also includes expanded disclosure requirements
regarding the interests of the parent and its noncontrolling interests. SFAS
160
is effective for the Company on July 1, 2009. Earlier adoption is prohibited.
The Company is currently evaluating the impact, if any, the adoption of SFAS
160
will have on its financial position, results of operations and cash flows.
In
February 2008, the FASB issued FASB Staff Position No. 140-3, “Accounting for
Transfers of Financial Assets and Repurchase Financing Transactions” (“FSP
140-3”). This FSP provides guidance on accounting for a transfer of a
financial asset and the transferor’s repurchase financing of the asset.
This FSP presumes that an initial transfer of a financial asset and a
repurchase financing are considered part of the same arrangement (linked
transaction) under SFAS No. 140. However, if certain criteria are met, the
initial transfer and repurchase financing are not evaluated as a linked
transaction and are evaluated separately under Statement 140. FSP 140-3
will be effective for financial statements issued for fiscal years beginning
after November 15, 2008, and interim periods within those fiscal years and
earlier application is not permitted. Accordingly, this FSP is effective for
the
Company on July 1, 2009. The Company is currently evaluating the impact,
if any, the adoption of FSP 140-3 will have on its financial position, results
of operations and cash flows.
In
March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“SFAS 161”). SFAS 161 requires enhanced disclosures
about an entity’s derivative and hedging activities and thereby improving the
transparency of financial reporting. It is intended to enhance the current
disclosure framework in SFAS 133 by requiring that objectives for using
derivative instruments be disclosed in terms of underlying risk and accounting
designation. This disclosure better conveys the purpose of derivative use in
terms of the risks that the entity is intending to manage. SFAS 161 is effective
for the Company on July 1, 2009. This pronouncement does not impact accounting
measurements but will result in additional disclosures if the Company is
involved in material derivative and hedging activities at that time.
In
April
2008, the FASB issued FASB Staff Position No. 142-3, “Determination of the
Useful Life of Intangible Assets” (“FSP 142-3”). This FSP amends the factors
that should be considered in developing renewal or extension assumptions used
to
determine the useful life of a recognized intangible asset under SFAS No. 142,
“Goodwill and Other Intangible Assets”. The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under
SFAS
No. 142 and the period of expected cash flows used to measure the fair value
of
the asset under SFAS No. 141(R), “Business Combinations,”and
other
U.S. generally accepted accounting principles. This FSP is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years and early adoption is prohibited.
Accordingly, this FSP is effective for the Company on July 1, 2009. The Company
does not believe the adoption of FSP 142-3 will have a material impact on its
financial position, results of operations or cash flows.
In
May,
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standard (“SFAS”) No. 162, “The Hierarchy of Generally
Accepted Accounting Principles,” (“SFAS No. 162”). SFAS No. 162 identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of nongovernmental entities
that
are presented in conformity with generally accepted accounting principles (GAAP)
in the United States (the GAAP hierarchy). SFAS No. 162 will be effective 60
days following the SEC’s approval of the
Public Company Accounting Oversight Board’s amendments to AU Section 411, “The
Meaning ofPresent
Fairly in Conformity With Generally Accepted Accounting Principles.” The FASB
has stated that it does not expect SFAS No. 162 will result in a change in
current practice. The application of SFAS No. 162 will have no effect on the
Company’s financial position, results of operations or cash flows.
17
In
June,
2008, the FASB issued FASB Staff Position No. EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions are Participating
Securities,” (“FSP EITF 03-6-1”). The Staff Position provides that unvested
share-based payment awards that contain non-forfeitable rights to dividends
or
dividend equivalents are participating securities and must be included in the
earnings per share computation. FSP EITF 03-6-1 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those years. All prior-period earnings per share data
presented must be adjusted retrospectively. Early application is not permitted.
The adoption of this Staff Position will have no material effect on the
Company’s financial position, results of operations or cash flows.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
See
the
Index to Financial Statements on page F-1. The supplementary data is
included in Part IV, Item 15.
ITEM
9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
No
events
occurred requiring disclosure under Item 304(b) of Regulation S-K.
ITEM
9A(T).CONTROLS
AND PROCEDURES.
Our
Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of our disclosure controls and procedures (as defined in
Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”)) as of June30,2008, and have concluded that, as of such date, our disclosure controls and
procedures were ineffective to ensure that information required to be disclosed
by us in reports that we file or submit under the Exchange Act is accumulated,
recorded, processed, summarized for management and reported within the time
periods specified in the rules and forms of the SEC.
Management’s
Report on Internal Control Over Financial Reporting
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A
material weakness is a significant deficiency (as defined in the Public Company
Accounting Oversight Board’s Auditing Standard No. 2), or a combination of
significant deficiencies, that results in reasonable possibility that a material
misstatement of the annual or interim financial statements will not be prevented
or detected on
a
timely basis.
During
its assessment of internal control over financial reporting for the period
ended
June 30, 2007, management discovered several weaknesses in its accounting
processes. Subsequently, management, with the participation of the Audit
Committee, engaged an accounting firm to assist the Company and hired an
experienced chief financial officer to implement systems and controls to
address the Company's needs. Additionally, RSM McGladrey was retained to
assist the Company in a study of it is internal controls. RSM McGladrey has
performed its review of our internal control over financial reporting as of
June 30, 2008, based on criteria established in Internal
Control—Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission.
Based
on
the findings of RSM McGladrey and management’s assessment of the effectiveness
of our internal control over financial reporting as of June 30, 2008, we
identified the following deficiencies in our internal controls over financial
reporting. Management does not believe any one deficiency would qualify as
a
material weakness but the combination of deficiencies may qualify as a
significant deficiency.
18
Deficiencies
Entity-Level
Controls.
We did
not maintain an effective control environment and certain entity-level controls
included in the information and communications and monitoring components of
internal control were not designed or operating effectively.
Segregation
of Duties.
We did
not provide for adequate segregation of duties in our accounting and finance
functions, specifically with respect to access to and control of our cash flow
without any secondary review.
Financial
Reporting and Period Closings.
We did
not maintain adequate policies and procedures to ensure that timely, accurate
and reliable consolidated financial statements were prepared and reviewed.
Remediation
Efforts to Address Deficiencies in Internal Control Over Financial
Reporting
As
a
result of the findings from the investigation and a company-led accounting
review, management intends to take steps, where practical, to implement the
remedial recommendations identified in the RSM McGladrey investigation and
to
complete the remediation of the deficiencies identified above by June 30, 2009.
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the SEC that permit us to provide
only management’s report in this annual report.
Changes
in Internal Controls
There
have been no changes in our internal controls over financial reporting
identified in the evaluation that occurred during our fourth quarter of fiscal
year 2008 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
ITEM
9B.OTHER
INFORMATION.
None.
PART
III
ITEM
10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Directors
The
following information is furnished with respect to each our directors as of
October 9, 2008. Each director’s term lasts until the 2008 Annual Meeting of
Stockholders and until he is succeeded by another qualified director who has
been elected. There are no family relationships between any of the directors
or
executive officers.
Name
Age
Position
Mark
S. Germain
58
Chairman
and Director
Frank
C. Carlucci
78
Vice-Chairman
and Director
William
D. Kirkland
46
Chief
Executive Officer and Director
Mark
Auerbach
70
Director
John
D. Macomber
80
Director
John
J. Regazzi
60
Director
Dr.
Andrew A. Sorensen
70
Director
Mark
S. Germain
has
served as our Chairman of the Board since March 2007, as a Director since
January 2006, and as a consultant to Collexis since October 2005. For more
than
the past five years, Mr. Germain has served as the Managing Director of The
Olmsted Group, LLC. He has been involved as a founder, director, chairman of
the
board, and/or investor in over twenty companies in the biotech field, and
assisted many of them in acquiring technology and in arranging corporate
partnerships, mergers and acquisitions and financings. Mr. Germain is a founding
member and director of ChomaDex, Inc. and serves
as
co-chairman of the board of directors of Pluristem Life Systems, Inc. In
addition, Mr. Germain has served as a director of Reis, Inc. since May 1997
and
serves as chairman of its audit committee. Mr. Germain also serves as a director
of several privately-held biotechnology companies and of Stem Cell Innovations,
Inc., a publicly traded company. He is a graduate of NYU School of Law, cum
laude, and Order of the Coif, and was previously a partner in a New York law
firm.
19
Frank
C. Carlucci
has
served as Vice-Chairman of the Board since June 2007. Mr. Carlucci currently
serves as Chairman Emeritus for The Carlyle Group, in Washington D.C. From
November 1987 to January 1989, Mr. Carlucci served as U.S. Secretary of Defense,
following his service as Assistant to the President for National Security
Affairs under President Ronald Reagan in 1987. Prior to serving in these
positions, he was Chairman and CEO of Sears World Trade, a business he joined
in
1983. Mr. Carlucci has had a career in government service, including serving
as
Deputy Secretary of Defense from 1980 to 1982, Deputy Director of Central
Intelligence from 1978 to 1980, U.S. Ambassador to Portugal from 1975 to 1978,
Under Secretary of Health Education and Welfare from 1973 to 1975, Deputy
Director of OMB from 1970 to 1972, and Director of the Office of Economic
Opportunity in 1969. Mr. Carlucci was a Foreign Service Officer from 1956 to
1980, and served as an officer in the U.S. Navy from 1952 to 1954.
Mark
Auerbach
was
appointed as a Director in June 2007. Mr. Auerbach is Chairman of our Audit
Committee, and our Board of Directors has determined that he qualifies as an
independent “audit committee financial expert” as defined under SEC rules. From
1993 to 2005, Mr. Auerbach served as Chief Financial Officer of Central Lewmar
LLP, a national fine paper distributor. He is currently a director for Optimer
Pharmaceuticals, Rx Elite Pharmaceuticals and Chairman of the Board of Directors
for Neuro Hitech. Mr. Auerbach serves as the Chairman of the audit committee
for
Rx Elite Pharmaceuticals and is a member of the audit committees of Neuro Hitech
Pharmaceuticals, and Optimer Pharmaceuticals. He also serves on the compensation
committees of Rx Elite Pharmaceuticals and Neuro Hitech Pharmaceuticals.
From September 2003 through October 2006, he served as Executive Chairman of
the
Board of Directors for Par Pharmaceutical Companies, Inc. A Certified Public
Accountant, Mr. Auerbach has also been a board member of several small cap
companies over the last twenty years. Mr. Auerbach holds a Bachelor of Science
in Commerce from Rider College.
William
D. Kirkland
has
served as a Director since January 2006, as well as Chief Executive Officer
and
President of Collexis since February 2007. Mr. Kirkland also served as Chief
Executive Officer and President of Collexis, Inc., a subsidiary of Collexis
B.V., from February 2006 to February 2007. From August 2001 until February
2006,
Mr. Kirkland was Business Unit Executive, (Americas) Life Sciences Business
Consulting Services for IBM. He was Vice President, Life Sciences Division,
of
Nutec Sciences, Inc., from October 2000 until August 2001. From 1991 until
October 2000, Mr. Kirkland was Director, Training and Development – Pfizer
Limited, United Kingdom. He currently serves as a director for SEBIO and Georgia
BioMed Partners. Mr. Kirkland holds a Bachelor of Science in Criminal Justice
from the University of South Carolina.
John
D. Macomber was
appointed as a Director in June 2007. Mr. Macomber has served as Principal
of
JDB Investment Group since 1992. He currently serves as a director of AEA
Investors LLC. Mr. Macomber is also Chairman of the Council for Excellence
in
Government, Vice Chairman of The Atlantic Council of the United States, a
Trustee of the Carnegie Institution of Washington, and The Folger Library.
Mr.
Macomber serves as a director of the National Campaign to Prevent Teen Pregnancy
and the Smithsonian National Board. He has held director positions at numerous
companies, including Mettler-Toledo International Inc., Bristol-Myers Squibb
Company, The Brown Group, Inc., Celgene Corporation, Chase Manhattan Bank,
Florida Power & Light, IRI International, Mirror World Technologies, Norlin
Industries, Rand McNally, RJR Nabisco, Pilkington Ltd., Textron Inc. and Xerox
Corporation. Mr. Macomber’s former non-profit directorships include the Lincoln
Center for the Performing Arts, New York Philharmonic and the New York
Zoological Society. Mr. Macomber is a former Trustee of The Rockefeller
University and Adelphi University, Charter Trustee of Phillips Academy, and
Chairman of the Advisory Board of the Yale School of Management. Prior to
joining JDB Investment Group, Mr. Macomber served as Chairman and President
of
the Export-Import Bank of the United States from 1989 to 1992, and served as
Chairman and Chief Executive Officer of Celanese Corporation from 1973 to 1986.
Mr. Macomber was a Senior Partner at McKinsey & Co. from 1954 to 1973. Mr.
Macomber graduated from Yale University in 1950 and Harvard Business School
in
1952.
Dr.
John J. Regazzi
was
appointed as a Director in June 2007. Dr. Regazzi has served as Dean, College
of
Information and Computer Science, and Dean, Palmer School of Library and
Information Science at the C.W. Post Campus of Long Island University since
July
2005. He is a tenured professor in the departments of Computer Science and
Library and Information Science. Dr. Regazzi currently serves as a director
of
the boards of BSI Group, Engineering Information, Inc. Foundation, CABI,
Elsevier Foundation and St. John’s Home for Boys. Dr. Regazzi served as Vice
President of The H.W. Wilson Company from 1983-1988, leaving to become President
and CEO of Engineering Information, Inc. In 1998, Dr. Regazzi led the
integration of Engineering Information, Inc. into Elsevier, a world leading
scientific, technical and medical publisher, and was subsequently appointed
CEO
of Elsevier North America. Dr. Regazzi has served as a director of Elsevier,
NFAIS and the Division of Scholarly Communications of the American Association
of Publishers. Dr. Regazzi holds a Bachelor of Arts in Psychology from St.
John’s University, a Master of Arts in Religion from the University of Iowa, a
Master of Science in Library and Information Science from Columbia University,
and a Ph.D. in Information Science from Rutgers University.
20
Dr.
Andrew A. Sorensen
was
appointed as a Director in September 2008. Dr. Sorensen retired as the President
of the University of South Carolina in July of 2008 where he served since 2002.
He currently is a professor at the University of South Carolina School of
Medicine. From 1996-2002, Dr. Sorensen was the President of the University
of
Alabama. From 1990-1996 he served as the Provost and Vice President for Academic
Affairs at the University of Florida. Prior to 1990 he spent three years as
the
Executive Director, AIDS Institute at Johns Hopkins Medical Institutions and
four years as the Dean of the School of Public Health at the University of
Massachusetts. In addition to his distinguished career in academia, Dr. Sorensen
serves on a number of boards, including Carolina First Bank, Health Sciences
of
South Carolina, Southeastern Universities Research Association and the
Southeastern Conference. Additionally, he serves on the National Institutes
of
Health National Science Advisory Board for Biosecurity and the Bioterrorism
Advisory Committee of the State of South Carolina.
Executive
Officers
The
following table provides certain information about our executive officers as
of
the date of this report. For biographical information about Mr. Kirkland please
see “Directors” above.
Name
Age
Position
William
D. Kirkland
46
Chief
Executive Officer, President and Director
Mark
Murphy
55
Chief
Financial Officer
Stephen
A. Leicht
32
Executive
Vice President and Chief Operating Officer
Darrell
W. Gunter
49
Executive
Vice President and Chief Marketing Officer
Bob
J.A. Schijvenaars
42
Chief
Scientific Officer
Martin
Schmidt
41
Chief
Technology Officer
Mark
Murphy joined
Collexis in April of 2008 as Chief Financial Officer. Prior to joining Collexis,
Mr. Murphy served as senior vice president of finance for PCA International,
Inc. from 2006 to March of 2008 where he directed all finance and treasury
functions. From 1998 to 2005, Mr. Murphy held a variety of financial and
operational leadership positions in the Kellogg Company including business
unit
CFO of Warehouse Club and Specialty Products and director of operations for
the
Kellogg Snacks DSDD distribution channel. Mr. Murphy holds a Bachelor of Science
in Business Administration and Accounting from Ohio University.
Stephen
A. Leicht
has
served as our Executive Vice President and Chief Operating Officer since October29, 2007. He previously served as our Vice President of Sales since February
2006. Prior to joining Collexis, Mr. Leicht served in increasing roles of
responsibility within IBM’s Sales and Distribution organization from 2001 to
2006. Mr. Leicht founded, ran and sold International Telecommunications
Distributors, acting as Chairman and CEO until late 2001. Mr. Leicht currently
serves on the Board of Advisors of iAdvantage Software and the University of
South Carolina, College of Engineering and Computing. In addition, Mr. Leicht
serves on the United Way of the Midlands Food Shelter Safety and Transportation
Board. Mr. Leicht has previously served as a director for the Center for
Entrepreneurial Development, SEBIO, and International Telecommunications
Distributors, Inc., and served on the Board of Advisors for Saffron Technology.
