UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-32255
GURUNET CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 98-0202855
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
Jerusalem Technology Park
Building 98
Jerusalem 91481 Israel
(ADDRESS INCLUDING ZIP CODE OF PRINCIPAL EXECUTIVE OFFICES)
+972-2-649-5123
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by an (X) 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 [X] NO [ ]
Indicate by an (X) whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] NO [X]
As of November 19, 2004, the registrant had outstanding 4,920,551 shares of
Common Stock, $0.001 par value per share.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Interim Consolidated Balance Sheets as of September 30, 2004 (unaudited) and December 31, 2003 1
Interim Consolidated Statements of Operations for the three and nine months ended
September 30, 2004 (unaudited) and 2003 ................................................... 2
Interim Consolidated Statements of Cash Flows for the nine months ended
September 30, 2004 (unaudited) and 2003 ................................................... 3
Notes to Interim Consolidated Financial Statements of September 30, 2004 (unaudited) ......... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........ 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................................... 19
Item 4. Controls and Procedures ...................................................................... 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................................................ 21
Item 2. Changes in Securities and Use of Proceeds .................................................... 21
Item 3. Defaults Upon Senior Securities .............................................................. 21
Item 4. Submission of Matters to a Vote of Security Holders .......................................... 21
Item 5. Other Information ............................................................................ 21
Item 6. Exhibits and Reports on Form 8-K ............................................................. 21
SIGNATURES ............................................................................................ 22
CERTIFICATIONS ........................................................................................ 24
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form
10-QSB contains forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Exchange Act. Forward-looking
statements are those that predict or describe future events or trends and that
do not relate solely to historical matters. You can generally identify
forward-looking statements as statements containing the words "believe,"
"expect," "will," "anticipate," "intend," "estimate," "project," "assume" or
other similar expressions, although not all forward-looking statements contain
these identifying words. All statements in this report regarding our future
strategy, future operations, projected financial position, estimated future
revenues, projected costs, future prospects, and results that might be obtained
by pursuing management's current plans and objectives are forward-looking
statements. You should not place undue reliance on our forward-looking
statements because the matters they describe are subject to known and unknown
risks, uncertainties and other unpredictable factors, many of which are beyond
our control. Our forward-looking statements are based on the information
currently available to us and speak only as of the date on which this report was
filed with the SEC. We expressly disclaim any obligation to issue any updates or
revisions to our forward-looking statements, even if subsequent events cause our
expectations to change regarding the matters discussed in those statements. Over
time, our actual results, performance or achievements will likely differ from
the anticipated results, performance or achievements that are expressed or
implied by our forward-looking statements, and such difference might be
significant and materially adverse to our stockholders. Many important factors
that could cause such a difference are described in our most recent registration
statement on Form SB-2 under the captions "Competition," "Proprietary Rights"
and "Risk Factors," all of which you should review carefully. Please consider
our forward-looking statements in light of those risks as you read this report.
i
GuruNet Corporation (Formerly Atomica Corporation) and Subsidiary
(A Development Stage Enterprise)
INTERIM CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
SEPTEMBER 30, 2004 DECEMBER 31, 2003
$ $
------------------ ----------------
(UNAUDITED) (AUDITED)
------------------ ----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents 651,871 123,752
Receivables 14,502 11,934
Prepaid expenses 391,259 20,481
Deferred charges, net 1,523,626 155,116
-------------- --------------
TOTAL CURRENT ASSETS 2,581,258 311,283
-------------- --------------
LONG-TERM DEPOSITS (RESTRICTED) 157,132 165,449
-------------- --------------
DEPOSITS IN RESPECT OF EMPLOYEE SEVERANCE OBLIGATIONS 422,701 339,651
-------------- --------------
PROPERTY AND EQUIPMENT, NET 200,571 206,408
-------------- --------------
OTHER ASSETS:
Intangible asset, net 78,195 --
Capitalized software development costs, net 31,760 --
Deferred tax asset, long-term 23,816 20,501
-------------- --------------
TOTAL OTHER ASSETS 133,771 20,501
-------------- --------------
TOTAL ASSETS 3,495,433 1,043,292
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 757,311 215,684
Accrued expenses 286,482 326,186
Accrued compensation 336,275 293,113
Advances on account of shares and stock warrants -- 200,000
Convertible promissory notes, net of unamortized discount of $1,095,003 as of
September 30, 2004 3,904,997 --
Deferred revenues, short-term 133,763 29,234
-------------- --------------
TOTAL CURRENT LIABILITIES 5,418,828 1,064,217
-------------- --------------
LONG-TERM LIABILITIES:
Liability in respect of employee severance obligations 520,975 431,025
Deferred tax liability, long-term 92,430 55,092
Deferred revenues, long-term 477,721 537,404
-------------- --------------
TOTAL LONG-TERM LIABILITIES 1,091,126 1,023,521
-------------- --------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Convertible preferred stock:
Series A; $0.01 par value; 130,325 shares authorized, issued, and outstanding
as of December 31, 2003; aggregate liquidation preference of $300,000; zero
shares outstanding as of September 30, 2004 -- 1,303
Series B; $0.01 par value; 217,203 shares authorized; 181,112 shares issued and
outstanding as of December 31, 2003; aggregate liquidation preference of
$1,350,000; zero shares outstanding as of September 30, 2004 -- 1,811
Series C; $0.01 par value; 260,643 shares authorized; 238,119 shares issued and
outstanding as of December 31, 2003; aggregate liquidation preference of
$2,750,000; zero shares outstanding as of September 30, 2004 -- 2,381
Series D; $0.01 par value; 824,646 shares authorized as voting stock and 21,721
shares authorized as non-voting stock; 807,468 shares of voting stock and
15,024 shares of non-voting stock issued and outstanding as of December 31, 2003;
aggregate liquidation preference of $28,400,000; zero shares outstanding as of
September 30, 2004 -- 8,225
Common stock; $0.001 par value; 30,000,000 and 2,856,937 shares authorized as of
September 30, 2004 and December 31, 2003, respectively; 1,727,373 and 353,876
shares issued and outstanding as of September 30, 2004 and December 31, 2003,
respectively 1,727 355
Additional paid-in capital 36,801,365 33,100,368
Deferred compensation (49,209) (125,873)
Accumulated other comprehensive loss (27,418) (27,418)
Deficit accumulated during development stage (39,740,986) (34,005,598)
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (3,014,521) (1,044,446)
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 3,495,433 1,043,292
============== ==============
See accompanying notes to the interim consolidated financial statements
1
GuruNet Corporation (Formerly Atomica Corporation) and Subsidiary
(A Development Stage Enterprise)
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED CUMULATIVE FROM
SEPTEMBER 30 SEPTEMBER 30 DECEMBER 22, 1998
--------------------------- ---------------------------- (INCEPTION) THROUGH
2004 2003 2004 2003 SEPTEMBER 30, 2004
------------ ------------ ------------ ------------ ------------------
$ $ $ $ $
------------ ------------ ------------ ------------ ------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------ ------------ ------------ ------------ ------------------
REVENUE 53,163 10,604 117,038 19,080 1,345,552
Cost of revenue 157,854 149,599 433,612 538,182 3,338,325
------------ ------------ ------------ ------------ ------------------
GROSS MARGIN (104,691) (138,995) (316,574) (519,102) (1,992,773)
------------ ------------ ------------ ------------ ------------------
OPERATING EXPENSES
Research and development 271,489 233,688 789,962 736,647 18,335,551
Sales and marketing 159,564 148,168 700,049 356,435 9,348,636
General and administrative 221,805 169,589 636,335 546,442 7,026,056
Loss in connection with shut-down of operations -- -- -- -- 1,048,446
------------ ------------ ------------ ------------ ------------------
TOTAL OPERATING EXPENSES 652,858 551,445 2,126,346 1,639,524 35,758,689
------------ ------------ ------------ ------------ ------------------
OPERATING LOSS (757,549) (690,440) (2,442,920) (2,158,626) (37,751,462)
Interest income (expense), net (1,397,322) 1,128 (3,247,774) 6,105 (1,440,056)
Other income (expense), net (6,646) (23,918) (10,671) 3,498 (480,854)
------------ ------------ ------------ ------------ ------------------
LOSS BEFORE INCOME TAXES (2,161,517) (713,230) (5,701,365) (2,149,023) (39,672,372)
Income tax expenses (7,010) -- (34,023) -- (68,614)
------------ ------------ ------------ ------------ ------------------
NET LOSS (2,168,527) (713,230) (5,735,388) (2,149,023) (39,740,986)
============ ============ ============ ============ ==================
BASIC AND DILUTED NET LOSS PER COMMON SHARE (1.26) (2.02) (3.64) (6.07) (62.80)
============ ============ ============ ============ ==================
WEIGHTED AVERAGE SHARES USED IN COMPUTING
BASIC AND DILUTED NET LOSS PER COMMON SHARE 1,727,373 353,876 1,574,923 353,876 632,857
============ ============ ============ ============ ==================
See accompanying notes to the interim consolidated financial statements.
