UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 333-131651
GOFISH CORPORATION
(Exact name of registrant as specified in its charter)
Nevada | 20-2471683 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
706 Mission Street, 10th Floor San Francisco, CA 94103 (Address of principal executive offices) (Zip Code) |
(415) 738-8706 (Registrant’s telephone number, including area code) |
Not Applicable (Former name, former address and former fiscal year, if changed since last report) |
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.
þ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨ Yes þ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of November 11, 2008, the issuer had 25,494,739 outstanding shares of common stock, par value $0.001 per share.
TABLE OF CONTENTS
Page | |||
PART I - FINANCIAL INFORMATION | |||
Item 1. | Financial Statements | 3 | |
Condensed Consolidated Balance Sheets (unaudited) | 3 | ||
Condensed Consolidated Statements of Operations (unaudited) | 4 | ||
Condensed Consolidated Statements of Cash Flows (unaudited) | 5 | ||
Notes to Condensed Consolidated Financial Statements (unaudited) | 6 | ||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21 | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 30 | |
Item 4. | Controls and Procedures | 31 | |
PART II - OTHER INFORMATION | |||
Item 1. | Legal Proceedings | 33 | |
Item 1A. | Risk Factors | 33 | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 51 | |
Item 3. | Defaults Upon Senior Securities | 51 | |
Item 4. | Submission of Matters to a Vote of Security Holders | 51 | |
Item 5. | Other Information | 51 | |
Item 6. | Exhibits | 51 | |
SIGNATURES | 52 | ||
EXHIBIT INDEX | 53 |
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
GoFish Corporation
Condensed Consolidated Balance Sheets (Unaudited)
September 30, | December 31, | ||||||
2008 | 2007 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 46,072 | $ | 1,108,834 | |||
Restricted cash | 550,000 | — | |||||
Trade accounts receivable | 2,727,131 | 1,604,209 | |||||
Prepaid expenses | 543,111 | 503,792 | |||||
Total current assets | 3,866,314 | 3,216,835 | |||||
Property and equipment, net | 295,595 | 457,317 | |||||
Convertible note fees, net amortization of $658,803 and $273,714 | 905,697 | 1,189,486 | |||||
Deposits | 119,979 | 117,979 | |||||
Total assets | $ | 5,187,585 | $ | 4,981,617 | |||
Liabilities and Stockholders’ Equity (Deficit) | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 3,701,557 | $ | 1,398,262 | |||
Accrued liabilities | 2,550,148 | 714,693 | |||||
Due to stockholder | 400,000 | — | |||||
Deferred revenue | 70,000 | — | |||||
Total current liabilities | 6,721,705 | 2,112,955 | |||||
Warrant liability | 328,036 | — | |||||
Convertible notes, net discount of $4,112,038 and $4,039,718 | 10,265,609 | 6,260,282 | |||||
Stockholders’ equity (deficit): | |||||||
Preferred Stock: $0.001 par value; 10,000,000 shares authorized; zero shares issued and outstanding at September 30, 2008 and December 31, 2007 | — | — | |||||
Common Stock: $0.001 par value; 300,000,000 shares authorized; 25,494,739 and 25,169,739 shares issued and outstanding at September 30, 2008 and December 31, 2007 | 25,496 | 25,171 | |||||
Notes receivable from stockholders | (18,910 | ) | (18,910 | ) | |||
Additional paid-in capital | 22,981,424 | 20,727,408 | |||||
Accumulated deficit | (35,115,775 | ) | (24,125,289 | ) | |||
Total stockholders’ equity (deficit) | (12,127,765 | ) | (3,391,620 | ) | |||
Total liabilities and stockholders’ equity (deficit) | $ | 5,187,585 | $ | 4,981,617 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
GoFish Corporation
Condensed Consolidated Statements of Operations (Unaudited)
Three | Three | Nine | Nine | ||||||||||
Months | Months | Months | Months | ||||||||||
Ended | Ended | Ended | Ended | ||||||||||
September 30, | September 30, | September 30, | September 30, | ||||||||||
2008 | 2007 | 2008 | 2007 | ||||||||||
Revenues | $ | 2,786,139 | $ | 485,812 | $ | 4,725,728 | $ | 541,572 | |||||
Cost of revenues and expenses: | |||||||||||||
Cost of revenue | 2,058,456 | 637,598 | 4,213,193 | 1,424,258 | |||||||||
Sales and marketing | 1,630,472 | 1,398,815 | 4,726,805 | 4,827,905 | |||||||||