Mr. Leicht holds a business degree from Bucknell University and a Master of
Business Administration from Pennsylvania State University.
Darrell
W. Gunter
has
served as our Executive Vice President and Chief Marketing Officer since April
2007. Prior to joining Collexis, Mr. Gunter served as Senior Vice President
of
Sales and Marketing for the Americas for Elsevier from March 1996 to April
2007.
He currently serves as a director of the Women’s Venture Fund. Mr. Gunter holds
a Bachelor of Science in Business Administration and Marketing from Seton Hall
University and a Master of Business Administration from Lake Forest Graduate
School of Management.
Bob
J.A. Schijvenaars
has
served as Chief Scientific Officer of Collexis B.V. since 2005. From 2001 to
2005, Mr. Schijvenaars served as Manager of Research and Consulting for Collexis
B.V. He served as an assistant professor for Erasmus University from 2000 to
2006. Mr. Schijvenaars holds a Master of Science in Computer Science from Leiden
University and a Ph.D. in Medical Informatics from Erasmus
University.
21
Martin
Schmidt
was
appointed as our Chief Technology Officer in October 2007 after we acquired
SyynX Solutions GmbH, a German company he founded in 1999. Mr. Schmidt
previously served as a Managing Director of SyynX. Under the leadership of
Mr.
Schmidt, SyynX became the global leader in application development on top of
the
Collexis core environment, including high profile engagements at Johns Hopkins
University, Harvard University, Asklepios Health System, Bristol Myers Squibb
and other leading institutions. Before joining SyynX, Mr. Schmidt was an
independent consultant for SHARED
–
a project funded by the European Commission to bring better healthcare
information to developing nations via the Internet. For the decade proceeding
Mr. Schmidt’s foray into information technology, he was a successful full time
independent musician and composer in jazz and modern music, giving concerts
all
over Europe. Mr. Schmidt serves on the supervisory board of e.Consult
AG.
Code
of Ethics
We
expect
all of our employees to conduct themselves honestly and ethically, particularly
in handling actual and apparent conflicts of interests and providing full,
accurate and timely disclosure to the public. We have adopted a Code of Ethics
and Business Conduct that applies to all of our employees. The Code of Ethics
and Business Conduct is available at www.collexis.com under the “Investors” tab.
Any amendment to, or waiver of, a provision of the Code of Ethics that applies
to our principal executive officer or principal financial officer and relates
to
any element of the definition of code of ethics set forth in Item 406(b) of
Regulation S-K will be also posted on our website.
As
required by Section 16(a) of the Securities Exchange Act of 1934, our directors
and executive officers, and persons who own beneficially more than 10% of our
common stock are required to file with the SEC initial reports of their
ownership of our common stock and to file subsequent reports for any changes
in
such ownership. Based on a review of Forms 3, 4, and 5 and any representations
made to us, we believe all reports required by Section 16(a) of the
Exchange Act were timely filed with respect to the fiscal year ended June 30,2008.
ITEM
11.EXECUTIVE
COMPENSATION.
The
following table sets forth the annual compensation of the Chief Executive
Officer, Chief Financial Officer and the
four
other most highly compensated executive officers of Collexis Holdings, Inc.
and
its subsidiaries for the year ended June 30, 2008. We refer to these officers
as
the “named executive officers” in this report.
These
amounts reflect amounts we recognized for financial statement reporting
purposes for the fiscal years ended June 30, 2008, 2007 and 2006
in
accordance with SFAS 123(R) for awards granted after December 31,2005. No
executive officer listed above received grants before January 1,2006. We
adopted SFAS 123(R) effective January 1, 2006. Because we were
not a
public company in prior years, in preparing our financial statements
for
all periods ending before January 1, 2007, we used the minimum
value
method for valuing options we granted in those years as permitted
by APB
25, SFAS 123 and SFAS 148. We were not required to expense over
the
vesting period the options that we granted before 2006. For purposes
of
the amounts shown in the above table, our compensation expense
for all
option grants since January 1, 2006 is based on the grant date
fair market
value but is recognized over the period in which the executive
officer
must provide services to earn the award. Our executive officers
will not
realize any value of these awards in cash unless and until they
exercise
the options and sell the underlying
shares.
(3)
Mr.
Kirkland joined Collexis Holdings, Inc. as Chief Executive Officer
on
February 1, 2006. On February 1, 2006, we granted options to purchase
shares 2,920,000 of our common stock at an exercise price of $0.10
per
share (as adjusted for the reverse merger) to Mr. Kirkland as compensation
for his employment. Under these options, shares vest quarterly
in
approximately equal amounts over three years on the first day of
each May,
August, November and February beginning May 1, 2006 until February1,2009, when the final 243,335 shares will vest. The options have
a
three-year term.
(4)
Mr.
Murphy joined Collexis Holdings, Inc. as Chief Financial Officer
on April7, 2008. Our board of directors has approved the grant of 400,000
shares
of restricted stock to Mr. Murphy. The restricted stock will vest
annually
over five years.
(5)
Mr.
van Praag resigned as Chief Executive Officer of Collexis B.V.
effective
June 30, 2008. On January 1, 2006, we granted options to purchase
1,000,000 shares of our common stock at an exercise price of $0.10
per
share (as adjusted for the reverse merger) to Van Praag Informatisering
B.V., an entity controlled by Mr. van Praag. As part of our agreement
with
Mr. van Praag with respect to his resignation, as of June 30, 2008,
all
shares have vested and the options remain exercisable until June30,2010.
(6)
These
amounts reflect fees paid under management agreements to entities
controlled by each of Mr. van Praag and Mr. Buurman for general
management
and director services prior to January 1, 2007. The amounts above
represent the U.S. dollar amount at the then current average exchange
rate
to the Euro. On January 1, 2007, these management agreements were
cancelled and Mr. van Praag and Mr. Buurman were employed in their
roles
as executive officers of Collexis B.V.
(7)
Mr.
Buurman resigned as Vice President Strategy of Collexis B.V. effective
June 30, 2008. On January 1, 2006, we granted options to purchase
1,000,000 shares of our common stock at an exercise price of $0.10
per
share (as adjusted for the reverse merger) to V.D.B. Pacific B.V.,
an
entity controlled by Mr. Buurman. As part of our agreement with
Mr.
Buurman with respect to his resignation, as of June 30, 2008 all
shares
have vested and the options remain exercisable until June 30,2010.
(8)
On
February 1, 2006, we granted options to purchase 1,000,000 shares
of our
common stock at an exercise price of $0.10 per share (as adjusted
for the
reverse merger) to Mr. Leicht as compensation for his employment.
Under
these options, shares vest quarterly in approximately equal amounts
over
three years on the first day of each May, August, November and
February
beginning May 1, 2006 until February 1, 2009, when the final 83,335
shares
will vest. The options have a three-year term. On November 1, 2006,
we
granted options to purchase an additional 300,000 shares of our
common
stock at an exercise price of $0.75 per share (as adjusted for
the reverse
merger) to Mr. Leicht as compensation for his employment. Under
these
options, shares vest quarterly in equal amounts over three years
on the
first day of each February, May, August and November beginning
February 1,2006 until November 1, 2009, when the final 25,000 shares will
vest. The
options have a three-year term.
(9)
Represents
commissions earned on sales.
(10)
Mr.
Gunter joined Collexis Holdings, Inc. as Chief Marketing Officer
on April1, 2007. On April 1, 2007, we granted options to purchase 750,000
shares
of our common stock at an exercise price of $0.75 per share to
Mr. Gunter
as compensation for his employment. Under these options shares
vest
quarterly in equal amounts over three years on the first day of
each July,
October, January and April beginning July 1, 2007 until November1, 2010,
when the final 62,500 shares will vest. The options have a four
-year
term.
Employment
Agreements
William
D. Kirkland.
William
Kirkland entered into an employment agreement with Collexis, Inc. and Collexis
B.V. to serve as the Chief Executive Officer and President of Collexis, Inc.,
a
subsidiary of Collexis B.V., on January 5, 2006, as amended on February 12,2007. Additionally, Mr. Kirkland has performed the duties of the Chief Executive
Officer of Collexis B.V. since February 2006. The agreement with Mr. Kirkland
is
for a term of three years, which is automatically extended for a consecutive
twelve month periods thereafter on the same terms and conditions, unless
either
party gives written notice not to renew 180 days prior to the end of any
term.
Mr. Kirkland’s right to receive an incentive bonus is based on the satisfaction
of performance criteria as determined by our board of directors in its sole
and
absolute discretion. Under the terms of his employment agreement, Mr. Kirkland
entered into an option agreement with Collexis B.V. on February 1, 2006,
under
which Mr. Kirkland was granted options to purchase 292,000 shares of the
common
stock of Collexis B.V. These options were converted in our February 2007
reverse
merger to options to acquire 2,920,000 shares of our common stock at $0.10
per
share, which expire on February 1, 2009. Under the terms of his employment
agreement, Mr. Kirkland is entitled to participate in all bonus and benefit
programs we establish for our executive employees, including health care
and
life insurance plans. The agreement also contains a non-compete clause and
non-solicitation of employees clause, for a period of one year from the date
of
termination of employment.
23
Stephen
A. Leicht.
Stephen
Leicht entered into an employment agreement with Collexis, Inc. and Collexis
B.V. to serve as the Director of Operations on January 25, 2006, which agreement
was amended and restated in April 2006, and further amended on February 12,2007. The amended and restated agreement is for a term of three years, which
is
automatically extended for a consecutive twelve month periods thereafter
on the
same terms and conditions, unless either party gives written notice not to
renew
180 days prior to the end of any term. Mr. Leicht’s right to receive an
incentive bonus is based on the satisfaction of performance criteria as
determined by our board of directors in its sole and absolute discretion.
Under
the terms of his employment agreement, Mr. Leicht entered into an option
agreement with Collexis B.V. on February 1, 2006, under which Mr. Leicht
was
granted options to purchase 100,000 shares of the common stock of Collexis
B.V.
On the reverse merger, these options were converted into options to acquire
1,000,000 shares of our common stock at $0.10 per share, which expire on
February 1, 2009. Under the terms of his employment agreement, Mr. Leicht
is
entitled to participate in all benefit programs established for other executives
of Collexis, Inc. The agreement also contains a non-compete clause and
non-solicitation of employees clause, for a period of one year from the date
of
termination of employment.
Darrell
W. Gunter.
Darrell
Gunter entered into an employment agreement with Collexis to serve as the
Chief
Marketing Officer in April 2007. The agreement with Mr. Gunter is for a term
of
three years, which is automatically extended for a consecutive twelve month
periods thereafter on the same terms and conditions, unless either party
gives
written notice not to renew 180 days prior to the end of any term. As part
of
his compensation arrangement, on April 1, 2007, we granted Mr. Gunter options
to
purchase 750,000 shares of our common stock at an exercise price of $0.75
per
share. These options vest quarterly over a three-year period beginning July1,2007 and expire on April 1, 2011. The agreement also contains a non-compete
clause and non-solicitation of employees clause, for a period of one year
from
the date of termination of employment.
Peter
van Praag.
Van
Praag Informatisering B.V. entered into a management agreement with Collexis
B.V. on October 27, 2005 to provide for the general management of Collexis
B.V.
Upon Mr. van Praag’s appointment as an officer of Collexis B.V. effective on the
reverse merger, this management agreement was cancelled. On February 14,2007,
Mr. van Praag entered into an employment agreement with Collexis B.V. to
serve
as the Chief Executive Officer of Collexis B.V.. Mr. van Praag’s employment
agreement was terminated as of June 30, 2008 upon his resignation. Mr. van
Praag
entered into a Separation and Settlement Agreement with Collexis on July31,2008 which was effective as of June 30, 2008 which provides for payments
of
€7,500 per month for 8 months or a total of €60,000, such payments approximate
$88,236 based on the average exchange rate for fiscal 2007. The agreement
also
contains a non-compete clause and non-solicitation of employees clause, for
a
period of one year from the date of termination of employment.
Henk
J. Buurman.
VDB
Pacific B.V. entered into a management agreement with Collexis B.V. on October27, 2005 to provide director services to Collexis B.V. Upon Mr. Buurman’s
appointment as an officer of Collexis B.V. effective on the reverse merger,
this
management agreement was cancelled. On February 14, 2007, Mr. Buurman entered
into an employment agreement with Collexis B.V. to serve as Vice President
of
Strategy. Mr. Buurman’s employment agreement was terminated as of June 30, 2008
upon his resignation. Mr. Buurman entered into a Separation and Settlement
Agreement with Collexis on July 31, 2008 which was effective June 30, 2008
which
provides for payments of €7,500 per month for 8 months or a total of €60,000,
such payments approximate $88,236 based on the average exchange rate for
fiscal
2007. The agreement also contains a non-compete clause and non-solicitation
of
employees clause, for a period of one year from the date of termination of
employment.
Potential
Payments Upon Termination or Change in Control
William
D. Kirkland.
Under
the terms of his employment agreement, if Mr. Kirkland is terminated by mutual
agreement, for cause (as defined in the employment agreement), at his election,
or due to his disability or death, he is entitled to accrued annual salary,
incentive bonuses, equity based incentives, and payment for accrued but untaken
vacation days. To the extent permissible, in the event of his disability
or
death, Mr. Kirkland or his estate will also be eligible to receive any benefits
to which he or it are entitled to receive under our benefit plans for the
six
months following such termination event. If Mr. Kirkland is terminated without
cause or at his election for good reason (as defined in the employment
agreement), he is entitled to his annual base salary, plus any accrued but
unpaid incentive bonuses and equity based incentives, on a regular payroll
basis
then in effect, for the lesser of (a) two years after the termination date
or
(b) the balance of then current employment period, plus payment for accrued
but
untaken vacation days and a continuation of benefits, to the extent permissible.
All of Mr. Kirkland’s options will vest on the first to occur of: (a) a change
in control (as defined in the option agreement); (b) Mr. Kirkland’s termination
for good reason; or (c) our termination of his employment without
cause.
Stephen
A. Leicht.
Under
the terms of his employment agreement , if Mr. Leicht is terminated by mutual
agreement, for death or disability, for cause (as defined in the employment
agreement), or by his voluntary termination, he is entitled to any base salary
that is earned but unpaid, payment for accrued but untaken vacation days,
vested
benefits under any employee benefit plan, and any unreimbursed expenses as
of
the termination date. If Mr. Leicht’s employment is terminated without cause or
at his election for good reason (as defined in the employment agreement),
we
will continue to pay his base salary for 180 days following termination.
These
payments will be reduced dollar-for-dollar by any wages or other compensation
actually received by Mr. Leicht during the period he is receiving such severance
payments. All of Mr. Leicht’s options issued under that agreement will vest on
the first to occur of: (a) a change in control (as defined in the option
agreements); (b) Mr. Leicht’s termination for good reason; or (c) our
termination of his employment without cause.
24
Darrell
W. Gunter Under
the
terms of his employment agreement, if Mr. Gunter is terminated by mutual
agreement, for death or disability, for cause (as defined in the employment
agreement), or by his voluntary termination, he is entitled to any base salary
that is earned but unpaid, payment for accrued but untaken vacation days,
vested
benefits under any employee benefit plan, and any unreimbursed expenses as
of
the termination date. If Mr. Gunter’s employment is terminated without cause or
at his election for good reason (as defined in the employment agreement),
we
will continue to pay his base salary for 180 days following termination.
These
payments will be reduced dollar-for-dollar by any wages or other compensation
actually received by Mr. Gunter during the period he is receiving such severance
payments. All of Mr. Gunter’s options will vest on the first to occur of: (a) a
change in control (as defined in the option agreement); (b) Mr. Gunter’s
termination for good reason; or (c) our termination of his employment without
cause.
Options
vest quarterly in approximately equal amounts over three years
on the
first day of each May, August, November and February until February1,2009.
(2)
Options
vest quarterly in approximately equal amounts over three years
on the
first day of each May, August, November and February until November1,2009.
(3)
Options
vest quarterly in approximately equal amounts over three years
on the
first day of each May, August, November and February until November1,2010.
(4)
Restricted
stock vests annually in equal amounts over five years from the
date of
grant.
Director
Compensation
The
following table summarizes the total compensation we paid to our non-employee
directors during the fiscal year ended June 30, 2008. We pay cash compensation
to our independent directors of $1,500 per meeting.
Name
Fees Earned
or Paid in
Cash
($)
All Other
Compensation
($)
Total
($)
Mark
S. Germain
—
80,000
(1)
80,000
Frank
C. Carlucci
9,000
—
9,000
Mark
Auerbach
3,000
—
3,000
John
D. Macomber
3,000
—
3,000
John
J. Regazzi
—
57,000
(2)
57,000
Dr.