2
GuruNet Corporation (Formerly Atomica Corporation) and Subsidiary
(A Development Stage Enterprise)
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
CUMULATIVE FROM
DECEMBER 22, 1998
(INCEPTION)
THROUGH
NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30,
------------------------------- -----------------
2004 2003 2004
------------- ------------- -----------------
$ $ $
------------- ------------- -----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
------------- ------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS (5,735,388) (2,149,023) (39,740,986)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING
ACTIVITIES:
Depreciation and amortization of tangible and intangible assets 92,061 202,164 2,184,990
Deposits in respect of employee severance obligations (83,050) (94,751) (422,701)
Loss on sale and write off of property and equipment in connection
with shut-down of operations -- -- 780,475
Other loss on sale and write off of property and equipment -- -- 549,802
Settlement of obligations for other than cash -- -- 225,589
Increase in liability in respect of employee severance obligations 89,950 101,273 520,975
Deferred income taxes 34,023 -- 68,614
Stock issued for domain name -- -- 1,500
Issuance of stock options and warrants to non-employees for
services rendered 16,570 -- 222,603
Revaluation of options issued to non-employees for services rendered -- -- (42,789)
Amortization of deferred compensation 21,624 -- 111,146
Amortization of deferred charges relating to promissory notes 660,826 -- 660,826
Amortization of discounts on promissory notes 2,190,008 -- 2,190,008
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Decrease (increase) in accounts receivable and other current assets (373,346) 363,659 (404,205)
Increase (decrease) in accounts payable (54,420) 96,563 161,264
Increase (decrease) in accrued expenses and other current liabilities 3,458 (42,295) 634,441
Increase in short-term deferred revenues 61,037 9,329 90,271
Increase (decrease) in long-term deferred revenues (16,191) 460,174 521,213
------------- ------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (3,092,838) (1,052,907) (31,686,964)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (82,479) (23,183) (3,985,505)
Proceeds from sale of property and equipment -- -- 54,415
Capitalization of software development costs (33,500) -- (33,500)
Purchase of intangible asset (80,200) -- (80,200)
Decrease (increase) in long-term deposits 8,317 51,064 (150,265)
------------- ------------- -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (187,862) 27,881 (4,195,055)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of loan -- -- (20,000)
Proceeds from loan -- -- 6,500
Proceeds from issuance of convertible preferred stock, net -- 32,800,000
Proceeds from issuance of common stock -- -- 57,500
Proceeds from issuance of promissory notes 4,800,000 100,000 5,000,000
Exercise of common stock options -- -- 1,000
Deferred charges relating to promissory notes and initial public offering (991,181) -- (1,146,297)
Issuance costs -- -- (130,697)
------------- ------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,808,819 100,000 36,568,006
------------- ------------- -------------
Effect of exchange rate changes on cash and cash equivalents -- (10,876) (34,116)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 528,119 (935,902) 651,871
Cash and cash equivalents at beginning of period 123,752 1,438,180 --
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 651,871 502,278 651,871
============= ============= =============
See accompanying notes to the interim consolidated financial statements
3
GuruNet Corporation (Formerly Atomica Corporation) and Subsidiary
(A Development Stage Enterprise)
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
--------------------------------------------------------------------------------
CUMULATIVE FROM
DECEMBER 22, 1998
(INCEPTION)
THROUGH
NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30,
------------------------------- -----------------
2004 2003 2004
------------- ------------- -----------------
$ $ $
------------- ------------- -----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
------------- ------------- -----------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid 40,997 8,588 89,729
============= ============= =================
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Stock issued for domain name -- -- 1,500
Issuance of common stock in lieu of loan repayments -- -- 6,500
Common stock issued in exchange for notes receivable -- -- 1,842,900
Repurchase of stockholders' common stock and cancellation of notes
receivable -- -- (1,842,900)
Conversion of preferred stock into common stock 13,720 -- 13,720
Issuance of warrants to non-employees 589,188 -- 589,188
Amortization of deferred charges relating to warrants 147,080 -- 147,080
Deferred charges recorded to accounts payable 596,047 596,047
Forfeiture of options granted to an employee 55,040 -- 55,040
See accompanying notes to the interim consolidated financial statements
4
NOTE 1 - BUSINESS
GuruNet Corporation ("the Parent"), formerly Atomica Corporation (a
Development Stage Enterprise), was founded as a Texas corporation on
December 22, 1998, and reorganized as a Delaware corporation in April
1999. On December 27, 1998 the Parent formed a subsidiary ("the
Subsidiary") based in Israel, primarily for the purpose of providing
research and development services to the Parent. GuruNet Corporation and
the Subsidiary are collectively referred to as "the Company". The Company
develops, markets and sells technology that intelligently and
automatically integrates and retrieves information from disparate sources
and delivers the result in a single consolidated view.
The Company incurred approximately $39.7 million and $31.7 million of net
losses and negative cash flows from operations, respectively, during its
initial period of operations through September 30, 2004. The Company had
$651,871 in cash and cash equivalents at September 30, 2004. The
Company's working capital deficiency at September 30, 2004 was
$2,837,570. These factors raise substantial doubt as to the ability of
the Company to continue as a going concern as of the balance sheet date,
September 30, 2004. However, as a result of funds raised in the initial
public offering ("IPO") (see note 12) and other factors, the Company
believes that it will be able it to continue its operations for at least
the twelve month period subsequent to the balance sheet date.
The accompanying unaudited interim consolidated financial statements were
prepared in accordance with the instructions for Form 10-QSB and,
therefore, do not include all disclosures necessary for a complete
presentation of financial condition, results of operations, and cash
flows in conformity with generally accepted accounting principles. All
adjustments which are, in the opinion of management, of a normal
recurring nature and are necessary for a fair presentation of the interim
financial statements have been included. Nevertheless, these financial
statements should be read in conjunction with the Company's audited
financial statements for the year ended December 31, 2003. The results of
operations for the period ended September 30, 2004 are not necessarily
indicative of the results that may be expected for the entire fiscal year
or any other interim period.
NOTE 2 - REVENUE RECOGNITION
(a) In 2003, the Company sold lifetime subscriptions to its consumer
product and did not recognize revenue from those sales since the
obligation to continue serving such content had no defined
termination date and adequate history to estimate the life of the
customer relationship was not available. Cash received from such
lifetime licenses is reflected as long-term deferred revenues on the
accompanying balance sheets. Beginning April 2004, certain users who
purchased lifetime subscriptions in 2003, exchanged their lifetime
subscriptions for free two-year subscriptions to a newer enhanced
version of the GuruNet product. The cash previously received from
such users will be recognized over the new two-year subscription.
During the three months and nine months ended September 30, 2004,
the Company recognized approximately $10,000 and $16,000 of such
revenues, respectively.
(b) The Company generates advertising revenues through pay-per-click
keyword advertising. When a user searches sponsored keywords, an
advertiser's Website is displayed in a premium position and
identified as a sponsored result to the search. Generally, the
Company does not contract directly with advertisers, but rather,
those advertisers contract with a third party. The third party is
obligated to pay the Company a portion of the revenue it receives
from advertisers, as compensation for the Company's sale of
promotional space on its Internet properties. Amounts received from
such third parties are reflected as revenue on the accompanying
statement of operations in the period in which such advertising
services were provided.
NOTE 3 - FUNCTIONAL CURRENCY
Beginning January 2004, the financial statements of the Subsidiary were
measured using the U.S. dollar as its functional currency, due to
significant changes in economic facts and circumstances.
NOTE 4 - ACCOUNTING FOR STOCK-BASED COMPENSATION
As allowed by Statement of Financial Accounting Standards (SFAS) No. 123,
"ACCOUNTING FOR STOCK-BASED COMPENSATION", the Company utilizes the
intrinsic-value method of accounting prescribed by the Accounting
Principles Board (APB) Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES", and related interpretations, to account for stock option
plans for employees and directors. Compensation cost for stock options,
if any, would be measured as the excess of the estimated market price of
the Company's stock at the date of grant over the amount an employee must
pay to acquire the stock.
5
The Company has adopted the disclosure requirements of SFAS No. 123 and
SFAS No. 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION--TRANSITION AND
DISCLOSURE", for awards to its directors and employees. For disclosure
purposes only, the fair value of options granted to employees and
directors is estimated on the date of grant using the minimum-value
method with the following weighted average assumptions: no dividend
yield; risk-free interest rates of 2.18% to 6.68%; and an expected life
of three to five years. The fair value of options granted to employees
and directors subsequent to May 12, the date of the Company's first
filing with the U.S. Securities and Exchange Commission in connection
with its IPO, are measured, for disclosure purposes only, according to
the Black-Scholes option-pricing model with the following weighted
average assumptions: . no dividend yield; risk-free interest rates of
3.58% to 3.78%; volatility of 67.45%; and an expected life of four years.