Product development | 248,100 | 483,139 | 588,044 | 2,074,290 | |||||||||
General and administrative | 1,210,582 | 1,139,752 | 4,092,548 | 3,805,953 | |||||||||
Acquisition costs | — | 60,000 | — | 949,461 | |||||||||
Total costs of revenues and expenses | 5,147,610 | 3,719,304 | 13,620,590 | 13,081,867 | |||||||||
Operating loss | (2,361,471 | ) | (3,233,492 | ) | (8,894,862 | ) | (12,540,295 | ) | |||||
Other income (expense): | |||||||||||||
Interest income | 5,662 | 65,471 | 15,846 | 120,602 | |||||||||
Miscellaneous income (expense) | — | — | 100 | 537 | |||||||||
Interest expense | (893,227 | ) | (612,501 | ) | (2,111,570 | ) | (709,569 | ) | |||||
Total other income (expense) | (887,565 | ) | (547,030 | ) | (2,095,624 | ) | (588,430 | ) | |||||
Net loss before provision for income taxes | (3,249,036 | ) | (3,780,522 | ) | (10,990,486 | ) | (13,128,725 | ) | |||||
Provision for income taxes | — | — | — | — | |||||||||
�� | |||||||||||||
Net loss | $ | (3,249,036 | ) | $ | (3,780,522 | ) | $ | (10,990,486 | ) | $ | (13,128,725 | ) | |
Net loss per share – basic and diluted | $ | (0.13 | ) | $ | (0.16 | ) | $ | (0.43 | ) | $ | (0.55 | ) | |
Shares used to compute net loss per share – basic and diluted | 25,494,739 | 24,130,276 | 25,518,896 | 24,024,966 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
GoFish Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months | Nine Months | ||||||
Ended | Ended | ||||||
September 30, | September 30, | ||||||
2008 | 2007 | ||||||
Cash flows from operating activities: | |||||||
Net loss | $ | (10,990,486 | ) | $ | (13,128,725 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||
Depreciation and amortization of property and equipment | 195,118 | 158,806 | |||||
Amortization of convertible note fees | 385,089 | 148,954 | |||||
Stock-based compensation | 1,339,841 | 1,005,950 | |||||
Non cash interest expense | 1,645,863 | 515,218 | |||||
Write-off of acquisition advances | — | 420,338 | |||||
Changes in operating assets and liabilities: | |||||||
Trade accounts receivable | (1,122,922 | ) | (478,450 | ) | |||
Prepaid expenses | 62,681 | (138,854 | ) | ||||
Deferred direct acquisition costs | — | 66,040 | |||||
Other assets | (2,000 | ) | — | ||||
Accounts payable | 2,303,295 | 1,001,529 | |||||
Accrued liabilities | 1,835,455 | 1,017,037 | |||||
Deferred revenue | 70,000 | — | |||||
Net cash used in operating activities | (4,278,066 | ) | (9,412,157 | ) | |||
Cash flows from investing activities: | |||||||
Acquisition advances | — | (1,020,338 | ) | ||||
Payment of direct acquisitions costs | (550,000 | ) | 350,000 | ||||
Funds held as restricted cash | — | — | |||||
Funds released from restricted cash | — | 1,728,728 | |||||
Funds held as deposits | — | (160,856 | ) | ||||
Advances to founder and stockholder | — | (660 | ) | ||||
Purchase of property and equipment | (33,396 | ) | (524,781 | ) | |||
Net cash provided by (used in) investing activities | (583,396 | ) | 372,093 | ||||
Cash flows from financing activities: | |||||||
Proceeds from issuance of common stock, net of issuance cost | — | 1,759,278 | |||||
Due to stockholder | 610,000 | — | |||||
Repayment of due to stockholder | — | (384,793 | ) | ||||
Proceeds from issuance of note payable | — | 200,000 | |||||
Repayment of note payable | — | (200,000 | ) | ||||
Proceeds from issuance of unsecured convertible original issue discount notes due June 2010 and related warrants net of fees of $101,300 | 3,188,700 | — | |||||
Proceeds from issuance of 6% senior convertible notes due June 2010 and related warrants, net of fees of $1,080,293 | — | 9,250,665 | |||||
Net cash provided by financing activities | 3,798,700 | 10,625,150 | |||||
Net increase (decrease) in cash and cash equivalents | (1,062,762 | ) | 1,585,086 | ||||
Cash at beginning of the period | 1,108,834 | 3,369,542 | |||||
Cash at the end of the period | $ | 46,072 | $ | 4,954,628 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
GoFish Corporation
Notes to the Condensed Consolidated Financial Statements (Unaudited)
1. | The Company |
General - Unibio Inc. was incorporated in the state of Nevada on February 2, 2005. On September 14, 2006, Unibio Inc. changed its name to GoFish Corporation.