Andrew Sorensen
—
—
—
25
(1)
We
have an oral consulting arrangement with Mark S. Germain. Under
this
arrangement, we pay Mr. Germain $10,000 per month for his consulting
services. To
the extent Mr. Germain does not request payment, the amounts owed
him are
accrued as an expense on our books.
(2)
We
have a consulting arrangement with John J. Regazzi. Under this
arrangement, we currently pay Dr. Regazzi $6,000 per month for
his
consulting services. The agreement dated April 1, 2007, has no
expiration
date.
Compensation
Discussion and Analysis
Compensation
Philosophy and Objectives
Our
executive compensation philosophy is to enable Collexis to attract, retain
and
motivate key executives to achieve our long-term objectives. Attracting and
retaining key executives is particularly challenging in the software industry
where executives are required to remain focused and committed throughout
long
periods of product development and, at times, financial instability. The
market
for executive talent in the software industry is highly
competitive.
Setting
Executive Compensation
The
Compensation Committee has
responsibility for our executive compensation philosophy and the design of
executive compensation programs, based
on
consideration of our strategic and financial goals, competitive forces,
fairness, individual responsibilities, challenges and economic factors.
In
addition to evaluating our executives’ contributions and performance in light of
corporate objectives, we also base our compensation decisions on market
considerations. All forms of compensation are evaluated relative to the market
in our industry. Individual compensation pay levels may vary from this reference
point based on recent individual performance and other considerations, including
breadth of experience, length of service, the anticipated level of difficulty
in
replacing an executive with someone of comparable experience and skill, and
the
initial compensation levels required to attract qualified new hires.
We
compensate our executives principally through base salary, performance-based
annual cash incentives and equity awards. The objective of this three-part
approach is to remain competitive with other companies in our industry, while
ensuring that our executives are given the appropriate incentives to achieve
near-term objectives and at the same time create long-term shareholder value.
Base
Salary.
We
provide our executive officers with a level of assured cash compensation
in the
form of a base salary that reflects their professional status and
accomplishments. As described above, our compensation philosophy allows the
Compensation Committee to take into account, for both current and new executive
officers, recent individual performance, breadth of experience, length of
service, the anticipated level of difficulty in replacing an executive with
someone of comparable experience and skill, and the initial compensation
levels
required to attract qualified new hires. In setting base salaries for our
executive officers (other than the Chief Executive Officer), the Compensation
Committee also considers the recommendation of our Chief Executive Officer.
As a result of the analysis described above, in August 2008 the
Compensation Committee increased the annual base salary for our Chief Executive
Officer to $300,000 and our Chief Operating Officer to $250,000 a 20% and
25%
increase over their respective base salaries in the previous fiscal
year.
26
Annual
Executive Bonuses. We
do not have a formal incentive or bonus plan for executives. However, our
board
of directors has the right in its discretion to pay our executives annual
cash
performance bonuses pursuant to the terms of each executive’s employment
agreement. The board may consider our corporate goals and objectives and
our
actual performance against those criteria in its determination of whether
cash
incentive or bonus payments should be made to our executives. In addition,
our
board may consider an executive’s individual performance in its determination of
whether cash incentive or bonus payments should be made to the executive.
Employee
Benefits.
We
provide employee benefits on a company-wide basis with the selection of specific
plans made based on management’s analysis of plans available in the marketplace
as well as the necessary elements to attract and retain employees. We offer
employee benefit programs that are intended to provide financial protection
and
security for our employees and to reward them for the total commitment we
expect
from them in service to Collexis. Company-wide benefits such as medical,
dental
life insurance and profit sharing 401(k) are available to executives under
plans
and policies that are available to all of our U.S. based employees.
Employment
Agreements.
Named
executive officers are hired pursuant to written employment agreements which
establish base compensation, eligibility for performance based bonuses, equity
awards, severance and other benefits. We believe employment agreements promote
retention and provide for various covenants to protect our intellectual
property. The Compensation Committee reviews and approves executive employment
agreements. We believe that the benefits provided by these agreements are
reasonable and are consistent with practices in our industry. For more details
concerning our Employment Agreements, please refer to “Employment Agreements”
and “Potential Payments upon Termination or Change in Control”
above.
Tax
Deductibility of Compensation
Under
Section 162(m) of the Internal Revenue Code, we may not deduct annual
compensation in excess of $1 million paid to certain employees, generally
the
Chief Executive Officer and four other most highly compensated executive
officers, unless that compensation qualifies as performance-based compensation
under a shareholder approved plan and meets certain other technical
requirements. While the Compensation Committee considers the impact of
Section 162(m) in structuring our compensation plans and programs, the
Compensation Committee has, and may continue to, approve awards which would
not
qualify as performance-based compensation under Section 162(m). The
Compensation Committee reserves the flexibility and authority to make decisions
that are in the best interest of the company and our shareholders, even if
those
decisions do not result in full deductibility under
Section 162(m).
Compensation
Committee Report
The
Compensation Committee has reviewed and discussed the Compensation Discussion
and Analysis with management and, based on such review and discussions, the
Compensation Committee recommended to the board of directors that the
Compensation Discussion and Analysis be included in this annual report on
Form
10-K.
THE
COMPENSATION COMMITTEE
John
J. Regazzi (Chairman)
Frank
C. Carlucci
John
D. Macomber
Mark
Auerbach
Compensation
Committee Interlocks and Insider Participation
During
the fiscal year ended June 30, 2008, there were no Compensation Committee
interlocks or insider participation.
ITEM
12.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
The
following table sets forth as of October 9, 2008 the number of shares of
our
common stock beneficially owned by (1) each of our directors; (2) each of
our
named executive officers; (3) each beneficial owner of more than 5% of our
outstanding common stock; and (4) all of our executive officers and directors
as
a group.
28
Name of Beneficial Owner(1)
Amount and Nature of
Beneficial Ownership(2)
Percent of Class(3)
Directors:
Mark
S. Germain(4)
3,497,360
3.16
%
Mark
Auerbach(5)
1,236,667
1.12
%
Frank
C. Carlucci(6)
3,603,333
3.28
%
William
D. Kirkland(7)
32,799,976
29.18
%
John
D. Macomber (8)
1,603,332
1.46
%
John
J. Regazzi (9)
1,203,333
1.09
%
Andrew
A. Sorensen
—
*
Named
Executive Officers:
Mark
Murphy
—
*
Peter
van Praag(10)
5,795,820
5.23
%
Henk
J. Buurman(11)
2,865,200
2.59
%
Stephen
A. Leicht(12)
1,116,666
1.01
%
Darrell
W. Gunter
375,000
*
All
Directors and Executive Officers as a Group (13 persons)
(13)
55,331,680
46.43
%
Other
5% Stockholders:
Margie
Chassman (14)
30,669,426
27.82
%
Search
Dynamics Corp. and Ltd. (15)
30,267,511
27.58
%
*
Less
than one percent.
(1)
Unless
otherwise indicated, the address for each of our directors and
executive
officers is in care of Collexis Holdings, Inc., 1201 Main Street,
Suite
980, Columbia, South Carolina29201.
(2)
In
setting forth this information, we relied on our stock and transfer
records and other information provided by the persons or entities
listed
in the table. Beneficial ownership is reported in accordance with
SEC
regulations and therefore includes shares of common stock that
may be
acquired within 60 days after October 9, 2008 upon the exercise
of
outstanding stock options. Shares of common stock issuable upon
the
exercise of such options are deemed outstanding for purposes of
computing
the percentage of common stock owned by the beneficial owner listed
in the
table, but are not deemed outstanding for purposes of computing
the
percentage of outstanding common stock owned by any other shareholder.
Except as otherwise stated below, all shares are owned directly
and of
record, and each named person or entity has sole voting and investment
power with regard to the shares shown as owned by such person or
entity.
(3)
Based
on 109,743,727 shares outstanding as of October 9, 2008 and assumes
the
exercise by the indicated stockholder or group of all options to
purchase
our common stock held by that stockholder or group that are exercisable
on
or before 60 days from October 9, 2008.
(4)
Includes
1,000,000 shares of common stock issuable to Mr. Germain on the
exercise
of vested stock options. Also includes 2,497,360 shares of common
stock
owned by Margery Germain, Mr. Germain’s spouse, as to which he disclaims
beneficial ownership.
(5)
Includes
270,000 shares of common stock issuable to Mr. Auerbach on the
exercise of
vested stock options. Also includes 966,667 shares of common stock
owned
by Susan Auerbach, Mr. Auerbach’s
spouse.
(6)
Includes
270,000 shares of common stock issuable to Mr. Carlucci on the
exercise of
vested stock options.
(7)
Includes
2,403,343 shares of common stock issuable to Mr. Kirkland on the
exercise
of vested stock options and 243,327 shares of common stock issuable
on the
exercise of stock options that will vest in the next 60 days.
Also includes all shares of common stock owned by Margie Chassman
and her
affiliates that are held in a voting trust for which Mr. Kirkland
serves
as trustee. The trustee is required to vote on a pro rata basis
proportionate to all other votes actually cast. Mr. Kirkland disclaims
beneficial ownership of the shares held in the trust. For a more
detailed
discussion of this voting trust, see “Certain Relationships and Related
Transactions and Director Independence – Chassman Voting Trust.”
(8)
Includes
270,000 shares of common stock issuable to Mr. Macomber on the
exercise of
vested stock options.
(9)
Includes
270,000 shares of common stock issuable to Dr. Regazzi on the exercise
of
vested stock options.
(10)
Includes
4,795,820 shares of common stock owned by Van Praag Informatisering
B.V.,
a company wholly owned by Mr. van Praag. Also includes 1,000,000
shares of
common stock issuable to Van Praag Informatisering B.V. on the
exercise of
vested stock options.
(11)
Includes
1,865,200 shares of common stock owned by V.D.B. Pacific B.V.,
a company
controlled by Mr. Buurman. Also includes 1,000,000 shares of common
stock
issuable to V.D.B. Pacific B.V. on the exercise of vested stock
options.
(12)
Includes
1,008,333 shares of common stock issuable to Mr. Leicht on the
exercise of
vested stock options and 108,333 shares of common stock issuable
on the
exercise of stock options that will vest in the next 60
days.
(13)
Includes
8,900,837 shares of common stock issuable on the exercise of vested
stock
options and 522,492 shares of common stock issuable on the exercise
of
stock options that will vest in the next 60 days.
29
(14)
Includes
shares of common stock owned by Margie Chassman and her affiliates
that
are held in a voting trust for which our Chief Executive Officer
serves as
trustee. For a more detailed discussion of this voting trust, see
“Certain
Relationships and Related Transactions and Director Independence
–
Chassman Voting Trust.” Also includes 516,120 shares of common stock
issuable on the exercise of vested stock options. The address for
Ms.
Chassman is 465 W. 23rd
Street, Apt. 12J, New York, NY10011.
(15)
Includes
shares of common stock owned by each of Search Dynamics Limited,
Youssef
El Zein and Oussama Salam, who are shareholders we deem to be controlling
or under common control with Search Dynamics
Corp.
Equity
Compensation Plans
The
following chart provides information regarding our equity compensation plans
(including individual compensation arrangements) for the fiscal year ended
June30, 2008:
Equity
Compensation Plan Information
Plan category
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
Equity
compensation plans approved by security holders
—
—
—
Equity
compensation plans not approved by security holders
19,015,809
$
0.42
—
Director
Options.
Options
granted to our directors are fully vested as of the date of grant and expire
five years from the date of grant, if not terminated earlier under the terms
of
the nonqualified stock option agreement. We have granted nonqualified stock
options to certain of our directors as follows:
·
Mark
S. Germain – 1,000,000 shares at an exercise price of $0.75 per share;
·
Mark
Auerbach – 270,000 shares at an exercise price of $0.75 per
share;
·
Frank
C. Carlucci – 270,000 shares at an exercise price of $0.75 per share;
·
John
D. Macomber – 270,000 shares at an exercise price of $0.75 per share; and
·
John
J. Regazzi – 270,000 shares at an exercise price of $0.75 per
share.
Post-Merger
Employee Options.
We have granted certain individuals and entities, including certain of our
executive officers, nonqualified options to purchase 6,474,192 shares of
our
common stock at an exercise price of $0.75 per share. These options vest
quarterly over a three-year period and expire between three and eight years
from
the date of grant, if not terminated earlier under the terms of the nonqualified
stock option agreement. In certain of these agreements, the options vest
immediately upon a change in control or if the employee is terminated without
cause or resigns for good reason (as each term is defined in the stock option
agreement).
Pre-Merger
Employee Options.
Before the reverse merger on February 13, 2007, Collexis B.V. granted
nonqualified stock options to several of its officers, directors and
employees. These options were converted in the reverse merger to options
to acquire shares of our common stock, and the exercise price and amount
of
shares were adjusted accordingly. These options vest quarterly over a
three-year period and expire three to five years from the date of grant,
if not
terminated earlier under the terms of the agreement. As of October 9,2008, nonqualified options to purchase 9,463,621 share of our common stock
have
been granted under these terms with exercise prices ranging from $0.10 per
share
to $0.3875 per share.
30
ITEM
13.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
Certain
Relationships and Related Transactions
Chassman
Voting Trust
On
October 15, 2007, we entered into a voting trust agreement with Margie Chassman
and William D. Kirkland, our Chief Executive Officer, as trustee under the
voting trust agreement. We paid no consideration in connection with the voting
trust agreement. As of October 9, 2008, Ms. Chassman owned 30,153,306 shares,
or
27.5% of our issued and outstanding common stock. Ms. Chassman deposited
all
such shares of common stock into the voting trust. The voting trust agreement
does not restrict Ms. Chassman or any of her family members or affiliates
(as
those terms are defined in the voting trust agreement) from selling or pledging
any of the shares deposited into the voting trust, nor does it prohibit Ms.
Chassman or any of her family members or affiliates from purchasing additional
shares of our common stock, provided that any shares they purchase also become
subject to the voting trust agreement. With regard to any matter submitted
to
our stockholders for a vote (including by written consent), the trustee must
give instructions to us to the effect that the shares in the trust are being
voted on such matter on a pro rata basis proportionate to all other votes
actually cast. The voting trust terminates upon the earlier of: (a) October15,2017; or (b) when the shares in the trust represent less than 19% of the
voting
interest of our outstanding capital stock.
All
transactions, if any, between Collexis and its officers, directors and principal
shareholders and their affiliates and any transactions between us and any
entity
with which its officers, directors or principal shareholders are affiliated
are
subject to the approval of a majority of the board of directors, including
the
majority of the independent and disinterested outside directors of the board
and
must be on terms no less favorable to Collexis than could be obtained from
unaffiliated third parties.
Board
Committees and Independence
Our
board
of directors currently consists of seven members. We have three standing
committees:
Committee
Members
Audit
Committee
Mark
Auerbach (Chairman), Frank C. Carlucci, and John D.
Macomber
Compensation
Committee
John
J. Regazzi (Chairman), Frank C. Carlucci, John D. Macomber and
Mark
Auerbach
Nomination
and Corporate Governance
John
D. Macomber (Chairman), Frank C. Carlucci and Mark S.
Germain
Our
board
of directors has evaluated whether each of these committee members is
“independent” within the meaning of the federal securities laws concerning
independence of directors generally and of members of the audit committee.
Shares of our common stock are traded on the OTC Bulletin Board and not on
NASDAQ or another national securities exchange. As permitted under applicable
SEC rules, we have elected to apply NASDAQ listing standards in determining
whether our directors are independent. The board has determined that Mr.
Auerbach, Dr. Regazzi, Mr. Carlucci and Mr. Macomber are independent under
the
NASDAQ listing standards. In determining that Dr. Regazzi is independent,
the
board took into account that we have a consulting arrangement with Dr. Regazzi
under which we pay him $6,000 per month for his consulting services. Therefore,
a majority of our board of directors is independent, and our compensation
committee is composed solely of independent directors.
The
board
determined that Mr. Auerbach, a member of the audit committee, meets the
higher
standards of independence for members of an audit committee under the NASDAQ
listing standards and the SEC rules. Neither Mr. Germain nor Dr. Regazzi
were
found by the board to be “independent” for the purposes of serving on our audit
committee under either the NASDAQ listing standards or the SEC rules applicable
to audit committee members.
31
ITEM
14.
PRINCIPAL
ACCOUNTANT FEES AND
SERVICES.
Fees
to Independent Auditors
The
following table shows the fees that we paid for services performed in the
fiscal
years ended June 30, 2008 and June 30, 2007:
Audit
Fees.
This
category includes the aggregate fees billed for professional services rendered
by the independent auditors during the year ended June 30, 2008 and the six
months ended June 30, 2007, respectively, for the audit of our consolidated
annual financial statements and the review of financial statements included
in
our quarterly reports.
Audit-Related
Fees.
This
category includes the aggregate fees billed for non-audit services, exclusive
of
the fees disclosed relating to audit fees, during the year ended June 30,2008
and the six months ended June 30, 2007. These services principally include
the
assistance and issuance of consents for various filings with the
SEC.