The following illustrates the effect on net loss and net loss per share
if the Company had applied the fair value method of SFAS No. 123, for
accounting purposes:
NINE MONTHS ENDED CUMULATIVE FROM
THREE MONTHS ENDED ---------------------------- INCEPTION
SEPTEMBER 30 SEPTEMBER 30 THROUGH
------------------------------ ---------------------------- SEPTEMBER 30,
2004 2003 2004 2003 2004
------------- ------------- ------------- ------------- ---------------
$ $ $ $ $
------------- ------------- ------------- ------------- ---------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------- ------------- ------------- ------------- ---------------
Net loss, as reported (2,168,527) (713,320) (5,735,388) (2,149,023) (39,740,986)
Add:
Stock-based compensation expense to
employees included in reported net
loss, net of related tax effects 4,063 -- 21,624 -- 36,619
Deduct:
Stock-based compensation expense to
employees and directors determined
under fair value based method for all
awards, net of related tax effects (24,064) (4,507) (47,580) (14,236) (197,934)
------------- ------------- ------------- ------------- ---------------
Net loss, pro-forma (2,188,528) (717,737) (5,761,344) (2,163,259) (39,902,301)
============= ============= ============= ============= ===============
Net loss per common share, basic and diluted:
As reported (1.26) (2.02) (3.64) (6.07) (62.80)
============= ============= ============= ============= ===============
Pro-forma (1.27) (2.03) (3.66) (6.11) (63.05)
============= ============= ============= ============= ===============
NOTE 5 - NET LOSS PER SHARE DATA
Basic and diluted net loss per common share are presented in conformity
with the SFAS No. 128, "EARNINGS PER SHARE". Diluted net loss per share
is the same as basic net loss per share as the inclusion of 839,900
outstanding stock options and 1,372,048 convertible preferred stock,
until their conversion in January 2004 (see Note 10), would be
anti-dilutive. Share and per-share data presented throughout the
financial statements and notes reflect a 1-for-23 reverse stock split
that the Company declared in January 2004.
NOTE 6 - INTANGIBLE ASSETS
In March 2004, the Company purchased the domain name Answers.com for
$80,200. The domain name is being amortized over the life of the asset
which is estimated at 10 years.
NOTE 7 - CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Beginning the second quarter of 2004, the Company has capitalized certain
internal use software and Website development costs totaling $33,500, in
accordance with Statement of Position (SOP) 98-1, "ACCOUNTING FOR THE
COST OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE", and
EITF 00-2, "ACCOUNTING FOR WEB SITE DEVELOPMENT COSTS". The capitalized
costs are amortized over their estimated useful lives, which varies
between two and four years.
6
NOTE 8 - DEFERRED CHARGES, NET
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- -------------
$ $
------------- -------------
(UNAUDITED) (AUDITED)
------------- -------------
Issuance costs relating to convertible promissory notes 1,118,734 130,018
Issuance costs relating to warrants 147,080 25,098
Issuance costs relating to IPO 1,065,718 --
------------- -------------
2,331,532 155,116
Less:
Charges deducted from paid-in capital (147,080) --
Amortization to interest expense (660,826) --
------------- -------------
1,523,626 155,116
============= =============
The costs incurred in connection with obtaining the promissory notes and
warrants (see Note 9) and with the IPO, which transpired subsequent to
balance sheet date on October 13, 2004 (the "IPO Effective Date") (See
Note 12), were recorded as deferred charges on the accompanying balance
sheet. The charges relating to the promissory notes are amortized to
interest expense over one year, the life of the notes. The charges
relating to the warrants were deducted from additional paid-in capital
upon issuance of the warrants. The charges relating to the IPO will be
reflected as a reduction to equity on the IPO Effective Date. Further,
upon conversion of the notes into common shares on such date, the Company
will reduce its paid in capital by any unamortized deferred charges
relating to the notes converted. The portion of the deferred charges
relating to the notes that are repaid at the IPO Effective Date will be
charged to interest expense.
NOTE 9 - CONVERTIBLE PROMISSORY NOTES
On January 30, 2004, and February 17, 2004, the Company issued, in
aggregate, $5 million of 8% Convertible Promissory Notes (the "Notes").
The aggregate principal amount of the Notes includes $200,000 previously
advanced to the Company by investors, in 2003, that was converted into
Notes in conjunction with the $5 million funding. The Notes were due on
the earlier of one year after their issuance or the consummation of an
IPO. Upon consummation of an IPO, a minimum of 50% (and up to 100% at the
election of each note holder) of the principal amount of the Notes were
to be converted into shares of Common Stock at a conversion price equal
to 75% of the offering price of the IPO (the "Offering Price").
Notwithstanding, in October 2004, prior to the IPO Effective Date, note
holders, holding $1,350,000 of the notes, were contractually obligated to
surrender their Notes to the Company for repayment and were not able to
convert any portion into shares (See Note 12b).
On October 13, 2004, the Company completed its IPO and $1,840,000 of the
Notes converted into 490,678 shares of common stock. The remaining
$3,160,000 of the Notes was repaid subsequent to the IPO closing date.
The Notes were secured by substantially all of the assets of the Company,
other than the stock of the Subsidiary, which was to be pledged upon
receipt of all third party consents required for such pledge. In
connection with the issuance of the Notes, the Company also issued
warrants to acquire an aggregate 1,700,013 shares of Common Stock at an
exercise price per share equal to 120% multiplied by the greater of (1)
$6.00, and (2) the Offering Price (the "Warrants"). Each note holder
received one warrant for every $3 funded through the Notes, with the
exception of the note holders who advanced the Company $200,000, in 2003,
who received one warrant for every $2 funded. The warrants will become
exercisable on December 31, 2004. Notwithstanding, subsequent to the
balance sheet date the Company cancelled 450,004 of the aforesaid
1,700,013 warrants (see Note 12b).
In connection with the original issuance of the Bridge Notes and warrants
in January 2004, the Company also issued a warrant to the lead purchaser
in the financing, to purchase 265,837 shares of common stock at an
exercise price equal to 75% of the Offering Price per share.
The Notes were also subject to various restrictions, including
limitations on the Company's ability to merge with another
7
business entity, using proceeds solely for working capital purposes,
selling a substantial portion of assets not in the ordinary course of
business, incurring indebtedness greater than $100,000, paying dividends
and entering into transactions that result in a change of control.
Further, the Notes also provided that upon an event of default, including
the Company's bankruptcy, or the Company's failure to make any cash
payment required under any of the documents executed in connection with
the issuance of the Notes, termination of the Company's planned IPO or
violation of any of the restrictions noted above, the Note holders could
require the Company to repurchase the Notes at 115% of the outstanding
principal amount, plus accrued interest. In the event an IPO was not
consummated within 180 days of the Notes issue dates ("IPO Due Date"),
the Company was obligated to file with the Securities & Exchange
Commission a "shelf" registration which will cover the resale of all the
shares of common stock issuable upon conversion of the Promissory Notes,
and upon exercise of the Warrants for an offering to be made on a
continuous basis pursuant to Rule 415. In addition, the Company would be
liable to pay the note holders liquidated damages in the amount of 1% or
1.5% of the aggregate purchase price of the Notes for each month
subsequent to the uncured occurrence of certain events, as defined in the
Securities Purchase Agreement, including if the IPO had not occurred on
or prior to the IPO Due Date or a shelf registration was not filed on or
prior to the fifth day following the IPO Due Date or was not declared
effective. During the three months ended September 30, 2004, the Company
incurred approximately $161,000 of such liquidated damages, and such
amount is included in interest expense on the accompanying Statement of
Operations.
In the Company's estimation, approximately $809,000 of the aforesaid $5
million related to the value of the Warrants, resulting in a note
discount of $809,000. Additionally, the Company recorded an additional
note discount, with a corresponding increase in paid-in capital, of
approximately $2,476,000, to account for the beneficial conversion terms
that the promissory note holders received, in comparison to the expected
IPO offering price. In accordance with EITF 00-27, the aforesaid note
discount was amortized to interest expense over the life of the
promissory notes, which was one year. On the IPO Effective Date, the
unamortized discount relating to the portion of the notes that converted
into shares will be immediately recognized as interest expense. To the
extent that the notes are repaid, the portion of equity recorded in
respect of the beneficial conversion feature will be decreased, pro-rata,
and gain on extinguishment of debt will be recorded.