GoFish Corporation and subsidiaries (the “Company”) operates an online entertainment and media network (the “GoFish Network”) with a focus on reaching kids, teens and moms. The Company generates revenue by selling advertising on the websites in the GoFish Network. The GoFish Network is comprised of owned and operated websites as well as third-party websites (“publishers”) aimed at the 6-17 year old demographic and their co-viewing parents, for which the Company is the exclusive brand advertising monetization partner. The Company aims to attract publishers to the GoFish Network by providing them with access to relevant, high quality, advertising, as well as sponsorship and video and other content opportunities at higher revenue rates than could be obtained by these sites independently. The collection of these websites into the GoFish Network provides a platform for advertisers to reach the Company’s core constituency of kids, teens and moms.
Management's Plan - The Company has incurred operating losses and negative cash flows since inception. Management expects that revenues will increase as a result of the Company’s planned continued expansion of the GoFish Network’s reach, scale and scope. The Company also expects to incur additional expenses for the development and expansion of its publisher network, marketing campaigns for a number of its programming launches and the continuing integration of its businesses. In addition, the Company also anticipates gains in operating efficiencies as a result of the increase to its sales and marketing organization. However, the Company expects that operating losses and negative cash flows will continue for the foreseeable future but anticipates that losses will decrease from current levels to the extent that the Company continues to grow and develop. These Company’s expectations are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by such expectations, including those identified under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q. While the Company believes that it will be able to expand operations, gain market share, and raise additional funds, there can be no assurance that in the event the Company requires additional financing, such financing would be available on terms which are favorable or at all. Failure to generate sufficient cash flows from operations or raise additional capital would have a material adverse effect on the Company's ability to achieve its intended business objectives. These factors raise substantial doubt about the Company's ability to continue as a going concern.
Going Concern - The Company's financial statements have been presented on a basis that contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company continues to face significant risks associated with the execution of its strategy given the current market environment for similar companies. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
2. | Summary of Significant Accounting Policies |
Basis of Presentation - The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements as discussed below. In the opinion of management, all adjustments, consisting of normal recurring adjustments necessary for the fair presentation of the financial statements, have been included. The results of operations for any interim period are not necessarily indicative of the results of operations for the full year or any other subsequent interim period. Further, the preparation of condensed financial statements requires management to make estimates and assumptions that affect the recorded amounts reported therein. Actual results could differ from those estimates. A change in facts or circumstances surrounding the estimate could result in a change to estimates and impact future operating results.
6
GoFish Corporation
Notes to the Condensed Consolidated Financial Statements (Unaudited)
The financial statements and related disclosures have been prepared with the presumption that users of the interim financial statements have read or have access to the Company’s audited consolidated financial statements for the preceding fiscal year. Accordingly, the accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007 filed with the Securities and Exchange Commission on March 31, 2008.
Reclassifications - Certain financial statement reclassifications have been made to prior period amounts to conform to the current period presentation.
Comprehensive Loss - The Company has no components of comprehensive income (loss) other than its net loss and, accordingly, comprehensive loss is the same as the net loss for all periods presented.
Loss Per Share - Basic net loss per share to common stockholders is calculated based on the weighted-average number of shares of common stock outstanding during the period excluding those shares that are subject to repurchase by the Company. Diluted net loss per share attributable to common shareholders would give effect to the dilutive effect of potential common stock consisting of stock options, warrants, and preferred stock. Dilutive securities have been excluded from the diluted net loss per share computations as they have an antidilutive effect due to the Company’s net loss.