Tax
Fees.
This
category includes the aggregate fees billed for tax services rendered in
the
preparation of federal and state income tax returns for Collexis and our
subsidiaries.
All
Other Fees.
This
category includes the aggregate fees billed for all other services, exclusive
of
the fees disclosed above, rendered during the year ended June 30, 2008 and
the
six months ended June 30, 2007.
Oversight
of Accountants; Approval of Accounting Fees
Under
the
provisions of its charter, our audit committee is responsible for the
appointment, compensation, retention and oversight of the work of the
independent auditors. The charter provides that the audit committee has the
sole
and direct responsibility for determining the compensation of the independent
auditor.
All
of
the accounting services and fees reflected in the table above were reviewed
and
approved by the audit committee, and none of the services were performed
by
individuals who were not employees of the independent auditor.
PART
IV
ITEM
15.
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES.
(a)
(1)
Financial
Statements – see index on Page F-1
herein.
(2)
Other
financial statements and schedules are not presented because they
are
either not required or the information required by such financial
statements or schedules is presented
elsewhere.
(b)
The
exhibits filed as part of this Report as required by Item 601
of
Regulation S-K are included in the Index to Exhibits at page E-1
included elsewhere in this Annual
Report.
32
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
duly
caused this report to be signed on its behalf by the undersigned, thereunto
duly
authorized.
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant in the capacities and on the
dates
indicated.
We
have
audited the consolidated balance sheet of Collexis Holdings, Inc. and
Subsidiaries as of June 30, 2008, and the related consolidated statements
of
operations, comprehensive loss, stockholders’ equity (deficit) and cash flows
for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an
opinion on these consolidated financial statements based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the
accounting principles used and significant estimates made by management,
as well
as evaluating the overall financial statement presentation. We believe that
our
audit provides a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Collexis Holdings, Inc.
and
Subsidiaries as of June 30, 2008, and the results of their operations and
their
cash flows for the year then ended, in conformity with U.S. generally accepted
accounting principles.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, has continuing net cash outflows from operations and its
current liabilities exceed its current assets. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note
2. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
We
were
not engaged to examine management's assertion about the effectiveness of
Collexis Holdings, Inc.’s internal control over financial reporting as of June30, 2008 included in the accompanying Management’s Report on Internal Control
Over Financial Reporting in Item 9A(T) of Form 10-K and, accordingly, we
do not
express an opinion thereon.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Members
of the Audit Committee of
Collexis
Holdings, Inc.
We
have
audited the accompanying consolidated balance sheet of Collexis
Holdings, Inc., and subsidiaries ("the
Company") as of June 30, 2007 and the related statements of operations,
statements of stockholders' equity (deficit), comprehensive loss, and cash
flows
for the six month period ended June 30, 2007. These financial statements
are the
responsibility of the Company's management. Our responsibility is to express
an
opinion on these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
financial
statements are free of material misstatement. The Company is not required
to
have, nor were we engaged to perform, an audit of its internal control
over
financial reporting. Our audit included consideration of internal control
over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing
an
opinion on the effectiveness of the Company’s internal control over financial
reporting. An audit includes examining, on a test basis, evidence supporting
the
amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our
opinion.
In
our
opinion, the financial statements referred above present fairly, in all
material
respects, the financial position of the Company as of June 30, 2007 and
the
results of its operations and its cash flows for the six month period ended
June30, 2007 in conformity with accounting principles generally accepted in
the
United States of America.
As
described in Note 10 to the financial statements included in the transition
report for the transition period from January 1, 2007 to June 30, 2007
included
in form 10-KSB/A, during July and September 2007, the Company sold approximately
3.7 million of its common stock in private offerings, for a total of
approximately $2.8 million. In addition there are approximately $2.7 million
in
escrow in connection with subscription agreements for approximately 3.6
million
shares.
/s/
Bernstein
& Pinchuk LLP
New
York,
New York
September28, 2007, except for the correction of an error concerning overstated general
and administrative expenses as disclosed in Note 1 to the financial statements
included in the transition report for the transition period from January1, 2007
to June 30, 2007 included in form 10-KSB/A and its effect on the Consolidated
Statements of Operations and loss per share, Comprehensive loss, and Cash
Flows
for the six months ended June 30, 2007, and the related cumulative effect
on the
equity section of the Balance Sheet as of June 30, 2007, as to which the
date is
October 29, 2007.
Accounts
receivable, net of allowance for doubtful accounts of $ 302,492 and
$
84,422, respectively
1,193,678
618,462
Prepaid
expenses and other current assets
225,973
231,768
Total
current assets
2,895,885
1,037,491
Property
and equipment, at cost, net of accumulated depreciation of $ 671,293
and $
430,760, respectively
540,485
211,282
Intangibles,
net of accumulated amortization of $998,584
7,726,426
-
Trade
Name
1,090,494
-
Goodwill
9,616,603
-
Other
assets
Security
deposit - rent
23,482
34,179
Other
long term assets
-
67,375
Option
to purchase Syynx
-
673,750
Total
other assets
23,482
775,304
Total
assets
$
21,893,375
$
2,024,077
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current
liabilities
Accounts
payable trade
$
1,152,230
$
409,931
Accrued
taxes and expenses
1,299,416
923,319
Other
and deferred charges
21,299
9,645
Deferred
revenue
762,566
238,681
Deferred
tax liability
22,706
-
Current
portion of deferred purchase price
3,803,507
-
Total
current liabilities
7,061,724
1,581,576
Loan
from shareholder
-
650,000
Non-current
liabilities
Deferred
tax liability
1,532,977
-
Deferred
purchase price
6,991,696
-
Total
non-current liabilities
8,524,673
-
Stockholders'
equity (deficit)
Common
stock, par value $0.001, authorized 277,713,000 shares; 109,743,727
shares
issued and outstanding as of June 30, 2008; authorized 277,713,000
shares;
59,818,728 issued and oustanding as of June 30, 2007
109,744
59,819
Additional
paid-in capital
30,314,289
13,200,590
Accumulated
other comprehensive income
636,693
26,082
Accumulated
deficit
(24,753,748
)
(13,493,990
)
Total
stockholders' equity (deficit)
6,306,978
(207,499
)
Total
liabilities and stockholders' equity
$
21,893,375
$
2,024,077
The
accompanying notes are an integral part of these consolidated financial
statements.
NOTE
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organizational
Matters
Our
Company was formed when, on February 13, 2007, Collexis Holdings, Inc., a
Delaware corporation, merged with and into Technology Holdings, Inc., a Nevada
corporation. As the surviving company, Technology Holdings, Inc. changed
its
name to Collexis Holdings, Inc. Immediately before the merger, Collexis
Holdings, Inc. had acquired through a share exchange approximately 99.5%
of the
outstanding capital stock of Collexis B.V. On June 27, 2008, we acquired
the
remaining 0.5% of Collexis B.V. stock we did not previously own in exchange
for
183,333 shares of our common stock. Before the merger, Technology Holdings,
Inc.
was a development stage company with no operations. Collexis B.V. was founded
in
1999 in the Netherlands and through these transactions became the operating
subsidiary of Collexis Holdings, Inc. and acquirer for accounting
purposes.
On
October 19, 2007, we acquired our
long-time software development partner, SyynX
WebSolutions GmbH, a
privately-held software company based in Cologne, Germany.
Additionally, on February 1, 2008, we acquired Lawriter, LLC, an
Ohio
based company that provides online legal research services to bar associations
under the name Casemaker®
via
monthly database subscription fees.
To
further expand our offerings to legal industry clients, on January 18, 2008,
we
entered into a licensing and publishing agreement with VersusLaw, Inc., under
which we acquired a perpetual, non-exclusive, transferable license to use
VersusLaw’s legal-related collection of judicial opinions.
Description
of Business
Collexis
Holdings, Inc., sometimes referred to as “Collexis,” the “Company,”“we,”“us,” or “our” in
this
report, is a global software development company headquartered
in Columbia, South Carolina with major operations in Cincinnati, Ohio,
Geldermalsen, the Netherlands and Cologne, Germany.
We
develop software that supports the knowledge intensive market, building tools
to
search and mine large sets of information. Our software enables search,
aggregation, navigation and discovery of information. Using public as well
as
proprietary thesauri of industry specific language, we can create “fingerprints”
of texts - such as articles, web pages, books and internal and external
databases - that can be used in turn to find the most relevant information
for a
researcher or business professional. We
generate our revenues primarily from licensing our software, providing services
to the users of our software, maintaining and supporting our software, selling
related hardware and hosting software on an application service provider
basis.
We
operate several subsidiaries that support our core technology sales in the
government, enterprise and life science sectors. We recently acquired an
industry-dedicated subsidiary, Lawriter LLC, that provides online legal research
services to lawyers in the United States primarily through state bar
associations. In addition, we now offer the world’s first pre-populated
professional social network for life science researchers, www.biomedexperts.com.
Our
technology is based on the principle of fingerprinting or the semantic profiling
of a document. The Collexis software can create a fingerprint for any piece
of
text containing relevant information. This process makes use of a structure
of
professional terminology in a particular field, including thesaurus, taxonomies
or ontologies. A thesaurus contains selected words, terms and concepts and
their
semantic relationships in a hierarchical structure also reflecting synonyms
and
homonyms. The profiled fingerprint of a document is the starting point for
industry applications that we use in our primary markets. The document
fingerprint depends not only on the capabilities of the resulting application,
but also on the underlying functionality and scalability of the system
architecture to perform in industries as diverse as the legal, life sciences,
and defense/government markets.
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for financial
reporting and in accordance with Article 8 of Regulation S-X. The results of
operations of Collexis Holdings, Inc. and its wholly-owned subsidiaries Collexis
B.V. and Collexis, Inc. are included for all periods presented. The results
of
SyynX Solutions, GmbH are included from October 19, 2007 and the results of
Lawriter, LLC are included from February 1, 2008, their respective acquisition
dates.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Fiscal
Year End
The
Company’s fiscal year end for financial reporting is June 30. The Company’s
fiscal year end for income tax reporting has recently been changed to June
30 to
correspond with its financial reporting period.
Fair
Value of Financial Instruments
Statement
of Financial Accounting Standards (“SFAS”) No. 107, “Disclosure About Fair Value
of Financial Instruments,” requires the Company to disclose, when reasonably
attainable, the fair market values of its assets and liabilities that are deemed
to be financial instruments. The carrying amounts and estimated fair values
of
the Company’s financial instruments approximate their fair value due to their
short-term nature.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. Significant estimates include: the valuation of shares issued
for services or in connection with acquisitions; the valuation of fixed assets
and intangibles and their estimated useful lives; the valuation of investments;
contingencies; and litigation. The Company evaluates its estimates on an ongoing
basis. Actual results could differ from those estimates under different
assumptions or conditions.
Revenue
Recognition
The
Company recognizes revenue in accordance with Statement of Position 97-2,
“Software Revenue Recognition” (“SOP 97-2”), and Statement of Position 98-9,
“Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions.”The Company recognizes revenue from non-cancelable software
licenses when the license agreement has been signed, delivery has occurred,
the
fee is fixed or determinable and collectability is probable. The Company
recognizes license revenue from resellers when an end user has placed an order
with the reseller and the above revenue recognition criteria have been met
with
respect to the reseller. In multiple element arrangements, the Company defers
the vendor-specific objective evidence of fair value (“VSOE”) related to the
undelivered elements and recognizes revenue on the delivered elements using
the
percentage-of-completion method.
The
most
commonly deferred elements are initial maintenance and consulting services.
The
Company recognizes initial maintenance on a straight-line basis over the initial
maintenance term. The Company determines VSOE of maintenance by using a
consistent percentage of maintenance fees to license fee based on renewal rates.
The Company recognizes maintenance fees in subsequent years on a straight-line
basis over the life of the applicable agreement. Maintenance contracts entitle
the customer to hot-line support and all unspecified product upgrades released
during the term of the maintenance contract. Upgrades include any and all
unspecified patches or releases related to a licensed software product.
Maintenance does not include implementation services to install these upgrades.
The Company determines VSOE of services by using an average consulting rate
per
hour for consulting services sold separately, multiplied by the estimate of
hours required to complete the consulting engagement.
Delivery
of software generally occurs when the product (on CDs) is delivered to a common
carrier. Occasionally, delivery occurs through electronic means whereby the
Company makes the software available to the customer through the Company’s
secure FTP (File Transfer Protocol) site. The Company does not offer any
customers or resellers a right of return.
For
software license, services and maintenance revenue, the Company assesses whether
the fee is fixed and determinable, the Company has performed the services and
whether or not collection is probable. The Company assesses whether the fee
is
fixed and determinable based on the payment terms associated with the
transaction. If a significant portion of a fee is due after the Company’s normal
payment terms, which are 30 to 90 days from invoice date, the fee is not
considered fixed and determinable. In these cases, the Company recognizes
revenue as the fees become due.
The
Company assesses assuredness of collection based on a number of factors,
including past transaction history with the customer and the credit-worthiness
of the customer. The Company does not ask customers for collateral. If the
Company determines that collection of a fee is not probable, the Company defers
the fee and recognizes the revenue when collection becomes probable, which
is
generally when the Company receives payment.
The
Company’s arrangements do not generally include acceptance clauses. If an
arrangement includes an acceptance provision, however, acceptance occurs upon
the earliest of receipt of a written customer acceptance or expiration of the
acceptance period.
The
Company bills the majority of its training and consulting services based on
hourly rates. The Company generally recognizes revenue as it performs these
services. However, when an arrangement with a customer is based on a fixed
fee
or requires significant work either to alter the underlying software or to
build
additional complex interfaces to enable the software to perform as the customer
requests, the Company recognizes the related revenue using the percentage of
completion method of accounting. The percentage of completion method of
accounting applies to the Company’s custom programming services, which are
generally contracted on a fixed fee basis. The Company charges anticipated
losses, if any, to operations in the period that the Company determines such
losses are probable.
The
Company recognizes revenues from transaction fees associated with subscription
arrangements, which are billable on a per transaction basis, based on the actual
number of transactions processed during the period. The
Company’s Lawriter subsidiary, invoices its subscription customers in advance of
the month for which the subscription services are being provided. Recognition
of
revenue associated with such billing is recognized by Lawriter in the month
the
services are actually provided.
In
accordance with Emerging Issues Task Force (“EITF”) No. 01-14, “Income Statement
Characterization of Reimbursement Received for ‘Out of Pocket’ Expenses
Incurred,”the Company classifies reimbursements received for out-of-pocket
expenses as revenue.
Foreign
Currency Risk
The
Company has conducted significant sales activity through its subsidiaries in
the
Netherlands and Germany. The Company has experienced foreign exchange gains
and
losses to date without engaging in any hedging activities.
The
Company’s foreign operations’ functional currency is the applicable local
currency (primarily the Euro). Assets and liabilities for these foreign
operations are translated at the exchange rate in effect at the balance sheet
date, and income and expenses are translated at average exchange rates
prevailing during the period. Translation gains or losses are reflected in
the
statements of operations.
Cash
and Cash Equivalents, and Marketable Securities
The
Company invests its excess cash in money market funds. All highly liquid
investments with stated maturities of three months or less from date of purchase
are classified as cash equivalents; all highly liquid investments with stated
maturities of greater than three months are classified as marketable
securities.
Loss
per Common Share
Loss
per
share (“EPS”) is computed based on a weighted average number of common shares
outstanding and excludes any potential dilution. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock, which would then share in the earnings of the Company.
During the periods presented, the Company had 19,015,809 options, warrants
and
restricted stock outstanding that could potentially dilute basic earnings per
share in the future. These instruments were excluded from the computation of
diluted earnings per share, because their effect would have been
anti-dilutive.
The
Company evaluates the collectability of accounts receivable based on a
combination of factors. In cases where the Company is aware of circumstances
that may impair a specific customer’s ability to meet its financial obligations,
the Company records a specific allowance against amounts due, and thereby
reduces the net receivable to the amount management believes
is probable of collection. For all other customers, the Company recognizes
allowances for doubtful accounts based on the length of time the receivables
are
outstanding, the current business environment and historical experience. The
Company charges off receivables when the Company becomes aware of circumstances
indicating that the receivables are uncollectible. The Dutch tax authorities
reimburse any VAT tax that the Company previously paid on the uncollectible
receivables.
Equipment
and Leasehold Improvements
Equipment
and leasehold improvements are stated at cost, less accumulated depreciation
and
amortization. The Company computes depreciation expense using the straight-line
method over the estimated useful lives of the assets (five years for cars,
furniture and fittings and three years for computers, website and software).
The
Company amortizes leasehold improvements using the straight-line method over
the
lesser of the remaining term of the lease or its estimated useful
life.