NOTE 10 - STOCKHOLDERS' EQUITY (DEFICIT)
(a) As of December 31, 2003, the Company's share capital was comprised
of common stock and four separate classes of convertible preferred
stock. In January 2004, in connection with and as a condition to
the issuance of the convertible promissory notes (see Note 9), the
Company declared a 1-for-23 reverse stock split. In addition, the
preferred stockholders, as a class, agreed to convert all of the
1,372,048 shares of the Company's issued and outstanding preferred
stock into common stock.
(b) In January 2004, the Company adopted the 2004 Stock Option Plan
(the 2004 Plan), authorizing 866,000 options for future grants. As
a result, no further grants can be made under the 2003 Option Plan
and the remaining shares reserved under this plan were canceled.
(c) In July 2004, the Company decided to grant the holders of the
Convertible Promissory Notes and Warrants an aggregate of 750,002
additional warrants, of which 198,530 were cancelled subsequent to
balance sheet date (see Note 12b). Each holder received
approximately 0.44 warrants for each bridge warrant previously
held. In connection therewith, the Company recorded an additional
deferred charge with a corresponding increase in paid-in capital,
of approximately $357,000, to account for the additional benefit
that the convertible promissory holders received. The aforesaid
deferred charge was amortized to interest expense over the
remaining life of the promissory notes. On the IPO Effective Date,
the unamortized balance of such deferred charges will be
immediately recognized as interest expense.
(d) During the nine months ended September 30, 2004, the Company
granted in aggregate 412,664 stock options to directors, officers,
employees and non-employees. No stock options were granted during
the third quarter of 2004.
8
NOTE 11 - COMMITMENTS AND CONTINGENCIES
(a) Future minimum lease payments under non-cancelable operating
leases as of September 30, 2004 are as follows:
YEAR ENDING DECEMBER 31 $
-----------
2004 44,934
2005 179,736
2006 47,980
2007 12,930
-----------
285,580
===========
(b) As security for future rental commitments the Subsidiary provided
a bank guarantee in the amount of approximately $112,000.
(c) All of the Subsidiary's obligations to its bank, including the
bank guarantee that such bank made to the Subsidiary's landlord,
are secured by a lien on all of the Subsidiary's deposits at such
bank. As of September 30, 2004, deposits at such bank amounted to
$274,215, including a long-term deposit of $101,359.
(d) In the ordinary course of business, the Company enters into
various arrangements with vendors and other business partners,
principally for content, web-hosting and marketing arrangements.
Effective January 1, 2004, the Company entered into a licensing
agreement with one of its content providers through December 2006
at a total cost of $50,000. On May 25, 2004, the Company entered
into an additional agreement to license content from one of its
providers, through August 2007, for an aggregate amount of
$215,000.
(e) In December 2002, the Company implemented a reorganization (the
"December 2002 Reorganization") which substantially reduced the
Company's expenditures. The December 2002 Reorganization included
staff reductions of fifteen persons, or approximately 52% of the
Company's work force, including senior management, professional
services, sales and marketing, research and development and
administrative staff. The December 2002 Reorganization also
included the shutdown of the Company's California office and
resulted in a loss on the disposal of fixed assets. In total, the
Company incurred a loss of approximately $1,048,000 in connection
with the December 2002 Reorganization, of which $780,000 related
to the disposal of fixed assets and $265,000 related to an accrual
for salaries, benefits and office and equipment lease obligations
that the Company recorded as of December 31, 2002. Of the amount
accrued, $218,000 was paid during 2003, $13,000 was paid during
the first three quarters of 2004 and $34,000 which relates to a
lease obligation for equipment no longer in use, remains
outstanding as of September 30, 2004.
NOTE 12 - SUBSEQUENT EVENTS
(a) On October 13, 2004, the Company completed its IPO of 2.35 million
shares of common stock at $5 per share pursuant to a Registration
Statement on Form SB-2 (Registration no. 333-115424).
Additionally, the underwriters exercised their over-allotment
option and purchased 352,500 additional shares of the Company's
common stock, at $5 per share, on November 18, 2004.. Total
proceeds of this offering, including the exercise of the
over-allotment option, were approximately $10,800,000 , net of
underwriting fees and estimated offering expenses of approximately
$2,700,000. In conjunction with the offering, $1,840,000 of the
promissory notes converted into 490,678 shares of common stock and
the remaining $3,160,000 was repaid.
The following table summarizes our balance sheet data as of
September 30, 2004 as adjusted for the following events:
o proceeds of the IPO, including the exercise of the
over-allotment option, of approximately $10,800,000, net of
underwriting fees and estimated offering expenses of
approximately $2,700,000;
9
o interest (cash and non-cash charges relating to the bridge
note discounts and deferred charges) through the IPO
effective date, October 13, 2004; and
o the conversion of $1,840,000 principal amount of our
outstanding bridge notes into 490,678 shares of common
stock, and the repayment of the other $3,160,000 of bridge
notes.
AS OF SEPTEMBER 30, 2004
--------------------------------
ACTUAL AS ADJUSTED
------------- -------------
(UNAUDITED) (UNAUDITED)
------------- -------------
$ $
------------- -------------
Cash and cash equivalents 651,871 8,658,646
Working capital (deficiency) (2,837,570) 8,139,791
Total assets 3,495,433 9,953,582
Long-term liabilities 1,091,126 1,091,126
Total stockholders' equity (deficit) (3,014,521) 7,962,840
In connection with the aforesaid events, the Company will record
interest of approximately $195,000 (cash and non-cash charges
relating to the bridge notes, bridge note discounts and deferred
charges) for the period October 1, 2004 through October 12, 2004.
The Company will record additional interest expense of
approximately $684,000, on October 13, 2004, the IPO effective
date, in connection with the amortizations of the bridge note
discounts and deferred charges, at such date. In the fourth
quarter of 2004, the Company will also record a gain on
extinguishment of debt of approximately $1,022,000 to reverse
amounts previously recorded as interest expense, to the extent
that the bridge notes were repaid and thus the beneficial
conversion feature was not realized. Finally, the Company will
record a gain on extinguishment of debt of approximately $195,000
to reverse amounts previously recorded as interest expense that
stemmed from warrants which were cancelled in October 2004 (see
note 12).
(b) In October 2004, prior to the IPO Effective Date, the National
Association of Securities Dealers, Inc. deemed that $1,350,000 of
the Convertible Promissory Notes and related Warrants of 648,534
received by certain Purchasers were underwriter's compensation,
because of the relationship between those note holders and one of
the Company's underwriters. As a result of this finding, such note
holders were contractually obligated to surrender such warrants to
the Company without consideration, and to surrender their Notes to
the Company for prepayment. In connection with the aforesaid
surrender, the Company will, in the fourth quarter of 2004, reduce
deferred charges by approximately $95,000, and reverse non-cash
interest expense of $40,000 that was previously recorded in the
third quarter of 2004.
(c) In November 2004, the Company's compensation committee granted
260,896 options to purchase shares of common stock, under the 2004
Plan.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition and results of operations
should be read in conjunction with the financial statements and the notes to
those statements included elsewhere in this report. This discussion includes
forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from those anticipated in these forward-looking
statements.
GENERAL
We possess technology that helps integrate and retrieve online
information from disparate sources and delivers the result in a single
consolidated browser view. Our answer engine delivers snapshot, multi-faceted
definitions and explanations from attributable reference sources about numerous
topics in our database. We seek to differentiate ourselves by providing our
users with relevant reference information that enhances results achieved through
traditional search engines. Most search engines respond to an Internet user's
query with a long list, often thousands, of links to more Websites that in some
way relate to the query term. Our answer engine automatically displays relevant,
narrative responses to a user's query without requiring the user to review a
list of hyperlinks sequentially. Our answer engine also directly displays
information in various formats such as charts, graphs and maps.
RECENT EVENTS
INITIAL PUBLIC OFFERING
On October 13, 2004, the Company completed its initial public offering of 2.35
million shares of its common stock at $5 per share pursuant to a Registration
Statement on Form SB-2 (Registration no. 333-115424). Additionally, the
underwriters exercised their over-allotment option and purchased an additional
352,500 shares of the Company's common stock, at $5 per share, on November 18,
2004. Total proceeds of this offering, including the exercise of the
over-allotment option, were approximately $10,800,000 million, net of
underwriting fees and offering expenses of approximately $2,700,000 million. In
conjunction with the offering, $1,840,000 of the $5 million of promissory notes
we owed to Bridge Note holders, converted into 490,678 shares of common stock
and the remaining $3,160,000 was repaid from the net proceeds of the offering
GURUNET.COM
We currently offer two versions of the GuruNet: a free version with basic
reference sources and a premium pay version containing more reference sources. A
user who does not want to pay for our full content offering may access those
limited content sources we make available as part of our free offering, either
through our Website or by downloading our free software or free toolbar. By
purchasing a subscription to our premium pay version the subscriber has access
our full content during the life of the subscription. The Company is currently
evaluating the efficacy of this model, and is considering distributing what is
currently the premium pay version of GuruNet, for free. If we decide to take
that route, GuruNet will be monetized on the internet solely based on
advertising revenue. When a user searches sponsored keywords, a link to an
advertiser's Website is displayed in a premium position and identified as a
sponsored result to the search. Further, if we take this route we may decide
that the Company does not wish to support two brands, GuruNet.com and
Answers.com, and we may decide to unite the product brands under the brand name
that we feel is most effective.