The following outstanding stock options, restricted stock and convertible notes (on an as-converted into common stock basis) were excluded from the computation of diluted net loss per share attributable to holders of common stock as they had an antidilutive effect for the three and nine months ended September 30, 2008 and 2007:
Three | Three | Nine | Nine | ||||||||||
Months | Months | Months | Months | ||||||||||
Ended | Ended | Ended | Ended | ||||||||||
September 30, | September 30, | September 30, | September 30, | ||||||||||
2008 | 2007 | 2008 | 2007 | ||||||||||
Shares issuable upon exercise of employee and nonemployee stock options | 1,854,821 | 499,197 | 1,854,821 | 499,197 | |||||||||
Shares issuable upon satisfaction of restriction | 300,000 | — | 300,000 | — | |||||||||
Shares issuable upon conversion of notes | 8,411,358 | 6,412,500 | 8,411,358 | 6,412,500 | |||||||||
Total | 10,566,179 | 6,911,697 | 10,566,179 | 6,911,697 |
Segments - Segments are defined as components of the Company’s business for which separate financial information is available that is evaluated by the Company’s chief operating decision maker (its CEO) in deciding how to allocate resources and assess performance. The Company has only one overall operating segment.
7
GoFish Corporation
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Restricted Cash - Restricted cash represents funds deposited as security for a letter of credit that the Company has provided to a publisher that guarantees minimum payments for the first quarter of 2008.
Accounts Receivable Concentrations – At September 30, 2008, three customers accounted for 14%, 9% and 9%, respectively, of accounts receivable. At December 31, 2007, three customers accounted for 27%, 21% and 9%, respectively, of accounts receivable.
Revenue Concentrations - The Company’s revenue is generated mainly from advertisers who purchase inventory in the form of graphical, text-based or video ads on the GoFish Network. These advertisers’ respective agencies facilitate the purchase of inventory on behalf of their advertisers. For the three months ended September 30, 2008, three customers accounted for 12%, 11% and 9%, respectively, of total revenues. For the nine months ended September 30, 2008, two customers accounted for 21% and 8%, respectively, of total revenues. For the three months ended September 30, 2007, four customers accounted for 32%, 19%, 14% and 12%, respectively, of total revenues. For the nine months ended September 30, 2007, four customers accounted for 28%, 17%, 13% and 11%, respectively, of total revenues.
Stock-Based Compensation - On January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment (“SFAS 123(R)”), using the modified prospective transition method. Under the fair value recognition provisions of SFAS 123(R), stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period. Compensation for grants that were outstanding as of January 1, 2006 is being recognized over the remaining service period using the compensation cost previously estimated in the Company’s SFAS 123 pro forma disclosures.
The Company currently uses the Black-Scholes option pricing model to determine the fair value of stock-based awards. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by the Company’s stock price as well as by assumptions regarding a number of complex and subjective variables. These variables include the Company’s expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. The Company estimates the volatility of the Company’s common stock at the date of the grant based on a combination of the implied volatility of publicly traded options on the Company’s common stock and the Company’s historical volatility rate. The dividend yield assumption is based on historical dividend payouts. The risk-free interest rate is based on observed interest rates appropriate for the term of the Company’s employee options. The Company uses historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest. For options granted, we amortize the fair value on a straight-line basis. All options are amortized over the requisite service periods of the awards, which are generally the vesting periods. If factors change we may decide to use different assumptions under the Black-Scholes option-pricing model and stock-based compensation expense may differ materially in the future from that recorded in the current periods.
Included in cost of revenues and expenses is $320,327 and $252,131 of stock-based compensation for the three months ended September 30, 2008 and 2007, respectively. For the three months ended September 30, 2008, this amount included $70,919 of stock-based compensation related to nonemployees on the issuance of options, warrants and restricted stock and $249,408 related to employees. For the three months ended September 30 2007, this amount includes $0 of stock-based compensation related to nonemployees on the issuance of options, warrants and restricted stock and $252,131 related to employees.