The
Company’s policy is to charge the costs of software development to expense in
the year in which the Company incurs these costs. Generally, the Company does
not capitalize costs related to projects that reach technological feasibility
upon completion of a working model. Given the general nature of the Company’s
current development of software products, the Company uses the working model
method to measure technological feasibility. Because the time between
establishment of a working model and general availability is short, no costs
qualify for capitalization. Software development costs aggregated approximately
$1,446,000 for the year ended June 30, 2008 and $ 498,000 for the six months
ended June 30, 2007.
Impairment
or Disposal of Long-Lived Assets
In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,”the Company monitors events or changes in circumstances that
may indicate carrying amounts of its long-lived assets may not be recoverable.
When such events or changes in circumstances are present, the Company assesses
the recoverability of its assets by determining whether the carrying amount
of
its assets will be recovered through undiscounted, expected future cash flows.
If the Company determines that the carrying values of specific long-lived assets
are not recoverable, the Company will record a charge to operations to reduce
the carrying value of those assets to their fair values. The Company considers
various valuation factors, principally discounted cash flows, to assess the
fair
values of long-lived assets.
Goodwill
and Intangible Assets
Goodwill
represents the excess of the cost of an acquisition over the fair value of
net
assets acquired. In accordance with SFAS No. 142, “Goodwill and Other Intangible
Assets” , goodwill is reviewed for impairment utilizing a two-step process. The
first step of the impairment test requires the identification of the reporting
units, and comparison of the fair value of each of these reporting units to
the
respective carrying value. The fair value of the reporting units is determined
based on valuation techniques using the best information that is available,
such
as discounted cash flow projections. If the carrying value is less than the
fair
value, no impairment exists and the second step is not performed. If the
carrying value is higher than the fair value, there is an indication that
impairment may exist and the second step must be performed to compute the amount
of the impairment. In the second step, the impairment is computed by comparing
the implied fair value of reporting unit goodwill with the carrying amount
of
that goodwill. SFAS No. 142 requires goodwill to be tested for impairment
annually at the same time every year, and when an event occurs or circumstances
change such that it is reasonably possible that an impairment may exist. The
annual impairment tests are performed in the fourth quarter of each
year.
Because
of the proximity of the acquisition (Note 3) to year end, management does not
believe there is any impairment to its Goodwill or Intangible Assets at June30,2008.
Other
intangible assets, which include customer lists, trademarks, and other
identifiable intangible assets, are amortized on a straight-line basis over
estimated useful lives of three to 10 years.
Income
Taxes
Deferred
income taxes are provided using the liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and
tax
credit carryforwards and deferred
tax liabilities are recognized for taxable temporary differences. Temporary
differences are the
differences between the reported amounts of assets and liabilities and their
tax
bases. Deferred tax assets
are reduced by a valuation allowance when, in the opinion of management, it
is
more likely than
not that
some portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of the changes in tax
laws and rates of the date of enactment.
When
tax
returns are filed, it is highly certain that some positions taken would be
sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the
position that would be ultimately sustained. The benefit of a tax position
is
recognized in the financial statements in the period during which, based on
all
available evidence, management believes it is more likely than not that the
position will be sustained upon examination, including the resolution of appeals
or litigation processes, if any. Tax positions taken are not
offset or aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition
threshold are measured as the largest amount of tax benefit that is more than
50
percent likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions taken
that
exceeds the amount measured as described above is reflected as a liability
for
unrecognized tax benefits in the accompanying balance sheet along with any
associated interest and penalties that would be payable to the taxing
authorities upon examination.
Interest
and penalties associated with unrecognized tax benefits are classified as
additional income taxes
in the
statements of operations.
Concentration
of Credit Risk
The
Company has no off-balance sheet concentration of credit risk such as foreign
exchange contracts, option contracts or other foreign hedging arrangements.
The
Company maintains its cash balances with one financial institution that appears
to be adequately capitalized, and its accounts receivable credit risk is not
concentrated within any geographic area. The Company’s revenues are derived
primarily from large organizations involved in the life sciences, government
and
legal markets. Significant technological changes in the industry or customer
requirements, or the emergence of competitive products with new capabilities
or
technologies, could adversely affect the Company’s operating
results.
Major
Customers
For
the
year ended June 30, 2008, thirteen customers represented 67% of gross revenues.
For the six months ended June 30, 2007, three customers represented 52% of
total
gross revenues.
Stock-Based
Compensation
On
January 1, 2006, Collexis adopted SFAS No. 123R, “Share-Based Payment,” which
replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes
Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued
to Employees.” SFAS No. 123R requires the cost of employee services received in
exchange for equity instruments awarded or liabilities incurred to be recognized
in the financial statements. Under this method, compensation cost beginning
January 1, 2006 includes the portion vesting in the period for (1) all
share-based payments granted prior to, but not vested as of December 31, 2005,
based on the grant date fair value estimated in accordance with the original
provisions of SFAS No. 123, and (2) all share-based payments granted subsequent
to December 31, 2005, based on the grant date fair value estimated using the
Black-Scholes option pricing model.
The
Company began using the modified prospective transition method when it adopted
SFAS 123R as of January 1, 2006. The Company anticipates it will grant
additional employee stock options and/or non-vested stock units in the future.
The fair value of these grants is not included in the amount above, as the
impact of these grants cannot be predicted at this time because it will depend
on the number of share-based payments granted and the then current fair
values.
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, “Fair Value Measurements” (“SFAS 157”), which clarifies that fair value
is the amount that would be exchanged to sell an asset or transfer a liability
in an orderly transaction between market participants. Further, the standard
establishes a framework for measuring fair value in generally accepted
accounting principles and expands certain disclosures about fair value
investments. SFAS 157 is effective for fiscal years beginning after November15,2007. The Company does not expect the adoption of SFAS 157 to have a material
effect on its consolidated financial position, results of operations or cash
flows.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits
entities to choose to measure many financial instruments and certain other
items
at fair value. SFAS 159 is effective for fiscal years beginning after November15, 2007. The Company does not expect the adoption of SFAS 159 to have a
material effect on its consolidated financial position, results of operations
or
cash flows.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” (“SFAS
141(R)”) which replaces SFAS 141. SFAS 141(R) establishes principles and
requirements for how an acquirer in a business combination recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any controlling interest; recognizes and measures
goodwill acquired in the business combination or a gain from a bargain purchase;
and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. FAS 141(R) is effective for acquisitions by the Company taking
place on or after July 1, 2009. Early adoption is prohibited. The Company will
assess the impact of SFAS 141(R) if and when a future acquisition
occurs.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS 160”).
SFAS 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Before this statement, limited guidance existed for reporting
noncontrolling interests (minority interest). As a result, diversity in practice
exists. In some cases minority interest is reported as a liability and in others
it is reported in the mezzanine section between liabilities and equity.
Specifically, SFAS 160 requires the recognition of a noncontrolling interest
(minority interest) as equity in the consolidated financials statements and
separate from the parent’s equity. The amount of net income attributable to the
noncontrolling interest will be included in consolidated net income on the
face
of the income statement. SFAS 160 clarifies that changes in a parent’s ownership
interest in a subsidiary that do not result in deconsolidation are equity
transactions if the parent retains its controlling financial interest. In
addition, this statement requires that a parent recognize gain or loss in net
income when a subsidiary is deconsolidated. Such gain or loss will be measured
using the fair value of the noncontrolling equity investment on the
deconsolidation date. SFAS 160 also includes expanded disclosure requirements
regarding the interests of the parent and its noncontrolling interests. SFAS
160
is effective for the Company on July 1, 2009. Earlier adoption is prohibited.
The Company is currently evaluating the impact, if any, the adoption of SFAS
160
will have on its financial position, results of operations and cash flows.
In
February 2008, the FASB issued FASB Staff Position No. 140-3, “Accounting for
Transfers of Financial Assets and Repurchase Financing Transactions” (“FSP
140-3”). This FSP provides guidance on accounting for a transfer of a
financial asset and the transferor’s repurchase financing of the asset.
This FSP presumes that an initial transfer of a financial asset and a
repurchase financing are considered part of the same arrangement (linked
transaction) under SFAS No. 140. However, if certain criteria are met, the
initial transfer and repurchase financing are not evaluated as a linked
transaction and are evaluated separately under Statement 140. FSP 140-3
will be effective for financial statements issued for fiscal years beginning
after November 15, 2008, and interim periods within those fiscal years and
earlier application is not permitted. Accordingly, this FSP is effective
for the
Company on July 1, 2009. The Company is currently evaluating the impact,
if any, the adoption of FSP 140-3 will have on its financial position, results
of operations and cash flows.
In
March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“SFAS 161”). SFAS 161 requires enhanced disclosures
about an entity’s derivative and hedging activities and thereby improving the
transparency of financial reporting. It is intended to enhance the current
disclosure framework in SFAS 133 by requiring that objectives for using
derivative instruments be disclosed in terms of underlying risk and accounting
designation. This disclosure better conveys the purpose of derivative use
in
terms of the risks that the entity is intending to manage. SFAS 161 is effective
for the Company on July 1, 2009. This pronouncement does not impact accounting
measurements but will result in additional disclosures if the Company is
involved in material derivative and hedging activities at that time.
In
April
2008, the FASB issued FASB Staff Position No. 142-3, “Determination of the
Useful Life of Intangible Assets” (“FSP 142-3”). This FSP amends the factors
that should be considered in developing renewal or extension assumptions used
to
determine the useful life of a recognized intangible asset under SFAS No. 142,
“Goodwill and Other Intangible Assets”. The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under
SFAS
No. 142 and the period of expected cash flows used to measure the fair value
of
the asset under SFAS No. 141(R), “Business Combinations,”and
other
U.S. generally accepted accounting principles. This FSP is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years and early adoption is prohibited.
Accordingly, this FSP is effective for the Company on July 1, 2009. The Company
does not believe the adoption of FSP 142-3 will have a material impact on its
financial position, results of operations or cash flows.
In
May,
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standard (“SFAS”) No. 162, “The Hierarchy of Generally
Accepted Accounting Principles,” (“SFAS No. 162”). SFAS No. 162 identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of nongovernmental entities
that
are presented in conformity with generally accepted accounting principles (GAAP)
in the United States (the GAAP hierarchy). SFAS No. 162 will be effective 60
days following the SEC’s approval of the Public Company Accounting Oversight
Board’s amendments to AU Section 411, “The Meaning ofPresent
Fairly in Conformity With Generally Accepted Accounting Principles.” The FASB
has stated that it does not expect SFAS No. 162 will result in a change in
current practice. The application of SFAS No. 162 will have no effect on the
Company’s financial position, results of operations or cash flows.
In
June,
2008, the FASB issued FASB Staff Position No. EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions are Participating
Securities,” (“FSP EITF 03-6-1”). The Staff Position provides that unvested
share-based payment awards that contain non-forfeitable rights to dividends
or
dividend equivalents are participating securities and must be included in the
earnings per share computation. FSP EITF 03-6-1 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those years. All prior-period earnings per share data
presented must be adjusted retrospectively. Early application is not permitted.
The adoption of this Staff Position will have no material effect on the
Company’s financial position, results of operations or cash flows.
Advertising
Costs
The
Company expenses all advertising costs as incurred. For the year ended June30,2008the Company incurred approximately $432,000 in advertising expenses and
approximately $119,000 for the six months ended June 30, 2007.
NOTE
2. GOING CONCERN AND LIQUIDITY
As
shown
in the accompanying consolidated financial statements, we incurred a net loss
of
$11.3 million for the year ended June 30, 2008, and current liabilities
exceeded current assets by $4.2 million and we reported an accumulated
deficit of $24.8 million as of June 30, 2008. As a result, the report of
our Independent Registered Public Accounting Firm on these Consolidated
Financial Statements, includes an explanatory paragraph that expresses
substantial doubt about our ability to continue as a going concern.
In
the
year ended June 30, 2008, net cash used in operations was $7.9 million. Our
primary use of operating funds related to developing the Collexis Engine,
increasing our sales and marketing presence and the professional services costs
related to being a public company. Our working capital deficit was $4.2 million
for the fiscal year ended June 30, 2008 compared to a deficit of $544,000 for
fiscal year ended June 30, 2007.
Our
investing activities during the fiscal year ended June 30, 2008 reflected
payments made to purchase SyynX, Lawriter and the Versus Law license, as well
as
the deferred payments associated with such acquisitions. Net cash used in
investing activities was $5.6 million for the year ended June 30, 2008.
As
of
October 14, 2008, we had cash and cash equivalents of approximately $200,000.
We
believe our current cash balance together with any funds generated from our
operations will be sufficient to meet our working capital needs for two weeks.
Our
principal cash requirements are for working capital and to make deferred
payments relating to the SyynX and Lawriter acquisitions. The deferred payments
due on these acquisitions over the next twelve months are approximately $5.7
million. See discussion under Note 3 “Acquisitions.”
In
order
to alleviate our working capital deficiency, provide capital for deferred
acquisition payments and address our continued financing concerns, management
intends to take affirmative steps towards:
·
building
on the momentum established in the market with our profiling and
dashboard
products and cultivating our strategic alliances to increase our
market
presence;
·
developing
new products to address the demands in our core and legal markets;
and
·
identifying
sources of capital that will be sufficient to fund our operations
until
such time as we are cash flow positive.
To
guide
us in how to progress towards the above goals, we have retained an independent
consulting firm to objectively evaluate our markets and growth potential, assist
us with long range strategic planning, assist us in identifying capital and
other resource needs and the deployment of such resources to maximize our
product development and commercialization potential. However, there can be
no
assurance that this process will be successful.
In
order
to meet our short-term working capital needs, we are currently conducting a
private placement of our common stock for up to $4.05 million. As of the date
of
this report, we have accepted subscriptions for $1.0 million from a private
investor who has orally agreed to finance our working capital needs through
the
purchase of shares of our common stock, up to the amount of this private
placement, on an as needed basis until this offering is fully subscribed. The
investor is not contractually obligated to purchase additional shares of our
common stock, therefore, there can be no assurance that we will receive
additional funding through the private placement of our common stock and failure
to achieve such funding will result in a significant negative impact to our
business and our operating results.
The
accompanying consolidated financial statements do
not include any adjustments that might be necessary if the Company is unable
to
continue as a going concern.
NOTE
3. ACQUISITIONS
Lawriter
LLC
On
February 1, 2008, we acquired Lawriter LLC (“Lawriter”), an Ohio limited
liability company that provides online legal research services to a consortium
of bar associations under the name Casemaker®.
We
purchased all of the limited liability company interests in Lawriter from
OSBA.COM LLC, an Ohio limited liability company (“OSBA”), and the Institute of
Legal Publishing, Inc., an Ohio corporation f/k/a Lawriter Corporation
(“Lawcorp”), for an aggregate consideration of $9,000,000, or $4,500,000 to each
of the sellers, plus an Earnout (as defined below), if any.
Under
the
terms of the purchase agreement, at the closing:
·
we
made a cash payment of $1,125,000 to OSBA;
·
we
made a cash payment of $500,000 to Lawcorp; and
·
we
issued 666,666 unregistered shares of our common stock at an agreed-upon
value of $0.75 per share, or $500,000, to Lawcorp in a private offering.
We
also
agreed to pay Lawcorp $500,000 on or before February 8, 2008, which obligation
we mutually extended until, and paid on, February 27, 2008. In addition, we
agreed to pay a total of $1,255,000 to OSBA, the first installment of which
was
paid in May 2008, and $3,000,000 to Lawcorp, with the remaining balance to
each
seller to be paid in equal installments, as listed in the following
table.
With
respect to the remaining $2,120,000 consideration due to OSBA, the purchase
agreement provides that we may either:
(a)
credit
against the balance of that consideration the monthly fee that would
otherwise be payable by the Ohio State Bar Association to Lawriter
for the
60 months following the closing (which is estimated to equal a credit
of
approximately $424,000 per twelve month period or $2,120,000 in total)
or
(b)
pay
all or any portion of the balance directly to OSBA on a monthly basis
for
the 60 months following the closing, in which case the Ohio State
Bar
Association would resume making payments to Lawriter in the ordinary
course of business.
Under
the
terms of the purchase, we also agreed to pay the Earnout , if any, on a pro
rata
basis to OSBA and Lawcorp within 20 days following the end of each calendar
quarterly period within the Earnout period. The Earnout period:
·
begins
on the earlier occurrence of (a) the first day of that calendar month
on
which the aggregate Net Sales derived from the products and services
that
we acquired under the terms of the Agreement, including intellectual
property rights related to the Casemaker database and software and
Collexis-related technology and enhancements that we intend to offer
to
our customers and clients (collectively, “Legal Research Services”), have
been at least $2,750,000 for each of the previous three consecutive
calendar months following the closing or (b) the first day of the
18th
month following the closing; and
·
ends
on the last day of the 60th calendar month
thereafter.