In September 2004, we introduced a beta version of a feature called My Computer
Search ("MCS") in the GuruNet software download. MCS added desktop search
functionality to the premium GuruNet product by allowing users to instantly
locate files or email on the user's computer hard drive. In November 2004, due
the introduction of competing technologies, we decided not to continue
developing this beta product. MCS will no longer be a feature of the GuruNet
software download.
ANSWERS.COM
In August 2004 we launched a beta version of Answers.com, an answer engine
destination site similar to the web-based version of GuruNet. Our revenue model
for this product is based solely on advertising revenue and has been since its
inception in beta. When a user searches sponsored keywords, a link to an
advertiser's Website is displayed in a premium position and identified as a
sponsored result to the search. Our beta version of Answers.com is currently
available by accessing our destination Website without the need to download any
software. Beginning January 2005, we plan to also make Answers.com available
using software downloaded, without any fee, as is the case at GuruNet.com. Once
a user agrees to the license agreement entered into coincident with the download
of the software, the user working in any application such as e-mail,
spreadsheet, word processing, database or other program or application
11
need only "alt-click" on a word or phrase within a document and our answer
engine will access our online library and display information about that word or
phrase in a pop-up window. While Web users enjoy our integrated reference
information, our Web-based product does not provide the "alt-click" command,
reference source library tree view and context analysis that we include in our
software, therefore we expect that the addition of the "alt-click" software to
our Website will impact favorably on our usage metrics.
OTHER
o In July 2004, the Company decided to grant the holders of the
Convertible Promissory Notes and warrants an aggregate of 750,002
additional warrants, of which 198,530 were cancelled in October 2004.
Each holder received approximately 0.44 additional warrants for each
bridge warrant previously held.
o In October 2004, prior to the IPO Effective Date, the National
Association of Securities Dealers, Inc deemed that $1,350,000 of the
Convertible Promissory Notes and related Warrants of 648,534 received
by certain Purchasers were underwriter's compensation, because of the
relationship between those Note Holders and one of the Company's
underwriters. As a result of this finding, such Note Holders were
contractually obligated to surrender such warrants to the Company
without consideration, and to surrender their Notes to the Company for
prepayment. In connection with the aforesaid surrender, the Company
will, in the fourth quarter of 2004, reduce deferred charges by
approximately $95,000, and reverse non-cash interest expense of
$40,000 that was previously recorded in the third quarter of 2004.
o Over the course of December 2004 and January 2005, we expect to make
changes to the user interface of Answers.com and GuruNet.com that we
believe will make the websites more attractive to potential users.
REVENUES
Revenues for the three months ended September 30, 2004 were $53,163 compared to
$10,604 for the three months ended September 30, 2003, an increase of $42,559 or
401%. Revenues for the nine months ended September 30, 2004 were $117,038
compared to $19,080 for the nine months ended September 30, 2003, an increase of
$97,958 or 513%. Revenues during the three and nine months ended September 30,
2004 resulted primarily from amortization of deferred subscriptions license
revenues, amounting to approximately $42,000 and $93,000, maintenance contracts
on our corporate enterprise software of approximately $5,000 and $15,000, and
advertising revenues of approximately $6,000 and $9,000, respectively. In
contrast, revenues during the three and nine months ended September 30, 2003
resulted almost entirely from maintenance contracts on the corporate enterprise
systems that we sold in 2002. Subscriptions sold in the three and nine months
ended September 30, 2003 had no impact on those periods' revenues because at
that time we sold lifetime subscriptions. Since the obligation to continue
serving content had no defined termination date and we could not estimate the
time period over which the service would be provided, we did not recognize
revenue from those sales. Beginning December 2003, we began offering GuruNet
subscriptions to the public on an annual subscription basis, rather than a
lifetime fee basis. Revenues from such subscriptions are amortized over the life
of the related subscription. During the second quarter of 2004, we began
offering selected users who purchased lifetime licenses the opportunity to
exchange their lifetime license for an initial free defined-term license to a
newer enhanced version of GuruNet. The cash received from previous sales of
lifetime subscriptions is being recognized over the new defined-term
subscription period for users who agree to this offer.
Cash received from subscriptions sold in the three and nine months ended
September 30, 2004 was approximately $44,000 and $125,000, respectively,
compared to approximately $183,000 and $460,000 for the same periods in 2003.
The decrease is due to a number of factors, including the decrease in our
product price from $40 to $30, our offering one-year subscriptions rather than
lifetime subscriptions, and that we are in development stage and are still
testing various marketing approaches, which tends to cause variability in
subscription volume. Further, in October 2002, we began charging a fee for our
individual reference product, now known as GuruNet. Prior to such time, our
individual reference product was available to the public for free. During the
second and third quarter of 2003 we converted a significant number of users of
our free product, which had been available to the public between 1999 and
October 2002, to a paid subscription of our upgraded GuruNet product. Finally,
during second and third quarter of 2003, we entered into a distribution
arrangement with another company that sold a co-branded version of our product
during that period. Under our arrangement with that company, we earned
approximately $55,000, representing half the revenue that they earned from their
sales of the co-branded product.
COST OF REVENUES
Cost of revenues for the three months ended September 30, 2004 was $157,854
compared to $149,599 for the three months ended September 30, 2003, an increase
of $8,255 or 5.5%. The net decrease resulted primarily from a decrease in our
content costs that resulted from the discontinuation of some of our content
providers in 2004 offset by the addition of one person to the Technical Support
Department.
12
Cost of revenues for the nine months ended September 30, 2004 was $433,612
compared to $538,182 for the nine months ended September 30, 2003, a decrease of
$104,570 or 19.4%. The decrease is primarily attributable to higher content
costs incurred in the first three months of 2003 than we typically incur each
quarter as well as discontinuation of some of our content providers in the year
2004, as mentioned above.
Cost of revenues is comprised of fees to third party providers of content, web
hosting services, technical and customer support and professional services
salaries, benefits and overhead costs.
GROSS MARGIN
Gross margin for the three months ended September 30, 2004 was ($104,691)
compared to ($138,995) for the three months ended September 30, 2003, a decrease
in the negative margin of $34,304 or 24.7%. Further, our gross margin for the
nine months ended September 30, 2004 was ($316,574) compared to ($519,102) for
the nine months ended September 30, 2003, a decrease in the negative margin of
$202,528 or 39.0%. The decrease in the loss for the three months and nine months
ended September 30, 2004 was primarily due to increased subscription revenue
recognized and reduced content costs, as discussed above.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the three months ended September 30, 2004
was $271,489 compared to $233,688 for the three months ended September 30, 2003,
an increase of $37,801 or 16.2%. The increase is primarily attributable to an
increase in compensation costs as a result of increases in research and
development personnel added after September 30, 2003.
Research and development expenses for the nine months ended September 30, 2004
was $789,962 compared to $736,647 for the nine months ended September 30, 2003,
an increase of $53,315 or 7.2%. The increase in research and development costs
was due to an increase in compensation costs as discussed above.
The salaries, benefits and overhead costs of personnel, conducting research and
development of software and Internet products comprise research and development
expenses.
SALES AND MARKETING EXPENSES
Sales and marketing expenses for the three months ended September 30, 2004 were
$159,564 compared to $148,168 for the three months ended September 30, 2003, an
increase of $11,396 or 7.7%. The net increase was due primarily to increases in
our advertising, promotion and marketing consulting costs of $48,000 that were
offset, in part, by decreases in sales and marketing compensation related
expenses and overhead.
Sales and marketing expenses for the nine months ended September 30, 2004 were
$700,049 compared to $356,435 for the nine months ended September 30, 2003, an
increase of $343,614 or 96.4%. The increase was due to an increase in
advertising, promotion and marketing consulting costs by approximately $263,000
during the first nine months in 2004 as compared to the comparable period in
2003 due to our increased focus on promoting our product, and an increase in
sales and marketing compensation related expenses during the first nine months
in 2004 of approximately $57,000 as compared to the comparable period in 2003,
due to the addition of sales and marketing personnel. Salaries, benefits and
overhead costs of personnel, and public relations services and advertising
programs, including Internet-based keyword-targeted advertising services,
comprise sales and marketing expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three months ended September 30,
2004 were $221,805 compared to $169,589 for the three months ended September 30,
2003, an increase of $52,216 or 30.8%. General and administrative expenses for
the nine months ended September 30, 2004 were $636,335 compared to $546,442 for
the nine months ended September 30, 2003, an increase of $89,893 or 16.5%. The
increases relate primarily to personnel and salary increases.