8
GoFish Corporation
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Included in cost of revenues and expenses is $1,339,841 and $1,005,950 of stock-based compensation for the nine months ended September 30, 2008 and 2007, respectively. For the nine months ended September 30, 2008, this amount included $154,419 of stock-based compensation related to nonemployees on the issuance of options, warrants and restricted stock and $1,185,422 related to employees. For the nine months ended September 30, 2007, this amount included $227,883 of stock-based compensation related to nonemployees on the issuance of options, warrants and restricted stock, $778,067 related to employees.
The following table presents stock-based compensation expense included in the Company’s Consolidated Statements of Operations related to employee and non-employee stock options, warrants and restricted shares as follows for the three month and nine month periods ended September 30, 2008 and 2007:
Three Months Ended September 30, 2008 | Three Months Ended September 30, 2007 | Nine Months Ended September 30, 2008 | Nine Months Ended September 30, 2007 | ||||||||||
Cost of revenue | $ | 44,538 | $ | — | $ | 111,767 | $ | 141,667 | |||||
Sales and marketing | 86,902 | 82,074 | 402,262 | 227,156 | |||||||||
Product development | 13,009 | 48,077 | 40,140 | 189,481 | |||||||||
General and administrative | 175,878 | 121,980 | 785,672 | 447,646 | |||||||||
Total share-based compensation | $ | 320,327 | $ | 252,131 | $ | 1,339,841 | $ | 1,005,950 |
Stock-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the service period, generally the vesting period of the equity grant.
The fair value of each option grant has been estimated on the date of grant using the Black-Scholes valuation model with the following assumptions for the nine month periods ended September 30, 2008 and 2007:
September 30, | September 30, | ||||||
2008 | 2007 | ||||||
Risk free interest rate | 3.20% | 4.45% | |||||
Expected lives | 5.82 Years | 6.20 Years | |||||
Expected volatility | 70.49% | 67.33% | |||||
Dividend yields | 0% | 0% |
The Company estimates the fair value of stock options using the Black-Scholes option pricing model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, expected option term, expected volatility of the stock over the option’s expected term, risk-free interest rate over the option’s expected term, and the expected annual dividend yield. The Company believes that the valuation technique and approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the stock options granted in the nine months ended September 30, 2008 and 2007.
9
GoFish Corporation
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Recent accounting pronouncements
In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 141 (Revised 2007) (“SFAS 141R”), Business Combinations. This statement will significantly change the accounting for business acquisitions both during the period of the acquisition and in subsequent periods. SFAS 141R provides companies with principles and requirements on how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree as well as the recognition and measurement of goodwill acquired in a business combination. SFAS 141R also requires certain disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R will be effective January 1, 2009 for the Company and will be applied to any business combinations occurring on or after that date.
Concurrent with the issuance of SFAS No. 141R, the FASB issued SFAS No. 160 (“SFAS 160”), Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51. SFAS 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 will also be effective for the Company effective January 1, 2009. Early adoption is not permitted. The Company does not currently expect the adoption of SFAS 160 to have any impact on its financial statements.
In March 2008, the FASB issued SFAS No. 161 (“SFAS 161”), Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133. SFAS 161 intends to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. SFAS 161 also requires disclosure about an entity’s strategy and objectives for using derivatives, the fair values of derivative instruments and their related gains and losses. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008, and will be applicable to the Company in the first quarter of fiscal 2009. The Company does not currently expect the adoption of SFAS 161 to have any impact on its financial statements.
In May 2008, the FASB issued SFAS No. 162 (“SFAS 162”), The Hierarchy of Generally Accepted Accounting Principles. SFAS 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 presented in conformity with generally accepted accounting principles in the United States of America. SFAS 162 will be effective 60 days following the SEC’s approval of the PCAOB amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company does not believe SFAS 162 will have a significant impact on the Company’s consolidated financial statements.
In June 2008, the FASB issued Staff Position FSP EITF No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”). FSP EITF 03-6-1 provides that unvested shares-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earning per share pursuant to the two-class method. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform to the provisions in FSP EITF 03-6-1. Early application of FSP EITF 03-6-1 is prohibited. The adoption of FSP EITF 03-6-1 is not anticipated to have a material effect on the Company’s consolidated financial statements.