The
term
“Net Sales” means gross revenues derived from Legal Research Services less
returns, discounts, allowances, sales taxes and bad debt reserves, as determined
in accordance with U.S. generally accepted accounting principles. The term
“Earnout” means a lump sum cash payment equal to the product of (x) the Earnout
percentage of 3.75%, or 3.9% in certain circumstances, multiplied by (y) Net
Sales derived from Legal Research Services during each calendar quarterly period
within the Earnout period, reduced by any payment we may be required to make
to
the consortium of bar associations under the terms of their respective license
agreements with Lawriter. The aggregate of any or all Earnout payments, however,
cannot exceed $15,000,000.
The
total
of remaining payments, $5,884,255, represents the actual payment amounts due
on
their respective due dates. The calculation of deferred purchase price on our
consolidated balance sheet at June 30, 2008, $5,090,407, reflects the present
value of these payments discounted at the implied interest rate of 8%. The
difference of $793,848 represents the value of imputed interest.
The
transaction is accounted for in accordance with SFAS No. 141. The purchase
price
allocation, as of the purchase date, is as follows:
Purchase
Price:
Deferred
purchase price (net of imputed interest of $947,272)
$
5,927,728
Cash
1,625,000
Common
shares issued
500,000
8,052,728
Direct
costs of acquisition
232,707
Total
purchase price
$
8,285,435
Values
assigned to assets and liabilities:
Cash
$
65,377
Accounts
receivable
247,676
Property
and equipment
104,216
Acquired
technology (estimated useful life of seven years)
1,170,000
Trade
name (estimated useful life indefinite)
1,090,000
Customer
contracts (estimated useful life of ten years)
726,000
Goodwill
5,275,330
Accounts
payable and accrued expenses
(97,005
)
Deferred
revenue
(256,084
)
Accrued
restructuring charges
(40,075
)
Total
purchase price assigned
$
8,285,435
The
Company continues to evaluate and value the identifiable intangible assets
and
acquisition costs of Lawriter. Thus, this preliminary allocation is subject
to
refinement, including an increase in purchase price for the reasonably estimable
value of the Earnout, as permitted for a period of 12 months from the date
of
acquisition.
On
August28, 2008, we paid to OSBA their $313,750 installment referenced in the table
above. This payment was within the 30 day grace period permitted under the
purchase agreement.
SyynX
Solutions GmbH
On
October 19, 2007, we entered into a Share Purchase Agreement with the
shareholders and managing directors of SyynX Solutions GmbH (“SyynX”), for an
aggregate cash consideration of €5,923,267, or approximately $8,488,343 at then
current exchange rates. The Company made the first installment payment of
€1,500,000 on December 31, 2007 ($2,208,350 as the average exchange rate on
the
payment date). This payment reflects a €500,000 reduction for an option payment
previously made by Collexis B.V. The Company is required to make the remaining
payments in installments over three years as follows (due to rounding of the
payments to be made to several sellers, the reflection of a credit as noted
below, and changes in the exchange rate as of June 30, 2008, the amounts below
do not equal the gross amounts above):
The
total
of remaining payments, $6,197,848, represents the actual payment amounts due
on
their respective due dates, calculated at June 30, 2008 exchange rates. The
calculation of deferred purchase price on our consolidated balance sheet at
June30, 2008, $5,704,796, reflects the present value of these payments discounted
at
the implied interest rate of 8%. The difference of $544,381 represents the
value
of imputed interest.
The
transaction is accounted for in accordance with SFAS No. 141, “Business
Combinations.” The purchase price allocation, as of the purchase date, is as
follows:
Purchase
Price:
Deferred
purchase price (net of imputed interest of $790,941)
$
7,029,308
Exercise
of option
712,550
7,741,858
Direct
costs of acquisition
189,878
Write
off of Synnx receivable from Collexis Holdings, Inc.
(200,587
)
Total
purchase price
$
7,731,149
Values
assigned to assets and liabilities:
Cash
$
154,036
Accounts
receivable
320,820
Deferred
tax assets
48,005
Property
and equipment
71,435
Trade
name (estimated useful life of five years)
1,090,000
Acquired
technology (estimated useful life of seven years)
4,004,733
Goodwill
3,918,673
Accounts
payable and accrued expenses
(21,183
)
Income
taxes payable
(127,876
)
Deferred
tax liability
(1,608,479
)
Other
liabilities
(119,015
)
Total
purchase price assigned
$
7,731,149
In
connection with the transactions contemplated by the SyynX share purchase
agreement, we granted to each of the three managing directors of SyynX as a
condition to their employment agreements an option to purchase 1,000,000 shares
of our common stock at an exercise price of $0.75 per share. The options have
a
term of eight years. The options vested or will vest as follows: options to
purchase 16,666 shares vested on October 19, 2007; options to purchase 16,666
shares vested or will vest each month through August 19, 2012, and options
to
purchase the final 16,706 shares will vest on September 19, 2012. Additionally,
on February 15, 2008, we granted seven former SyynX employees and one consultant
the option to purchase a total of 275,000 shares of our common stock at an
exercise price of $0.75 per share, under a proportionally identical vesting
schedule and as called for under the agreement.
Combined
consolidated pro forma financial information
The
operating results of SyynX and Lawriter are included with ours beginning
October19, 2007 and February 1, 2008 respectively. The
following pro forma information reflects the impact on our statement of
operations had these acquisitions occurred on July 1, 2007 and 2006
respectively.
Aggregate
amortization expense on existing acquired intangible assets was $ 998,584 in
2008. Estimated amortization expense in each of the next five years is as
follows: 2009 - $1.6 million; 2010 - $1.6 million; 2011 - $ 1.6 million; 2012
-
$ 1.6 million; and 2013 - $ 706,853.
On
January 18, 2008, we entered into a licensing and publishing agreement with
VersusLaw, Inc. (“VersusLaw”), under which we acquired a non-exclusive,
transferable license to use VersusLaw’s legal-related collection of judicial
opinions. In exchange for the rights granted to us under the agreement, we
paid
to VersusLaw a licensing fee of $1,164,866, which was composed of: $100,000
in
cash; a secured promissory note for $650,000; and 846,666 shares of our common
stock with an agreed value of $0.75 per share, or $635,000. The principal of
the
note was due on February 18, 2008. Under the terms of the agreement, if the
note
was not paid by that date, the outstanding principal would begin to accrue
interest at a default rate of 18% per annum. The note is secured by our accounts
receivables. On March 18, 2008, we paid $100,000 toward the outstanding
principal. We paid the principal due of $550,000 on April 14, 2008.
The
purchase accounting adjustments for the SyynX acquisition were pushed down
to
the subsidiary. As a result, the amounts for acquired technology and goodwill
differ from the amounts initially set up at the acquisition date because of
changes in the exchange rate between the Euro and the U.S. dollar.
On
October 19, 2007 we purchased 100% of the outstanding shares of SyynX Solutions
GmbH. In connection
with the acquisition we issued debt to the former shareholders of €5,422,938 or
approximately
$7,728,229 at the exchange rate at the date of the acquisition, October 19,2007. The payments are non-interest bearing and we have recorded them net of
unamortized discount of $790,941 imputed at the rate of 8%. At June 30, 2008,
the total unpaid balance of this note payable is $5,704,796. Aggregate
maturities during the next three years are 2009 $2,018,300; 2010 $1,753,785;
2011 $1,878,339.
On
February 1, 2008, we purchased 100% of the outstanding shares of Lawriter,
LLC.
In connection with
the
acquisition we issued debt to the former shareholders of $6,875,000. The
payments are non-interest bearing and we have recorded them net of unamortized
discount of $793,848 imputed at the rate of 8%. At June 30, 2008, the total
unpaid balance of this note payable is $5,090,407. Aggregate maturities during
the next five years are 2009 $1,785,207; 2010 $941,128; 2011 $1,019,242; 2012
$1,103,577; 2013 $241,253.
NOTE
7. LEASE OBLIGATIONS
The
Company leases office space, vehicles and equipment under non-cancelable
operating leases. Rent expense charged to operations in the accompanying
consolidated statements of operations for office space, vehicles and equipment
under operating leases was approximately $413,353 and $170,379 for the year
ended June 30, 2008 and six months ended June 30, 2007,
respectively.
We
lease
approximately 4,500 square feet of office space in Geldermalsen, the
Netherlands, for €4,152 (approximately US$5,970 at current exchange rates). The
lease expires on June 30, 2011. Our Dutch facility houses primarily research
and
development staff.
We
lease
approximately 3,300 square feet for our offices in Columbia, South Carolina,
for
approximately $5,500 per month. The lease expires on September 30, 2009. Our
Columbia location serves as our global headquarters and as an administrative
and
support facility for our United States activities.
We
lease
a small office facility in Cologne, Germany, less than 500 square feet, for
approximately $735 per month at current exchange rates. The core of our research
and development staff, located in Germany work in virtual offices.
We
lease
approximately 5,200 square feet of office space in two facilities in Cincinnati,
Ohio, for our Lawriter business for approximately $6,700. Both leases will
expire within the next twelve months. We are in the process of negotiating
a new
lease in one facility. We also lease an apartment for $2,200 per month; this
lease ends September 30, 2008 and will not be renewed.
Scheduled
future minimum payments required for non-cancelable operating leases are as
follows:
Office Rent
Car Lease
Equipment
Total
2008
$
211,376
$
104,705
$
13,322
$
329,403
2009
88,678
44,885
6,578
140,141
2010
71,637
3,616
-
75,253
$
371,691
$
153,206
$
19,900
$
544,797
NOTE
8. RELATED PARTY TRANSACTIONS
On
June27, 2008, Collexis Holdings, Inc. acquired the .5% interest in Collexis B.V.
it
did not previously own from a minority shareholder who is the spouse of Peter
van Praag, the former CEO of Collexis B.V. As consideration for the interest
in
Collexis B.V., Collexis Holdings, Inc. issued 183,333 shares of its common
stock, at an agreed-upon value of $0.30 per share or $55,000.
The
Company pays a consulting fee of $10,000 per month to its Chairman of the Board,
based on an oral consulting arrangement. As of June 30, 2008 and 2007, the
Company owed $100,000 and $60,000, respectively, under this agreement.
Additionally, the Company pays a Director, Dr. John Regazzi, $6,000 per month
for consulting services. These services are based on a written consulting
agreement dated April 1, 2007, the agreement has no expiration
date.
In
June
2007, the Company received a $650,000 loan from its largest shareholder for
working capital purposes. This loan did not bear interest and was repaid in
full
upon the completion of the Company’s private placement in July 2007 in which the
Company raised approximately $2,072,000.
NOTE
9. INCOME TAXES
Net
deferred tax assets and liabilities consist of the following components at
June30, 2008 and 2007:
The
provision for income taxes charged to operations for the year ended June30,2008 and the six months ended June 30, 2007 consists of the
following:
2008
2007
Current
tax (benefit)
$
(100,329
)
$
-
Deferred
tax (benefit)
(222,926
)
-
$
(323,255
)
$
-
The
income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income for the years
ended
June 30, 2008 and 2007.
Income
(loss) from continuing operations before income taxes included the
following:
2008
2007
U.S.
loss
$
(7,317,949
)
$
-
Non-U.S.
loss - Collexis B.V.
(3,256,556
)
-
Non-U.S.
loss - Syynx
(1,008,508
)
-
Total
$
(11,583,013
)
$
-
The
components of the provision for income taxes are as
follows:
2008
2007
Current
income tax expense (benefit):
U.S.
federal
$
-
$
-
Non-U.S.
(100,329
)
-
U.S.
state and local
-
-
Total
current
$
(100,329
)
$
-
Deferred
income tax expense (benefit):
U.S.
federal
$
-
$
-
Non-U.S.
(222,926
)
-
U.S.
state and local
-
-
Total
current
$
(222,926
)
$
-
Total
income tax expense (benefit)
$
(323,255
)
$
-
As
of
June 30, 2008, the Company has approximately $ 13,754,000 in non-U.S. and
$
9,745,000 in U.S. in net operating loss carryforwards. The non-U.S.
carryforwards will begin to expire in 2011 and the U.S. carryforward will
begin
to expire in 2026.
The
principal reasons for the differences between the consolidated income tax
(benefit) expense and the amount computed by applying the statutory federal
income tax rate of 34% to pre-tax income were as follows for the years ended
June 30:
2008
2007
Tax
at federal statutory rate
$
(3,938,224
)
$
(2,217,446
)
Change
in valuation allowance
3,199,546
1,370,004
Effect
of lower foreign income tax rates
305,655
689,367
Effect
of exchange rate changes on valuation allowance
109,768
158,075
Total
income tax benefit
$
(323,255
)
$
-
NOTE
10. STOCKHOLDERS’ EQUITY
Collexis
Stock Options
The
Company believes stock option awards better align the interests of its employees
with those of its shareholders. Pre-Merger
Employee Options.
Before the reverse merger on February 13, 2007, Collexis B.V. granted
nonqualified stock options to several of its officers, directors and
employees. These options were converted in the reverse merger to options
to acquire shares of our common stock, and the exercise price and amount
of
shares were adjusted accordingly. These options vest quarterly over a
three-year period and expire three to five years from the date of grant,
if not
terminated earlier under the terms of the agreement. As of October 9,2008, nonqualified options to purchase 9,463,621 share of our common stock
have
been granted under these terms with exercise prices ranging from $0.10 per
share
to $0.3875 per share.
Post-Merger
Employee Options.
We have granted certain individuals and entities, including certain of our
executive officers, nonqualified options to purchase 6,474,192 shares of
our
common stock at an exercise price of $0.75 per share. These options vest
quarterly over a three-year period and expire between three and eight years
from
the date of grant, if not terminated earlier under the terms of the nonqualified
stock option agreement. In certain of these agreements, the options vest
immediately upon a change in control or if the employee is terminated without
cause or resigns for good reason (as each term is defined in the stock option
agreement).
The
fair
value of each option award is estimated on the date of grant using the
Black-Scholes valuation model. We used no dividend yield, an expected volatility
rate of 63.64%, a risk free interest rate range of 4.5%-4.8% and an average
expected life of 2.3 years
A
summary
of our stock option activity is set forth below:
The
following table summarizes additional information about stock options
outstanding at June 30, 2008:
Options
Outstanding
Options
Exercisable
Exercise
Price
Per Share
Number of
Shares
Weighted
Average
Remaining
Life
Weighted
Average
Exercise
Price
Number
Exercisable
Weighted
Average
Exercise
Price
$ 0.10
8,897,501
1.57
$
0.10
7,272,469
$
0.10
$ 0.30
25,000
1.09
$
0.30
14,600
$
0.30
$ 0.3875
516,120
3.03
$
0.3875
516,120
$
0.3875
$ 0.75
8,579,192
4.61
$
0.75
4,576,735
$
0.75
18,017,813
3.06
$
0.42
12,379,924
$
0.353
NOTE
11. OPERATING SEGMENTS
The
Company sells to companies primarily within the European Union and the United
States. The Company’s operating activities consist of a single segment. The
following is a summary of operations within geographic areas:
Collexis
and its wholly-owned subsidiary Lawriter LLC are defendants in a case commenced
by JuriSearch Holdings LLC (“JuriSearch”), a vendor of content
to Lawriter,
in the
Superior Court for Los Angeles County, California. The case was commenced
on
April 10, 2008, and asserts claims based on breach of contract, conversion,
and
replevin (an act to recover goods by somebody who claims to own them).
JuriSearch alleges that it has been damaged in an amount exceeding $500,000
by
Lawriter’s termination of the contract and asserted failure to return property
belonging to JuriSearch.
Lawriter
believes that JuriSearch breached the contract by failing to provide accurate
and timely data, as well as by communicating directly with Lawriter’s customers
(the bar associations with whom Lawriter does business) concerning the contract
in violation of the terms of the contract.
Collexis
and Lawriter have filed papers in the United States District Court for the
Central District of California to remove the suit to that court, and have
filed
an answer and counterclaim. In addition, Lawriter filed a case against
JuriSearch on April 14, 2008 in the Court of Common Pleas of Hamilton County,
Ohio. Lawriter’s case asserts claims against JuriSearch for defamation, tortuous
interference with contracts, and breach of contract based on JuriSearch’s
communications with Lawriter’s customers. We believe that JuriSearch’s claims
are without merit and intend to defend the California lawsuit vigorously
and
prosecute the Ohio lawsuit vigorously.
NOTE
13. SUBSEQUENT EVENT
On
July15, 2008, Collexis Holdings, Inc. acquired the shares of Collexis Inc. from
its
wholly owned subsidiary Collexis B.V. for the nominal value of $1. Collexis
Inc.
is incorporated in the U.S. and is our primary operating subsidiary in the
U.S.
We determined that the transfer value of Collexis Inc. was nominal based on
the
subsidiary’s accumulated losses.