General and administrative expenses consist primarily of salaries, benefits and
overhead costs for executive and administrative personnel, e-commerce fees,
insurance, fees for professional services, including consulting, legal, and
accounting fees, travel costs, non-cash stock compensation expense for the
issuance of stock options and other general corporate expenses.
INTEREST INCOME (EXPENSE), NET
Interest income (expense), net for the three and nine months ended September 30,
2004 was ($1,397,322) and ($3,247,774), compared to $1,128 and $6,105 for the
comparable periods in 2003, representing net increases in interest expense of
$1,398,450 and
13
$3,253,879, respectively. Interest expense, net for the three and nine months
ended September 30, 2004 is comprised of approximately $1,165,000 and
$2,852,000, respectively, of amortization of note discounts and deferred charges
relating to the convertible promissory notes, which are described in the
footnotes to the accompanying financial statements. The remainder is comprised
of 8% interest on the face of the $5.0 million convertible promissory notes and
of monthly liquidated damages in the amount of 1% to 1.5% of the aggregate
purchase price of the Notes, approximating $235,000 and $403,000 for the three
and nine months ended September 30, 2004, respectively, less interest income.
Interest income, net for the first three and nine months of 2003 consisted of
interest income earned.
OTHER INCOME (EXPENSE), NET
Other income (expense), net for the three months ended September 30, 2004 was
($6,646) as compared to ($23,918) for the three months ended September 30, 2003,
representing a decrease in other expenses of $17,272 or 72.2%. Other income
(expense), net for the nine months ended September 30, 2004 was ($10,671) as
compared to $3,498 for the nine months ended September 30, 2003, representing an
increase in other expenses of $14,169. The changes in other income (expense) net
for the three and nine months ended September 30, 2004 as compared to the same
periods in 2003, resulted primarily from differences in the amount of foreign
exchange gains/(losses) in the respective periods.
INCOME TAX EXPENSE
Our effective tax rate differs from the statutory federal rate due to
differences between income and expense recognition prescribed by the United
States and Israeli tax laws and Generally Accepted Accounting Principles. We
utilize different methods and useful lives for depreciating property and
equipment. The recording of certain provisions result in expense for financial
reporting but the amount is not deductible for income tax purposes until
actually paid. Our deferred tax assets are mostly offset by a valuation
allowance because realization depends on generating future taxable income,
which, in our estimation, is not more likely to transpire, than to not
transpire.
We had net operating loss carryforwards for federal and state income tax
purposes of approximately $26 million at December 31, 2003 and $20.1 million at
December 31, 2002. The federal net operating losses will expire if not utilized
on various dates from 2019 through 2023. The state net operating losses will
expire if not utilized on various dates from 2009 through 2013. Our Israeli
subsidiary has capital loss carryforwards of approximately $604,000 that can be
applied to future capital gains for an unlimited period of time under current
tax rules.
The Tax Reform Act of 1986 imposed substantial restrictions on the utilization
of net operating losses and tax credits in the event of an ownership change of a
corporation. The bridge financing and the offering are likely to result in a
change of control in ownership, as defined in Section 382 of the Internal
Revenue Code.
Accordingly, our ability to utilize net operating losses and credit
carryforwards may be limited as the result of such an ownership change.
Our subsidiary had income in 2003 and 2002, resulting from its cost plus
agreement with the parent company, whereby it charges us for research and
development services it provides to us, plus 12.5%. However, the subsidiary is
an "approved enterprise" under Israeli law, which means that income arising from
the subsidiary's approved activities is subject to zero tax under the
"alternative benefit" path for a period of ten years. In the event of
distribution by the subsidiary of a cash dividend out of retained earnings which
were tax exempt due to the "approved enterprise" status, the subsidiary would
have to pay a 10% corporate tax on the amount distributed, and the recipient
would have to pay a 15% tax (to be withheld at source) on the amounts of such
distribution received.
As of September 30, 2004, we accrued approximately $66,000, net, to reflect the
estimated taxes that our subsidiary would have to pay if it distributed its
accumulated earnings to us. Should the subsidiary derive income from sources
other than the approved enterprise during the relevant period of benefits, this
income will be taxable at the tax rate in effect at that time (currently 35%,
gradually being reduced to 30% in 2005-2008). Through September 30, 2004, our
Israeli subsidiary received tax benefits of approximately $660,000.
NET LOSS
Our net loss increased to $2,168,527 and $5,735,388 in the three and nine months
ended September 30, 2004, respectively, from $713,230 and $2,149,023 for the
comparable periods in 2003, as a result of the changes in our revenues, cost of
sales and expenses as described above. As of September 30, 2004, our accumulated
deficit was $39,740,986.
14
CRITICAL ACCOUNTING POLICIES
While our significant accounting policies are more fully described in the notes
to the Company's audited consolidated financial statements for the year ended
December 31, 2003 and updated in the consolidated financial statements included
in this Form 10-QSB, we believe the following accounting policies to be the most
critical in understanding the judgments and estimates we use in preparing our
consolidated financial statements.
USE OF ESTIMATES
Our discussion and analysis of our financial condition and results of operations
is based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of our consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses. On an ongoing basis, we evaluate our estimates and
judgments, including those related to revenue recognition, accrued expenses and
the fair value of our common and preferred stock particularly as it relates to
stock-based compensation. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions and could have a material impact on our reported
results.
REVENUE RECOGNITION
In 2003, the Company sold lifetime subscriptions to its consumer product and did
not recognize revenue from those sales since the obligation to continue serving
such content had no defined termination date and adequate history to estimate
the life of the customer relationship was not available. Cash received from such
lifetime licenses is reflected as long-term deferred revenues on the
accompanying balance sheets. Beginning April 2004, certain users who purchased
lifetime subscriptions in 2003 exchanged their lifetime subscriptions for free
two-year subscriptions to a newer enhanced version of the GuruNet product. The
cash previously received from such users is being recognized over the new
two-year subscription.
We currently, generally, offer consumers one-year subscriptions. We recognize
the amounts we receive from subscriptions over the life of the related
subscription.
As noted in the Recent Events section above, we are considering changing our
consumer business model to an advertising-only model rather than our current
model, which is based on both subscription revenue and advertising. Should the
Company make such a change, we may decide to exercise our legal prerogative to
terminate fixed-term and lifetime subscriptions and ask those users to avail
themselves to our free website and software tools, just as any other user may
do. However, we may decide not to terminate subscriptions outstanding at the
time we make such a change. This means that those users will receive our full
content and will not have to upgrade their software. The software they
downloaded in conjunction with their subscription will be supported. The Company
is currently analyzing the accounting impact of the aforesaid two scenarios.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In January 2003, FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure, an amendment of FASB Statement No.
123" ("SFAS 148"), which provides alternative methods of transition for a
voluntary change to a fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosures in annual financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. We have determined that until
required otherwise, we will continue to account for stock-based compensation for
employees under APB 25, and elect the disclosure-only alternative under SFAS 123
and provide the enhanced disclosures as required by SFAS 148.
We record deferred stock-based compensation expense for stock options granted to
employees and directors if the fair value of the stock at the date of grant
exceeds the exercise price of the option. We recognize expenses as we amortize
the deferred stock-based compensation amounts over the related vesting periods.
The fair value of our stock, so long as we were a private company, was
determined by us based on a number of factors including input from our advisors,
and comparisons to private equity investments in us. These valuations are
inherently highly uncertain and subjective. If we had made different
assumptions, our deferred stock-based compensation amount, our stock-based
compensation expense, our net loss and our net loss per share could have been
significantly different.
The fair value of stock options granted to non-employees is measured throughout
the vesting period as they are earned, at which time we recognize a charge to
stock-based compensation. The fair value is determined using the Black-Scholes
option-pricing model,
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which considers the exercise price relative to the fair value of the underlying
stock, the expected stock price volatility, the risk-free interest rate and the
dividend yield. As discussed above, the fair value of the underlying stock was
based on assumptions of matters that are inherently highly uncertain and
subjective. As there has been no public market for our stock, our assumptions
about stock price volatility are based on the volatility rates of comparable
publicly held companies. These rates may or may not reflect our stock price
volatility following the offering. If we had made different assumptions about
the fair value of our stock or stock price volatility, the related stock based
compensation expense and our net loss and net loss per share amounts could have
been significantly different. We are required in the preparation of the
disclosures required under SFAS 148 to make certain estimates when ascribing a
value to stock options granted during the year. These estimates include, but are
not limited to, an estimate of the average time option grants will be
outstanding before they are ultimately exercised and converted into common
stock. These estimates are integral to the valuing of these option grants. Any
changes in these estimates may have a material effect on the value ascribed to
these option grants. This would in turn affect the amortization used in the
disclosures we make under SFAS 148, which could be material. For disclosure
purposes only, the fair value of options granted to employees was estimated on
the date of grant using the minimum-value method with the following weighted
average assumptions: no dividend yield; risk-free interest rates of 2.18% to
6.68%; and an expected life of three to five years. The fair value of options
granted to employees subsequent to May 12, the date of the Company's first
filing with the U.S. Securities and Exchange Commission in connection with its
initial public offering will be measured, for disclosure purposes only,
according to the Black-Scholes option-pricing model.