10
GoFish Corporation
Notes to the Condensed Consolidated Financial Statements (Unaudited)
During the first quarter of fiscal 2008, the Company adopted the following accounting standards:
In February 2008, the FASB issued FASB Staff Position (FSP) Financial Accounting Standard (FAS) 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Its Related Interpretive Accounting Pronouncements That Address Leasing Transactions (“FSP FAS 157-1”) and FSP FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP FAS 157-2”). FSP FAS 157-1 removes leasing from the scope of SFAS No. 157, Fair Value Measurements. FSP FAS 157-2 delays the effective date of SFAS No. 157 from 2008 to 2009 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, at least annually.
In September 2006, the FASB finalized SFAS No. 157, which became effective January 1, 2008 except as amended by FSP FAS 157-1 and FSP FAS 157-2 as described above. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements; however, it does not require any new fair value measurements. The adoption of this Statement did not have any effect on the Company’s consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), The Fair Value Option for Financial Assets and Financial Liabilities, which permits entities to elect to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. This election is irrevocable. SFAS 159 was effective in the first quarter of fiscal 2008. The Company has not elected to apply the fair value option to any of its financial instruments.
3. | Property and Equipment |
Property and equipment, net consisted of the following at September 30, 2008 and December 31, 2007:
September 30, | December 31, | ||||||
2008 | 2007 | ||||||
Computer equipment and software | $ | 647,405 | $ | 614,009 | |||
Leasehold improvements | 145,794 | 145,794 | |||||
Furniture and fixtures | 7,737 | 7,737 | |||||
Total property and equipment | 800,936 | 767,540 | |||||
Less accumulated depreciation and amortization | (505,341 | ) | (310,223 | ) | |||
Property and equipment, net | $ | 295,595 | $ | 457,317 |
Depreciation expense totaled $65,055 and $66,769 for the three months ended September 30, 2008 and 2007, respectively, and $195,118 and $158,806 for the nine months ended September 30, 2008 and 2007, respectively.
11
GoFish Corporation
Notes to the Condensed Consolidated Financial Statements (Unaudited)
4. | Accrued Liabilities |
Accrued liabilities consisted of the following at September 30, 2008 and December 31, 2007:
September 30, | December 31, | ||||||
2008 | 2007 | ||||||
Accrued vendor obligations | $ | 984,251 | $ | 236,833 | |||
Accrued compensation | 893,803 | 182,253 | |||||
Accrued travel and entertainment | 113,102 | 106,904 | |||||
Accrued legal expenses | 118,000 | 91,878 | |||||
Accrued city and county taxes | 94,475 | 53,182 | |||||
Accrued interest expense | 223,256 | 39,483 | |||||
Other | 123,261 | 4,160 | |||||
Total accrued liabilities | $ | 2,550,148 | $ | 714,693 |
5. | Convertible Notes |
In June 2007, the Company entered into a purchase agreement (the “Purchase Agreement”) pursuant to which the Company sold 6% senior convertibles notes due June 2010 (the “June 2007 Notes”) in the aggregate principal amount of $10,300,000 and warrants to purchase an aggregate of 3,862,500 shares of common stock (the “June 2007 Warrants”) in a private placement transaction (the “June 2007 Private Placement”).
The June 2007 Notes bear interest at a rate of 6% per annum, payable semi-annually in cash or shares of the Company’s common stock registered for resale, at the Company’s option. The June 2007 Notes mature three years from the date of issuance and are convertible, commencing six months after the date of issuance, into shares of the Company’s common stock at a conversion price of $1.60 per share, subject to full-ratchet anti-dilution protection. The Company has the right to force conversion of a specified amount of the June 2007 Notes at the then-applicable conversion price, provided that their common stock trades at or above $2.06 per share for the preceding 20 consecutive trading days and certain other conditions are satisfied. Subject to certain conditions, the Company also has the right to prepay the June 2007 Notes at par plus accrued interest and plus certain other amounts. Holders of the June 2007 Notes have the right to require the Company to purchase all or some of the June 2007 Notes in cash, plus a redemption premium to provide a total return on the June 2007 Notes of 10% per annum, upon the occurrence of certain change of control events prior to maturity. Holders of the June 2007 Notes also have the right to require the Company to repay the outstanding principal amount, plus accrued interest and certain other amounts, under the June 2007 Notes for a 30-day period following two years from the date of issuance.