On
August18, 2008 the board approved a private offering of 9,000,000 shares of our common
stock at a price per share of $0.45 or $4,050,000 in the aggregate. No placement
fees will be paid in connection with this offering. As of October9, 2008, we have accepted subscriptions from a single investor in the amount
of
$1.0 million for 2,222,222 shares. Additionally, the investor has orally agreed
to acquire the remaining offered shares throughout October and November 2008.
The investor has agreed to hold the shares purchased in the offering for a
minimum of one year. We have used or will use the proceeds of this offering
to
make installment payments required under the terms of our recent acquisitions
and for working capital.
F-23
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
have
audited the accompanying balance sheets of Collexis
B.V. and subsidiaries ("the
Company") as of December 31, 2006 and 2005 and the related statements of
operations, shareholders' (deficiency) equity, comprehensive loss, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an
opinion on these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required
to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control
over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. An audit includes examining, on a test basis, evidence supporting
the
amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our
opinion.
In
our
opinion, the financial statements referred above present fairly, in all material
respects, the financial position of the Company as of December 31, 2006 and
2005
and the results of its operations and its cash flows for the years then ended
in
conformity with accounting principles generally accepted in the United States
of
America.
As
described in Note 10 to the financial statements included in the transition
report for the transition period from January 1, 2007 to June 30, 2007 included
in form 10-KSB/A, during July and September 2007, the Company sold approximately
3.7 million of its common stock in private offerings, for a total of
approximately $2.8 million. In addition there are approximately $2.7 million
in
escrow in connection with subscription agreements for approximately 3.6 million
shares.
/s/
Bernstein
& Pinchuk LLP
New
York,
New York
September28, 2007, except for the correction of an error concerning overstated general
and administrative expenses as disclosed in Note 1 to the financial statements
included in the transition report for the transition period from January1, 2007
to June 30, 2007 included in form 10-KSB/A, and its effect on the Consolidated
Statements of Operations and loss per share, Comprehensive loss, and Cash
Flows
for the year ended December 31, 2006, and the related cumulative effect on
the
equity section of the Balance Sheet as of December 31, 2006, as to which
the
date is October 29, 2007.
Accounts
receivable, net of allowance for doubtful accounts of $82,530 and
$51,514,
respectively
436,066
267,333
Receivables
from related parties
44,996
55,896
Deferred
tax asset
-
1,606,615
Prepaid
expenses and other current assets
385,305
66,841
Total
current assets
1,988,537
2,439,481
Property
and equipment, at cost, net of accumulated depreciation of $394,154
and
$323,081, respectively
132,713
31,209
Other
assets
Security
deposit - rent
28,455
13,093
Other
long term assets
78,653
-
Option
to purchase Syynx
658,650
-
765,758
13,093
$
2,887,008
$
2,483,783
LIABILITIES
AND STOCKHOLDERS' (DEFICIENCY) EQUITY
Current
liabilities
Accounts
payable trade
$
451,731
$
81,962
Accrued
taxes and expenses
815,542
610,576
Deferred
revenue
287,848
171,376
Total
current liabilities
1,555,121
863,914
Other
liability - common stock to be issued
3,008,430
850,442
Stockholders'
(deficiency) equity
Common
stock, par value $0.06, authorized 10,000,000 shares, 4,300,495
shares
issued and outstanding at December 31, 2006; 2,580,495 shares issued
and
outstanding at December 31, 2005
276,612
162,533
Additional
paid-in capital
7,656,631
4,696,784
Accumulated
other comprehensive income
(208,544
)
6,636
Accumulated
deficit
(9,401,242
)
(4,096,526
)
(1,676,543
)
769,427
$
2,887,008
$
2,483,783
The
accompanying notes are an integral part of these consolidated financial
statements.
Adjustments
to reconcile net loss to net cash (used in) provided by operating
activities
Depreciation
and amortization
150,974
24,856
Changes
in operating assets and liabilities
Accounts
Receivable
(263,317
)
212,743
Allowance
for bad debts
-
(759
)
Prepaid
expenses
(267,726
)
12,621
Other
receivables
(118,587
)
(24,935
)
Deferred
tax assets
1,787,193
(176,380
)
Stock
option compensation expense
395,695
-
Accounts
payable
360,559
(192,483
)
Accrued
expenses
(54,480
)
105,559
Deferred
revenue
287,848
(363,559
)
Net
cash (used in) provided by operating activities
(3,026,557
)
(1,130,287
)
Cash
flows from investing activities
Acquisition
of equipment
(256,058
)
(20,367
)
Option
to purchase Syynx
(658,650
)
-
Net
cash used in investing activities
(914,708
)
(20,367
)
Cash
flows from financing activities
Cash
received on sale of stock
1,732,202
(88,950
)
Cash
received on stock subscriptions
3,008,430
850,442
Net
cash provided by financing activities
4,740,632
761,492
Net
increase (decrease) in cash
799,367
(389,162
)
Effect
of exchange rate changes on cash
(119,993
)
(48,914
)
Cash
and cash equivalents at beginning of period
442,796
880,872
Cash
and cash equivalents at end of period
$
1,122,170
$
442,796
Supplemental
disclosures of cash flow information:
Cash
paid during the period for
Interest
$
31,092
$
535
Income
taxes
$
-
$
-
The
accompanying notes are an integral part of these consolidated financial
statements.
F-28
NOTE
1.
OPERATIONS,
BUSINESS CONDITIONS, LIQUIDITY AND SIGNIFICANT ACCOUNTING
POLICIES
Collexis
B.V. (the “Company”) was incorporated under Dutch laws in August 1998. Through
that date, the Company’s principal purpose was to develop market and implement
information technology. The Company also offers consulting, implementation,
training, technical support, subscription and maintenance services in support
of
its customers’ use of its software products.
On
June21, 2001, the capital stock of the Company was changed into 10,000,000 shares
of
€0.05 each. As at December 31, 2005, 2,580,495 shares were issued. On January
13th
2006
another 1,720,000 shares were issued in exchange for an obligation to pay
$2,500,000.
On
October 1, 2000, Collexis Healthcare B.V. and Collexis Publishing B.V. were
incorporated under Dutch law. Collexis Inc. was incorporated under the
provisions and subject to the requirements of the Delaware General Corporation
Law on September 23, 2005. The Dutch subsidiaries did not commence activities.
The Company generated net losses of $5,304,716 and $727,950 for the periods
ended December 31, 2006 and 2005, respectively.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company; its
wholly owned subsidiaries located in The Netherlands and in the United States.
All intercompany transactions and balances have been eliminated.
Revenue
Recognition
The
Company recognizes revenue in accordance with Statement of Position 97-2,
‘‘Software Revenue Recognition’’ (‘‘SOP 97-2’’), and Statement of Position 98-9,
‘‘Modification of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions.’’ Revenue from non-cancelable software licenses is
recognized when the license agreement has been signed, delivery has occurred,
the fee is fixed or determinable and collectibility is probable. The Company
recognizes license revenue from resellers when an end user has placed an order
with the reseller and the above revenue recognition criteria have been met
with
respect to the reseller. In multiple element arrangements, the Company defers
the vendor-specific objective evidence of fair value (‘‘VSOE’’) related to the
undelivered elements and recognizes revenue on the delivered elements using
the
percentage-of-completion method.
The
most
commonly deferred elements are initial maintenance and consulting services.
Initial maintenance is recognized on a straight-line basis over the initial
maintenance term. The VSOE of maintenance is determined by using a consistent
percentage of maintenance to license fee based on renewal rates. Maintenance
fees in subsequent years are recognized on a straight-line basis over the life
of the applicable agreement. Maintenance contracts entitle the customer to
hot-line support and all unspecified product upgrades released during the term
of the maintenance contract. Upgrades include any and all unspecified patches
or
releases related to a licensed software product. Maintenance does not include
implementation services to install these upgrades. The VSOE of services is
determined by using an average consulting rate per hour for consulting services
sold separately multiplied by the estimate of hours required to complete the
consulting engagement.
Delivery
of software generally occurs when the product (on CDs) is delivered to a common
carrier. Occasionally, delivery occurs through electronic means where the
software is made available through our secure FTP (File Transfer Protocol)
site.
The Company does not offer any customers or resellers a right of
return.
For
software license, services and maintenance revenue, the Company assesses whether
the fee is fixed and determinable, the services have been performed and whether
or not collection is probable. The Company assesses whether the fee is fixed
and
determinable based on the payment terms associated with the transaction. If
a
significant portion of a fee is due after our normal payment terms, which are
30
to 90 days from invoice date, the fee is not considered fixed and determinable.
In these cases, the Company recognizes revenue as the fees become
due.
F-29
COLLEXIS
B.V.
NOTES
TO FINANCIAL STATEMENTS
The
Company assesses assuredness of collection based on a number of factors,
including past transaction history with the customer and the credit-worthiness
of the customer. Collateral is not requested from customers. If it is determined
that collection of a fee is not probable, the fee is deferred and revenue is
recognized at the time collection becomes probable, which is generally upon
receipt of cash.
The
Company’s arrangements do not generally include acceptance clauses. However, if
an arrangement includes an acceptance provision, acceptance occurs upon the
earliest of receipt of a written customer acceptance or expiration of the
acceptance period.
The
majority of our training and consulting services are billed based on hourly
rates. The Company generally recognizes revenue as these services are performed.
However, when there is an arrangement that is based on a fixed fee or requires
significant work either to alter the underlying software or to build additional
complex interfaces so that the software performs as the customer requests,
the
Company recognizes the related revenue using the percentage of completion method
of accounting. This would apply to our custom programming services, which are
generally contracted on a fixed fee basis. Anticipated losses, if any, are
charged to operations in the period such losses are determined to be
probable.
Revenues
from transaction fees associated with subscription arrangements, billable on
a
per transaction basis and included in services revenue on the Consolidated
Statements of Operations, are recognized based on the actual number of
transactions processed during the period.
In
accordance with EITF Issue No. 01-14, “Income Statement Characterization of
Reimbursement Received for ‘Out of Pocket’ Expenses Incurred,” reimbursements
received for out-of-pocket expenses incurred are classified as services revenue
in the Consolidated Statements of Operations.
Use
of Management Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities and disclosure of contingent assets and liabilities
at
the date of the consolidated financial statements and the reported amounts
of
revenues and expenses during the periods presented. Actual results could differ
from those estimates. Some of the significant estimates involve allowance for
doubtful accounts, recoverability of capitalized software development costs,
accrued expenses, provision for income taxes in foreign jurisdictions,
assessment of contingencies, revenue recognition, valuation of deferred tax
assets, and pro forma compensation expense pursuant to SFAS No.
123.
Cash
and Cash Equivalents and Restricted Cash
Cash
equivalents are stated at cost, which approximates market, and consist of
short-term, highly liquid investments with original maturities of less than
three months. At December 31, 2006 and 2005, there was no restricted
cash.
Allowance
for Doubtful Accounts
The
Company evaluates the collectibility of accounts receivable based on a
combination of factors. In cases where the Company is aware of circumstances
that may impair a specific customer’s ability to meet its financial obligations,
the Company records a specific allowance against amounts due, and thereby
reduces the net receivable to the amount management believes is probable of
collection. For all other customers, the Company recognizes allowances for
doubtful accounts based on the length of time the receivables are outstanding,
the current business environment and historical experience. The Company charges
off receivables in cases where the Company is aware of circumstances that these
are uncollectible. Any VAT tax paid is then reimbursed by the Dutch tax
authorities.
F-30
COLLEXIS
B.V.
NOTES
TO FINANCIAL STATEMENTS
Equipment
and Leasehold Improvements
Equipment
and leasehold improvements are stated at cost, less accumulated depreciation
and
amortization. Depreciation expense is computed using the straight-line method
over the estimated useful lives of the assets (five years for cars, furniture
and fittings and three years for computers and software). Leasehold improvements
are amortized using the straight-line method over the lesser of the remaining
term of the lease or their estimated useful lives.
The
Company’s policy is to charge the costs of software development to expense in
the year in which these costs occurred. Generally, costs related to projects
that reach technological feasibility upon completion of a working model are
not
capitalized the time between establishment of the working model and general
availability is of short duration. The nature of the Company’s current
development for software products is generally such that it can measure
technological feasibility most effectively using the working model method where
the time between establishment of a working model and general availability
is of
short duration, which results in no costs that qualify for
capitalization.
Research
and Development
The
Company incurred research and development expenditures of approximately $740,000
in the year ended December 31, 2006 and $510,000 in the year ended December31,2005, consisting of internal research and development expenditures, as well
as
expenditures related to research and development that we outsourced to
SyynX.
Impairment
or Disposal of Long-Lived Assets
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,
‘‘Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company
monitors events or changes in circumstances that may indicate carrying amounts
of its long-lived assets may not be recoverable. When such events or changes
in
circumstances are present, the Company assesses the recoverability of its assets
by determining whether the carrying amount of its assets will be recovered
through undiscounted, expected future cash flows.
Should
the Company determine that the carrying values of specific long-lived assets
are
not recoverable, the Company would record a charge to operations to reduce
the
carrying value of such assets to their fair values. The Company considers
various valuation factors, principally discounted cash flows, to assess the
fair
values of long-lived assets.
F-31
COLLEXIS
B.V.
NOTES
TO FINANCIAL STATEMENTS
Income
Taxes
Income
taxes are accounted for under the asset and liability method. The asset and
liability method requires that deferred tax assets be reduced by a valuation
allowance if, based on the weight of available evidence, it is more likely
than
not that some portion or all of such assets will not be realized. Deferred
tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of
existing assets and liabilities, and their respective tax bases and operating
loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in operations in the period that includes the enactment
date.
Concentration
of Credit Risk
SFAS
No.
105, “Disclosure of Information about Financial Instruments with Off-Balance
Sheet Risk and Financial Instruments with Concentration of Credit Risk,”
requires disclosure of any significant off-balance sheet and credit risk
concentrations. The Company has no off-balance sheet concentration of credit
risk such as foreign exchange contracts, option contracts or other foreign
hedging arrangements. The Company maintains the cash balances with one financial
institution that appears to be adequately capitalized and its accounts
receivable credit risk is not concentrated within any geographic area. The
Company’s revenues are concentrated in large organizations related to
healthcare, science and knowledge institutes, which are not very competitive
and
not rapidly changing. Significant technological changes in the industry or
customer requirements, or the emergence of competitive products with new
capabilities or technologies, could adversely affect operating
results.
As
of
December 31, 2006, three customers represented approximately 77% of total gross
receivables. For the year ended December 31, 2006, 2 customers represented
approximately 75 % of total gross revenues and for the year ended December31,2005 one customer represents approximately 60% total revenues.
Foreign
Currency Translation
The
functional currency for the company and its subsidiaries is the local currency
(the Euro). The results of operations for these companies are translated (FAS
52) from local currencies into U.S. dollars using the average exchange rates
during each period. Assets and liabilities are translated using exchange rates
at the end of the period with translation adjustments accumulated in
stockholders’ deficit. Intercompany loans are denominated in Euros.
Stock-Based
Compensation
FASB
Statement No. 148, “Accounting for Stock Based Compensation-Transition and
Disclosure, an Amendment of FASB Statement No. 123” (“SFAS 148”) provides
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based compensation. However, it allows an entity
to continue to measure compensation cost for stock instruments granted to
employees using the intrinsic-value method of accounting prescribed by
Accounting Principles Board Opinion No. 25 (‘‘APB 25’’), “Accounting for Stock
Issued to Employees,” provided it discloses the effect of SFAS 123, as amended
by SFAS 148, in the footnotes to the financial statements. In December 2004,
the
FASB issued SFAS 123 (revised 2004), “Share-Based Payment” (SFAS 123R), which
replaces SFAS 123 and supersedes APB Opinion No. 25. SFAS 123R requires all
share-based payments to employees, including grants of employee stock options
and non-vested stock grants, to be recognized as a compensation cost based
on
their fair values. The pro forma disclosures previously permitted under SFAS
123
no longer will be an alternative to financial statement recognition. The Company
is required to adopt SFAS 123R no later than January 1, 2006. Through December31, 2005, the Company has chosen to continue to account for stock-based
compensation using the intrinsic-value method. Accordingly, no stock option
related compensation expense has been recognized in the consolidated statements
of operations as all options granted had an exercise price equal to the market
value of the underlying stock on the date of grant.
On
December 1, 2005, the Company granted 36,000 stock options shares of non-vested
stock, to a certain employee with a vesting term of one year subject to
acceleration in accordance with the grant stipulations. The fair value of the
non-vested granted stock options on the date of grant was $ 22,754. For the
twelve months ended December 31, 2005, the Company has not recognized
compensation expenses related to non-vested stock options awards.
F-32
COLLEXIS
B.V.
NOTES
TO FINANCIAL STATEMENTS
In
December 2005, the granting of 75,000 stock options to a certain third party
was
cancelled and the Company has paid off the related reimbursement of $118,420
in
2006.