Finally, the rules governing accounting for option grants continue to evolve.
Should we be required in future periods to adopt grant-date fair value
accounting for employee awards and to recognize the cost over the service period
our results of operations would be adversely effected.
ACCOUNTING FOR INCOME TAXES
As part of the process of preparing our consolidated financial statements, we
are required to estimate our income taxes in each of the jurisdictions in which
we operate. This process involves management estimating our actual current tax
exposure together with assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included within our consolidated
balance sheet. We must then assess the likelihood that our deferred tax assets
will be recovered from future taxable income and, to the extent we believe that
recovery is not likely, we must establish a valuation allowance. To the extent
we establish a valuation allowance or increase this allowance in a period, we
must include an expense within the tax item in the statement of operations.
Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. We have fully offset our
US deferred tax asset with a valuation allowance. Our lack of earnings history
and the uncertainty surrounding our ability to generate taxable income prior to
the expiration of such deferred tax assets were the primary factors considered
by management in establishing the valuation allowance. Deferred tax assets and
liabilities in the financial statements result from the tax amounts that would
result if our Israeli subsidiary distributed its retained earnings to us. This
subsidiary continues to generate taxable income in respect of services provided
to us, and therefore we believe that the deferred tax asset relating to the
Israeli subsidiary will be realized. In the event that our subsidiary's products
would not generate such taxable income, we would need to write off the deferred
tax asset as an expense in the statement of operations. It should be noted that
as the income is derived from us, it is eliminated upon consolidation.
FOREIGN CURRENCY TRANSLATION
Beginning February 2004, our Israeli subsidiary began paying substantially all
of its salaries linked to the dollar, rather than the New Israeli Shekel
("NIS"). Based on this change, and in conjunction with all other relevant
factors our management has determined that the subsidiary's functional currency,
beginning the first quarter of 2004, is the U.S. dollar ("USD").
FAS 52, Appendix A, paragraph 42 cites economic factors that, among others,
should be considered when determining functional currency. We determined that
the cash flow, sales price and expense factors for our subsidiary, which prior
to 2004 all indicated functional currency in foreign currency, have changed in
2004 to indicate functional currency in our currency.
Our subsidiary's revenue is derived based on a cost plus methodology. Prior to
2004, salary expense, its primary expense, was determined in the foreign
currency resulting in income and expenses being based on foreign currency.
However, in 2004, a triggering event occurred that, in our opinion, warranted a
change of the functional currency of our subsidiary to that of our currency,
USD. Salary expense, the primary expense of our subsidiary, began to be
denominated in USD. This led to a change with respect to the currency of the
cash flow, sales price and expense economic factors and resulted in a
determination that our subsidiary's functional currency had changed to that of
our functional currency.
Had we determined that our subsidiary's functional currency was different than
what was actually used, whether in the three and
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nine months ended September 30, 2004 or prior periods, we believe that the
effect of such determination would not have had a material impact on our
financial statements.
NOTE DISCOUNT ON CONVERTIBLE PROMISSORY NOTES
In January and February 2004, we issued an aggregate of $5.0 million principal
amount of 8% convertible promissory notes. We estimate that approximately
$809,000 of the $5.0 million relates to the value of the warrants, resulting in
a note discount of $809,000. In accordance with EITF 00-27, such note discount
was being amortized over the life of the bridge notes. In October 2004, in
conjunction with our IPO, $1,840,000 of the $5 million of promissory notes we
owed to Bridge Note holders, converted into 490,678 shares of common stock and
the remaining $3,160,000 was repaid. On the IPO Effective Date, the unamortized
discount relating to the portion of the notes that converted into shares will be
immediately recognized as interest expense. To the extent that the notes are
repaid, the portion of equity recorded in respect of the beneficial conversion
feature will be decreased, pro-rata, and gain on extinguishment of debt will be
recorded.
Further, in July 2004, the Company decided to grant the holders of the
Convertible Promissory Notes and Warrants an aggregate of 750,002 additional
warrants, of which 198,530 were cancelled subsequent to balance sheet date (see
Note 12b). Each holder received approximately 0.44 warrants for each bridge
warrant previously held. In connection therewith, the Company recorded an
additional deferred charge with a corresponding increase in paid-in capital, of
approximately $357,000, to account for the additional benefit that the
convertible promissory holders received. The aforesaid deferred charge was
amortized to interest expense over the remaining life of the promissory notes.
On the IPO Effective Date, the unamortized balance of such deferred charges will
be immediately recognized as interest expense.
The fair value of the warrants was determined by us based on a number of factors
including the exercise price, the expected volatility in the share price and
input from our advisors. Such valuation is inherently highly uncertain and
subjective. Furthermore, the discount on the beneficial conversion feature of
the convertible promissory notes was calculated taking into consideration our
estimate of the fair value of these warrants. If we had made different
assumptions, our note discounts, additional paid in capital, interest expense in
respect of the amortization, our net loss and our net loss per share could have
been significantly different.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2003
From our inception through September 30, 2004, our operations have been funded
almost entirely through the proceeds we received from issuance of four series of
convertible preferred stock and convertible promissory notes between December
1998 and February 2004. The amounts raised were used primarily to fund research
and development, sales and marketing, business development and general and
administrative costs.
As of September 30, 2004, we had $3,495,433 of assets consisting of $651,871 in
cash and cash equivalents, $1,929,387 in other current assets and the remaining
balance in property and equipment, long-term deposits, domain name, capitalized
software development costs and deferred tax asset. Total liabilities as of
September 30, 2004 reflect current liabilities of $5,418,828, consisting of
convertible promissory notes, net of discounts, of $3,904,997, accounts payable
of $757,311, accrued expenses of $286,482, short-term deferred revenue of
$133,763 and accrued compensation of $336,275. Long-term liabilities in respect
of employee severance obligations, deferred tax liability and deferred revenue
were $1,091,126 at September 30, 2004.
Cash flows for the nine months ended September 30, 2004 and 2003 were as
follows:
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
------------------ ------------------
Net cash used in operating activities $ (3,092,838) $ (1,052,907)
Net cash (used in) provided by investing activities $ (187,862) $ 27,881
Net cash provided by financing activities $ 3, 808,819 $ 100,000
17
The increase in net cash used in operating activities during the first nine
months of 2004 compared to 2003 was primarily related to the overall increase in
operating expenses. Cash used in operating activities of $3,092,838 in 2004
consisted of net loss of $5,735,388 adjusted for certain non-cash items of
$3,022,012, and ($379,462) of changes to operating assets and liabilities. The
$3,022,012 of adjustments for certain non-cash items was comprised primarily by
the amortization of deferred charges and discounts relating to the Bridge Notes.
Cash used in operating activities in the first nine months of 2003 of $1,052,907
consisted of a net loss of $2,149,023 adjusted for non-cash items of $208,686
and changes to operating assets and liabilities of $887,430. The changes to
operating assets and liabilities in the first nine months of 2003 is what caused
net cash used in operating activities to be significantly less than the net
loss, and it was driven primarily by increases in long-term deferred revenue due
to the sale of lifetime subscriptions and decreases to accounts receivable that
resulted from the collection of accounts relating to 2002 enterprise sales, in
early 2003.
Cash used in investing activities of $187,862 in the first nine months of 2004
is attributable to the purchase of a domain name for $80,200, capitalization of
software development costs of $33,500, and capital expenditures of $82,479,
partially offset by a decrease in long-term deposits of $8,317. Cash provided by
investing activities during the first nine months of 2003 of $27,881 is
attributable to a net decrease in long-term deposits of $51,064 offset by net
capital expenditures of $23,183.
Cash and cash equivalents at December 31, 2003 were insufficient to provide the
capital we needed to operate. In January and February 2004, we issued $5.0
million aggregate principal amount of bridge notes. The bridge notes were due on
the earlier of the first anniversary of their issuance or the consummation of
our IPO. After deducting transaction fees, including finders fees and legal
fees, we received approximately $4,325,000 from the issuance of the convertible
promissory notes, including the $200,000 received from the sale of promissory
notes to four investors in 2003. The proceeds of the convertible promissory
notes enabled us to continue operating during the first nine months of 2004. Net
cash provided by financing activities during the first nine months of 2004 of
$3,808,819 resulted primarily from our receipt of $4,800,000 from the issuance
of convertible promissory notes in January and February 2004, offset by $991,181
of deferred charges representing costs associated with the convertible
promissory notes and the IPO. The sole cash flow from financing activities
during the first nine months of 2003 was the $100,000 we received from the sale
of a promissory note to one of the four investors noted above.