The purchase agreement governing the June 2007 Notes contains various negative covenants that provide that, unless the holders of greater than 75% of the aggregate principal amount of the June 2007 Notes then outstanding consent, the Company may not, among other things:
· | incur indebtedness (other than permitted indebtedness, including junior debt in connection with certain strategic transactions); |
· | create liens on the Company’s properties (other than permitted liens); |
· | amend the Company’s Articles of Incorporation so as to adversely affect the rights or privileges granted under the June 2007 Notes; |
· | make certain restricted payments (including cash dividends); and |
12
GoFish Corporation
Notes to the Condensed Consolidated Financial Statements (Unaudited)
· | issue equity securities with registration rights (subject to certain exceptions, including issuances of equity securities with registration rights in connection with certain strategic transactions) for a specified period after the effective date of the initial registration statement required to be filed by us under the Registration Rights Agreement. |
Events of default under the June 2007 Notes include, without limitation:
· | failure to pay principal, interest or other amounts when due; |
· | breaches of covenants; |
· | materially incorrect representations and warranties; |
· | cross-payment defaults and cross-acceleration to other material indebtedness; |
· | certain judgment defaults; |
· | events of bankruptcy; and |
· | failure to comply with certain registration obligations under the Registration Rights Agreement. |
Upon the occurrence of any event of default under the June 2007 Notes, holders of the June 2007 Notes have the right to require the Company to purchase all or any part of the outstanding principal amount of the June 2007 Notes at a purchase price in cash equal to the greater of: (i) 102% of such outstanding principal amount, plus all accrued and unpaid interest, any unpaid liquidated damages and other amounts then owing to the holders of the June 2007 Notes or (ii) an event equity value of the underlying shares of the common stock that would be issuable upon conversion of such principal amount, plus payment in shares of the Company’s common stock of all such accrued but unpaid interest thereon, plus an amount payable in cash of any liquidated damages and other amounts payable to the holders of the June 2007 Notes.
The June 2007 Warrants issued to the investors in the June 2007 Private Placement are exercisable for a period of five years commencing one year after the date of issuance at an exercise price of $1.75 per share. Utilizing the Black-Scholes valuation model and the following assumptions: estimated volatility of 85%, a contractual life of six years, a zero dividend rate, 5.12% risk free interest rate, and the fair value of common stock of $1.72 per share at date of grant, the Company determined the allocated fair value of the warrant to be $4,924,202. The Company has recorded this amount as a debt discount and is amortizing the debt discount over the term of the June 2007 Notes. The amortization is being recorded as interest expense and totaled $410,350 and $1,231,051 for the three and nine months ended September 30, 2008, respectively.
On November 28, 2007, one of the original holders of the June 2007 Notes sold its right, title and interest in its June 2007 Note to a third party at a $42,500 discount. The Company paid the original holder $42,500 and treated it as a debt discount and is amortizing the debt discount over the term of the June 2007 Notes. The amortization is being recorded as interest expense and totaled $4,108 and $12,325 for the three and nine months ended September 30, 2008, respectively.
13
GoFish Corporation
Notes to the Condensed Consolidated Financial Statements (Unaudited)
As part of the June 2007 Private Placement, the Company paid placement agent fees in the amount of $721,000 (which represented 7% of the gross proceeds raised in the June 2007 Private Placement), as well as associated expenses of $367,909, for a total of $1,088,909. In addition, as part of the June 2007 Private Placement, the Company issued placement agent warrants to purchase an aggregate of 309,000 shares of the Company’s common stock (the “June 2007 Placement Agent Warrants”). A portion of the June 2007 Placement Agent Warrants that are exercisable for 193,125 of the Company’s common stock are exercisable for a period of five years commencing one year after issuance at an exercise price of $1.60 per share. Utilizing the Black-Scholes option-pricing model and an assumed estimated volatility of 85%, an assumed contractual life of five years, an assumed zero dividend rate, an assumed 5.12% risk free interest rate, and an assumed fair value of the Company’s common stock of $1.72 per share on the date of issuance, the Company determined the allocated fair value of this portion of the June 2007 Placement Agent Warrants that are exercisable for 193,125 shares of the Company’s common stock to be $235,722. The remaining portion of the June 2007 Placement Agent Warrants that are exercisable for 115,875 of the Company’s common stock are exercisable for a period of five years commencing one year after issuance at an exercise price of $1.75 per share. Utilizing the Black-Scholes option-pricing model and an assumed estimated volatility of 85%, an assumed contractual life of five years, an assumed zero dividend rate, an assumed 5.12% risk free interest rate, and an assumed fair value of the Company’s common stock of $1.72 per share on the date of issuance, the Company determined the allocated fair value of this remaining portion of the June 2007 Placement Agent Warrants that are exercisable for 115,875 shares of the Company’s common stock to be $138,569. The total convertible note fees were $1,463,200. These fees are being amortized to expense over the term of the June 2007 Notes and amounted to $122,077 for the three months ended September 30, 2008 and $366,231 for the nine months ended September 30, 2008.