The
Company is using the modified prospective transition method when it adopted
SFAS
123R beginning January 1, 2006. The company anticipates it will grant additional
employee stock options and/or non-vested stock units in the future. The fair
value of these grants is not included in the amount above, as the impact of
these grants cannot be predicted at this time because it will depend on the
number of share-based payments granted and the then current fair
values.
Had
the
Company, however, elected to recognize compensation cost based on the fair
value
of the stock options at the date of grant under SFAS 123, as amended by SFAS
148
and SFAS 123R, such costs would have been recognized ratably over the vesting
period of the underlying instruments. However, the Company’s net income (loss)
and net income (loss) per common share would have changed to the pro-forma
amounts indicated in the table below.
Deduct:
Total stock based employee compensation expense determined under
fair
value based method for all awards
(22,754
)
Pro
forma net loss
(750,704
)
Net
loss per common share
Basic
and diluted - as reported
$
(0.28
)
Basic
and diluted - pro forma
$
(0.29
)
Fair
Value of Financial Instruments
Cash
and
cash equivalents, restricted cash, accounts receivable, accounts payable,
accrued expenses, other current liabilities and debt reported in the
consolidated balance sheets equal or approximate fair values.
Deferred
Revenue
Deferred
revenues primarily relate to customer software maintenance agreements that
have
been invoiced to customers prior to the performance of those services and,
to a
lesser extent, prepaid consulting and deferred license fees.
When
we
recently restated (a) our financial statements for the three and nine months
ended March 31, 2007 and 2006 in Amendment No. 1 to our Quarterly Report on
Form
10-QSB for the quarter ended March 31, 2007, and (b) our financial statements
for the nine months ended September 30, 2006 in Amendment No. 1 to our Current
Report on Form 8-K dated February 14, 2007, we determined that the audited
financial statements for the six months ended June 30, 2007 and the year ended
December 31, 2006 included in our transition report in Form 10-KSB filed on
October 16, 2007 contained an error in the calculation of the expense related
to
the application of FASB Statement No. 123(R) that caused the expense to be
overstated. Accordingly, we have restated our audited financial statements
for
the six months ended June 30, 2007 and the year ended December 31, 2006 to
reflect the proper expense calculation. As a result of this correction, certain
financial statement line items and per share data have been adjusted as
follows:
The
cumulative effect of the above changes on Additional Paid-in Capital and
Accumulated Deficit since July 1, 2005 is a decrease of $796,795 in each amount.
There are no changes to periods prior to January 1, 2006. Total Stockholder’s
(Deficiency) Equity remains unchanged.
The
Company leases office space, vehicles and equipment under non-cancelable
operating leases. Rent expense charged to operations in the accompanying
consolidated statements of operations for office space, vehicles and equipment
under operating leases was $148,588 and $144,344 for the periods ended December31, 2006 and 2005, respectively.
The
Company is obligated under two operating leases for real property. The first
lease was for the period June 1, 2001 to May 31, 2004 and it included two
extensions, the first for two years to May 31, 2006 and the second for 5 years
to May 31, 2011, both of which were exercised. This lease contains annual
escalations based on the consumer price index of the Netherlands. The second
lease is for additional space for a period of one year from January 1 to
December 31, 2007.
Scheduled
future minimum payments required for non-cancelable operating leases are as
follows
Office rent
Car leases
Computer
Total
2007
$
56,724
$
107,153
$
1,094
$
164,971
2008
43,336
81,367
-
124,703
2009
43,336
55,091
-
98,427
2010
43,336
3,887
-
47,223
2011
18,057
-
-
18,057
$
204,789
$
247,498
$
1,094
$
453,381
F-36
COLLEXIS
B.V.
NOTES
TO FINANCIAL STATEMENTS
The
Company has entered into a lease for office space in Columbia, South Carolina
expiring September 30, 2009. Minimum future rentals under this lease as of
December 31, 2006 were as follows:
Two
stockholders of the Company have invoiced management fees for the years ended
December 31, 2006 and 2005 respectively, in the amount of $527,646 and $398,368
respectively, in accordance with executed management agreements. The amount
receivable from these stockholders was $44,819 and $16,264 as at December 31,2006 and 2005, respectively. These receivables bear an interest at 3.5% per
annum.
In
December 2005, the granting of 75,000 stock options to SyynX WebSolutions GmbH,
was cancelled, and the Company has paid off the related reimbursement for the
amount of $118,420 in 2006.
NOTE
5.
INCOME
TAXES
The
Company’s deferred tax assets consist exclusively of net operating loss carry
forwards. At December 31, 2005, the Company had Dutch net operating loss
carry-forwards of $4,483,478 which are available to offset future Dutch taxable
income, if any, and which does not expire.
As
of
December 31, 2006 and 2005, the company had deferred tax assets, principally
based on net operating loss carryforwards of $2,052,298 and $1,606,615,
respectively, which may be applied against future taxable income and which
expire beginning in 2011. At December 31, 2006 and 2005, the deferred tax assets
(representing the potential future tax savings) related to the carryforwards
were as follows:
2006
2005
Deferred
Tax Asset
$
2,052,298
$
1,606,615
Less:
Valuation Allowance
(2,052,298
)
-
Net
Deferred Tax Asset
$
-
$
1,606,615
As
a
result of the uncertainty that net operating loss carryforwards will be able
to
be utilized against taxable income in either the Netherlands or the United
States in the foreseeable future, the company has provided for a full valuation
allowance during fiscal year 2006.
NOTE
6.
STOCKHOLDERS’
EQUITY
Subscribed
Stock
On
January 30, 2006, 1,720,000 shares were issued for $2,500,000 to a new
stockholder who in 2005 already had paid $850,442. This prepayment was based
on
an investment agreement, which was agreed on August 31, 2005. Before the end
of
June 2006, the Company received the remaining payments.
During
the year ended December 31, 2006, subscriptions of $3,008,430 were received
from
new stockholders, which was classified as other liabilities in the December31,2006 financial statements.
F-37
COLLEXIS
B.V.
NOTES
TO FINANCIAL STATEMENTS
Stock
Options
Collexis
Stock Option Plan
Collexis
considers a stock option plan as a powerful and strategic instrument for
binding, stimulating, committing and awarding important key players to Collexis.
Therefore, a Stock Option Plan has been developed consisting of:
·
a
wide range of long term call option provided to key people,
summarized in a Collexis Stock Option Detail Table.
·
a
set of documents in which the legal rules, regulations and conditions
are
described, together forming the Collexis Option
Agreement.
Collexis
has developed a procedure to appoint, approve and control all stock options
and
to guarantee that the individual Call Option Agreements are always signed and
filed and that the Collexis Stock Option Detail Table will continuously be
kept
up to date.
The
Company may grant statutory and non-statutory options to purchase shares of
Common Stock. A total of 153,000 shares are reserved as Collexis Pool for
employees.
A
summary
of stock option activity under the plan is as follows:
The
following table summarize additional information about stock options outstanding
at December 31, 2006:
Options Outstanding
Options Exercisable
Exercise Price Per Share
Number Of
Shares
Weighted
Average
Remaining
Life
Weighted
Average
Exercise
Price
Number
Exercisable
Weighted
Average
Exercise
Price
$1.00
1,007,500
2.08
$
1.00
253,623
$
1.00
$3.00
17,500
2.70
$
3.00
834
$
3.00
$3.88
51,612
4.52
$
3.88
51,613
$
3.88
$7.50
241,500
3.47
$
7.50
90,331
$
7.50
1,318,112
2.44
$
2.30
396,401
$
2.90
F-38
COLLEXIS
B.V.
NOTES
TO FINANCIAL STATEMENTS
NOTE
7.
OPERATING
SEGMENTS
The
Company sells to profit and nonprofit companies within The Netherlands, European
Union and United States. The Company’s operating activities consist of a single
segment.
NOTE
8.
CONTINGENCIES
The
Company has not been involved in disputes and/or litigation encountered in
its
normal course of business. The Company does not expect proceedings that will
have a material adverse effect on the Company’s business, consolidated financial
condition, results of operations or cash flows.
NOTE
9.
OPTION
TO PURCHASE SYYNX
WEBSOLUTIONS
On
October 9, 2006, the stockholders of SyynX WebSolutions GmbH (“SyynX”), a German
corporation, granted to the Company, in exchange for 500,000 euros
(approximately $700,000 USD), the right to demand, for a two year period ending
October, 2008, that these stockholders sell their shares in SyynX to the Company
for a purchase price of 5,000,000 Euros (approximately $7.0 million USD). The
amounts paid can be used as a reduction of the purchase price if and when the
company exercises the option. Additionally, if the merger is consummated, the
Company will grant 210,000 options to purchase shares of the Company’s stock to
certain shareholders and employees of SyynX at an exercise price of $7.50 per
share.
NOTE
10.
SUBSEQUENT
EVENTS
On
February 13, 2007, the stockholders of the Company agreed to transfer their
shares in the Company in exchange for 3,000 par value $.001 for the shares
of
Collexis Holdings, Inc.
In
connection with the completion of the merger on February 14, 2007, the Company
issued 46,182,370 shares of Common Stock in exchange for the common stock of
Collexis Delaware. This includes 3,284,090 shares of Common Stock issued in
exchange for shares of our common shares that had been sold in a private
placement in October 2006 for the post-merger equivalent of $.75 per share
of
Common Stock. On the same date, the Company completed the private sale of
2,836,358 shares of its Common Stock for $.75 per share.
Form
of Nonqualified Stock Option Agreement Used by Selected European
Employees
(incorporated by reference to Exhibit 4.3 to our Registration Statement
on
Form S-8 filed on December 27, 2007).
4.2
Form
of Supplement Agreement Used by Selected European Employees (incorporated
by reference to Exhibit 4.4 to our Registration Statement on Form
S-8
filed on December 27, 2007).
4.3
Form
1 of Nonqualified Stock Option Agreement Used by Selected U.S. Employees
(incorporated by reference to Exhibit 10.6 to our Current Report
on Form
8-K filed on February 14, 2007).
4.4
Form
2 of Nonqualified Stock Option Agreement Used by Selected U.S. Employees
(incorporated by reference to Exhibit 4.6 to our Registration Statement
on
Form S-8 filed on December 27, 2007).
4.5
Form
3 of Nonqualified Stock Option Agreement Used by Selected U.S. Employees
(incorporated by reference to Exhibit 4.7 to our Registration Statement
on
Form S-8 filed on December 27, 2007).
4.6
Form
of Nonqualified Stock Option Agreement Used by Certain Consultants
and
Directors (incorporated by reference to Exhibit 4.9 to our Registration
Statement on Form S-8 filed on December 27, 2007).
4.7
Form
of Nonqualified Stock Option Agreement Used by Selected Employees
(incorporated by reference to Exhibit 4.10 to our Registration Statement
on Form S-8 filed on December 27, 2007).
4.8
Form
of Supplement Agreement Used by Selected U.S. Employees (incorporated
by
reference to Exhibit 4.11 to our Registration Statement on Form S-8
filed
on December 27, 2007).
4.9
Form
2 of Nonqualified Stock Option Agreement Used by Certain Consultants
(incorporated by reference to Exhibit 4.12 to our Registration Statement
on Form S-8 filed on December 27, 2007).
9.1
Voting
Trust Agreement by and among Margie Chassman, Collexis Holdings,
Inc. and
William D. Kirkland dated October 15, 2007 (incorporated by reference
to
Exhibit 10.1 to our Current Report on Form 8-K filed on October 16,2007).
Amended
and Restated Employment Agreement, dated April 2006, by and between
Collexis BV, Collexis, Inc., and Stephen A. Leicht (incorporated
by
reference to Exhibit 10.5 to our Current Report on Form 8-K filed
on
February 14, 2007).
Option
Agreement, dated October 9, 2006, between SyynX WebSolutions GmbH,
Collexis B.V. and certain other persons (incorporated by reference
to
Exhibit 10.6 to our Annual Report on Form 10-KSB filed on October16,2007).
10.9
Summary
of Consulting Arrangement between Collexis Holdings, Inc. and Mark
S.
Germain (incorporated by reference to Exhibit 10.7 to our Annual
Report on
Form 10-KSB filed on October 16, 2007).
Form
of Collexis Holdings, Inc. Nonqualified Stock Option Agreement, by
and
between Collexis Holding, Inc. and certain directors (incorporated
by
reference to Exhibit 10.9 to our Annual Report on Form 10-KSB filed
on
October 16, 2007).
10.12
Collexis
Holdings, Inc. Nonqualified Stock Option Agreement, dated June 25,2007,
by and between Collexis Holding, Inc. and Mark Germain (incorporated
by
reference to Exhibit 10.10 to our Annual Report on Form 10-KSB filed
on
October 16, 2007).
10.13
Collexis
Holdings, Inc. Nonqualified Stock Option Agreement, dated April 1,2007,
by and between Collexis Holdings, Inc. and Darrell Gunter (incorporated
by
reference to Exhibit 10.11 to our Annual Report on Form 10-KSB filed
on
October 16, 2007).
10.14
Collexis
Support & Maintenance Agreement, dated June 22, 2007, by and between
Collexis, Inc. and the National Institutes of Health (incorporated
by
reference to Exhibit 10.12 to our Annual Report on Form 10-KSB filed
on
October 16, 2007).
10.15
Collexis
License Agreement, dated June 22, 2007, by and between Collexis,
Inc. and
the National Institutes of Health (incorporated by reference to Exhibit
10.13 to our Annual Report on Form 10-KSB filed on October 16,2007).
10.16
Share
Purchase Agreement dated October 19, 2007 by and among Collexis Holdings,
Inc. and the shareholders and managing directors of SyynX Solutions
GmbH
(incorporated by reference to Exhibit 10.1 to our Current Report
on Form
8-K filed on October 25, 2007).
10.17
Licensing
and Publishing Agreement by and between Collexis Holdings, Inc. and
VersusLaw, Inc. (incorporated by reference to Exhibit 10.1 to our
Current
Report on Form 8-K filed on January 25, 2008).
10.18
Secured
Promissory Note by Collexis Holdings, Inc. as maker to VersusLaw,
Inc. as
payee (incorporated by reference to Exhibit 10.2 to our Current Report
on
Form 8-K filed on January 25, 2008).
10.19
LLC
Interests Purchase Agreement dated February 1, 2008 by and among
Collexis
Holdings, Inc., Lawriter, Inc., Lawriter LLC, OSBA.COM LLC, the Institute
of Legal Publishing, Inc. and other ancillary parties (incorporated
by
reference to Exhibit 10.1 to our Current Report on Form 8-K filed
on
February 4, 2008).
Three
Party Escrow Agreement dated February 1, 2008 by and among Collexis
Holdings, Inc., OSBA.COM LLC and Escrow Associates, LLC (incorporated
by
reference to Exhibit 10.3 to our Current Report on Form 8-K filed
on
February 4, 2008).
Separation
and Settlement Agreement, effective as of June 30, 2008, by and among
Collexis Holdings, Inc., Collexis B.V., Peter van Praag, van Praag
Informatisering B.V. and Anna Adriana Wilhelmina Prinse (incorporated
by
reference to Exhibit 10.1 to our Current Report on Form 8-K filed
on
August 6, 2008).
E-2
10.24
Lock-Up
Agreement, effective as of June 30, 2008, by and among Collexis Holdings,
Inc., Collexis B.V., Peter van Praag, and van Praag Informatisering
B.V.
(incorporated by reference to Exhibit 10.2 to our Current Report
on Form
8-K filed on August 6, 2008).
10.25
Separation
and Settlement Agreement, effective as of June 30, 2008, by and among
Collexis Holdings, Inc., Collexis B.V., Henk Buurman and V.D.B. Pacific
B.V. (incorporated by reference to Exhibit 10.3 to our Current Report
on
Form 8-K filed on August 6, 2008).
10.26
Lock-Up
Agreement, effective as of June 30, 2008, by and among Collexis Holdings,
Inc., Collexis B.V., Henk Buurman and V.D.B. Pacific B.V. (incorporated
by
reference to Exhibit 10.4 to our Current Report on Form 8-K filed
on
August 6, 2008).
10.27
Consulting
Agreement, dated August 14, 2008 between Booz & Co. and Collexis
Holdings, Inc.
10.28
Form
of Subscription Agreement for the purchase of shares of Collexis
Holdings,
Inc. in a private placement.
14.1
Collexis
Holdings, Inc. Code of Ethics and Business Conduct (incorporated
by
reference to Exhibit 14.1 to our Current Report on Form 8-K filed
on March30, 2007).
16.1
Letter
on Change of Accountant, dated February 20, 2006 (incorporated by
reference to Exhibit 16.1 to our Current Report on Form 8-K filed
on
February 21, 2006).
Certification
of the Chief Executive Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended.
31.2
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended.
32.1
Certification
by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002Section 1350 Certifications.
32.2
Certification
by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
E-3
Dates Referenced Herein and Documents Incorporated by Reference