CURRENT AND FUTURE FINANCING NEEDS
We incurred net losses and negative cash flows from operations of approximately
$39.8 million and $31.7 million, respectively, during our initial period of
operation through September 30, 2004. We had $651,871 of cash and cash
equivalents at September 30, 2004. Our working capital deficiency at September
30, 2004 was $2,837,570.
On October 13, 2004, the Company completed its initial public offering of 2.35
million shares of its common stock at $5 per share pursuant to a Registration
Statement on Form SB-2 (Registration no. 333-115424). Additionally, the
underwriters exercised their over-allotment option and purchased an additional
352,500 shares of the Company's common stock, at $5 per share, on November 18,
2004. Total proceeds of this offering, including the exercise of the
over-allotment option, were approximately $10,800,000, net of underwriting fees
and offering expenses of approximately $2,700,000 million. In conjunction with
the offering, $1,840,000 of the $5 million of promissory notes we owed to Bridge
Note holders, converted into 490,678 shares of common stock and the remaining
$3,160,000 was repaid from the net proceeds of the offering.
We have spent, and expect to continue to spend, substantial amounts in
connection with implementing our business strategy. Based on our current plans,
we believe that after consideration of the net proceeds of the offering, we have
sufficient funds to enable us to meet our planned operating needs for at least
the twelve month period subsequent to the balance sheet date, September 30,
2004. We may decide to raise funds in the future, via public or private sales of
our shares or debt and other sources to finance acquisitions and growth.
OFF-BALANCE SHEET ARRANGEMENTS
We have not entered into any transactions with unconsolidated entities in which
we have financial guarantees, subordinated retained interests, derivative
instruments or other contingent arrangements that expose us to material
continuing risks, contingent liabilities or any other obligations under a
variable interest in an unconsolidated entity that provides us with financing,
liquidity, market risk or credit risk support.
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OBLIGATIONS AND COMMITMENTS
As of September 30, 2004, we had the following known contractual obligations,
commitments and contingencies:
=================================================================================================
Year Ending December 31 Purchasing Operating Short-term Total
Contracts (1) Leases Note Payable
-------------------------------------------------------------------------------------------------
October 1 - December 31,
2004 $57,725 $44,934 $5,000,000 $5,102,659
2005 39,225 179,736 -- 218,961
2006 -- 47,980 -- 47,980
2007 -- 12,930 -- 12,930
-------------------------------------------------------------------------------------------------
Total $96,950 $285,580 $5,000,000 $5,382,530
=================================================================================================
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
You should carefully consider the risks described below and elsewhere in this
report, which could materially and adversely affect our business, results of
operations or financial condition. In those cases, the trading price of our
common stock could decline and you may lose all or part of your investment.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. The primary objective of our investment activities is to
preserve principal while at the same time maximizing the income we receive from
our investments without significantly increasing risk. Some of the securities in
which we invest may have market risk. This means that a change in prevailing
interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with a fixed interest rate at
the then-prevailing rate and the prevailing interest rate later rises, the
principal amount of our investment will probably decline. Our portfolio includes
or may include in the future, cash equivalents and short-term interest bearing
securities, including corporate debt, money market funds and government debt
securities. Due to the short-term nature of these investments, we believe we
have no material exposure to interest rate risk arising from our investments.
FOREIGN CURRENCY RATE FLUCTUATIONS. While our Israeli subsidiary transacts
business in New Israel Shekels or NIS, most operating expenses and commitments
are linked to the US dollar. As a result, there is currently minimal exposure to
foreign currency rate fluctuations.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Based on their evaluations as
of the end of the period covered in this report, our principal executive officer
and principal financial officer have concluded that our disclosure controls and
procedures (as defined in Exchange Act Rules 13a, 14(c) and 15(d)) are effective
to ensure that information required to be disclosed by us in reports that we
file or submit under the Securities Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the SEC.
We believe that a controls system, no matter how well designed and operated, is
based in part upon certain assumptions about the
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likelihood of future events, and therefore can only provide, reasonable, not
absolute, assurance that the objectives of the controls system are met, and no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a company have been detected.
In addition, we have reviewed our internal controls over financial reporting and
have made no changes during the quarter ended September 30, 2004, that our
certifying officers concluded materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently involved in any legal proceedings. However, from time to
time we may be subject to legal proceedings and claims in the ordinary course of
business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On October 13, 2004, our registration statement on Form SB-2 (Registration No.
333-115424) was declared effective for our initial public offering, pursuant to
which we registered 2,702,500 shares of common stock to be sold by us, including
352,500 shares subject to the underwriters' over-allotment option. The stock was
offered at a price of $5.00 per share. The offering closed on October 18, 2004
after the sale of a total of 2,350,000 shares of our common stock and the
over-allotment was exercised, in full, on November 18, 2004. Total proceeds of
this offering, including the exercise of the over-allotment option, were
approximately $10,800,000, net of underwriters' discounts and commissions of
$1,216,125 and other offering expenses of approximately $1,495,000 (including
underwriters non-accountable expense allowance of $352,500). The underwriters of
the offering were Maxim Group LLC and EarlyBird Capital, Inc. No offering
expenses were paid directly or indirectly to directors, officers (or their
associates), or to persons owning 10% or more of any of our equity securities,
or to our affiliates. To date, we have not used any part of the net proceeds
from the offering, apart from the repayment of $3,160,000 to the bridge note
holders. We intend to use the remaining net proceeds from the offering of
approximately $7,640,000 to expand our sales and marketing activities, for
research and development expenses, for product support and for general corporate
purposes, including working capital, general and administrative expenses and
capital expenditures. We may also use a portion of the net proceeds to fund
possible investments in, or acquisitions of, complementary businesses, products
or technologies or in establishing joint ventures. We have no current agreements
or commitments with respect to any such investment, acquisition or joint
venture, and we currently are not engaged in negotiations with respect to any
such investment, acquisition or joint venture. Pending use of the net proceeds
of this offering, we have invested the funds in short-term, interest bearing
investments. The Registration Statement also registered (a) 490,678 shares of
common stock that were issued to investors in our 2004 bridge financing, (b)
2,067,318 shares of common stock underlying warrants issued to those investors;
and (c) 117,500 shares of common stock underlying purchase option issued to the
underwriters.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
(a) Exhibits
The exhibits listed on the Exhibit Index are included with
this report.
31.1 Certification of Principal Executive Officer required
under Rule 13a-14(a) or Rule 15d-14(a) of the
Securities and Exchange Act of 1934, as amended.
31.2 Certification of Principal Financial Officer required
under Rule 13a-14(a) or Rule 15d-14(a) of the
Securities and Exchange Act of 1934, as amended.
32.1* Certification of Principal Executive Officer required
under Rule 13a-14(a) or Rule 15d-14(a) of the
Securities and Exchange Act of 1934, as amended, and
18 U.S.C. Section 1350.
21
32.2* Certification of Principal Financial Officer required
under Rule 13a-14(a) or Rule 15d-14(a) of the
Securities and Exchange Act of 1934, as amended, and
18 U.S.C. Section 1350.
* The certifications attached as Exhibits 32.1 and 32.2 accompany this
Quarterly Report on Form 10-QSB pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed "filed" by GuruNet
Corporation for purposes of Section 18 of the Securities Exchange Act of
1934, as amended.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GURUNET CORPORATION
Date: November 29, 2004 /s/ Robert S. Rosenschein
-------------------------
Robert S. Rosenschein
Chief Executive Officer
(Principal Executive Officer)
/s/ Steven S. Steinberg
-----------------------
Steven S. Steinberg
Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report on Form
10-QSB:
31.1 Certification of Principal Executive Officer required
under Rule 13a-14(a) or Rule 15d-14(a) of the
Securities and Exchange Act of 1934, as amended.
31.2 Certification of Principal Financial Officer required
under Rule 13a-14(a) or Rule 15d-14(a) of the
Securities and Exchange Act of 1934, as amended.
32.1* Certification of Principal Executive Officer required
under Rule 13a-14(a) or Rule 15d-14(a) of the
Securities and Exchange Act of 1934, as amended, and
18 U.S.C. Section 1350.
32.2* Certification of Principal Financial Officer required
under Rule 13a-14(a) or Rule 15d-14(a) of the
Securities and Exchange Act of 1934, as amended, and
18 U.S.C. Section 1350.
* The certifications attached as Exhibits 32.1 and 32.2 accompany this
Quarterly Report on Form 10-QSB pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed "filed" by GuruNet
Corporation for purposes of Section 18 of the Securities Exchange Act of
1934, as amended.
23