Also embedded in the June 2007 Private Placement is a nondetachable conversion feature that is in-the-money at the commitment date. Per EITF 98-5, a beneficial conversion feature allows the securities to be convertible into common stock at the lower of a conversion rate fixed at the commitment date or a fixed discount to the market price of the common stock at the date of conversion. The embedded beneficial conversion feature is recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. That amount is calculated at the commitment date as the difference between conversion price and the fair value of the common stock or other securities into which the security is convertible, multiplied by the number of shares into which the security is convertible (intrinsic value).
The beneficial conversion feature amounted to $772,500 and is recorded as a debt discount and is amortizing over the term of the June 2007 Notes. The amortization is being recorded as interest expense and totaled $206,000 for the three and nine months ended September 30, 2008, respectively.
In two separate closings, on April 18, 2008 and June 30, 2008, the Company sold unsecured convertible original issue discount notes due June 8, 2010 in the aggregate principal amount of $4,117,647 (the “2008 Notes”) and detachable warrants (the “2008 Warrants”) to purchase an aggregate of 3,997,723 shares of our common stock, in a private placement transaction for an aggregate purchase price of $3,500,000. The 2008 Notes are discounted 15% from their respective principal amounts, and will bear interest at a rate of 15% per annum beginning one year from the date of issuance, payable on any conversion date or the maturity date of the 2008 Notes in cash or shares of the Company’s common stock, at the investor’s option. The 2008 Notes will mature on June 8, 2010 and will be convertible into shares of our common stock, at the investor’s option, 181 days after the date of issuance at a conversion price of $2.06 per share, subject to full-ratchet anti-dilution protection. The Company has recorded $617,648 as a debt discount on the 2008 Notes and is amortizing the debt discount over the term of the 2008 Notes. The amortization is being recorded as interest expense and totaled $76,619 and $102,049 for the three and nine months ended September 30, 2008.
14
GoFish Corporation
Notes to the Condensed Consolidated Financial Statements (Unaudited)
The 2008 Warrants are exercisable after 181 days from issuance until April 18, 2013 at an exercise price of $1.75 per share. Utilizing the Black-Scholes option-pricing model and the following assumptions: estimated volatility of 64.9%, a contractual life of five years, a zero dividend rate, 3.34% risk free interest rate, and the fair value of common stock of $1.75 per share at date of grant, the Company determined the initial allocated fair value of the warrants to be $276,858. The Company has recorded $276,858 as a debt discount and is amortizing the debt discount over the term of the 2008 Notes. The amortization is being recorded as interest expense and totaled $34,726 and $43,264 for the three and nine months ended September 30, 2008. As part of the issuance on April 18, 2008 and June 30, 2008, the Company paid legal and due diligence fees of $101,300. These fees are being amortized to expense over the term of the 2008 Notes and amounted to $12,217 and $18,858 for the three and nine months ended September 30, 2008.
The 2008 Warrants provide for a contingent cash settlement feature, as such, the initial allocated fair value and subsequent re-measurements are classified as Warrant Liability in the Company’s consolidated financial statements. See Note 7.
Interest expense totaled $893,227 and $2,111,570 for the three and nine months ended September 30, 2008, respectively.
6. | Stock Options and Warrants |
In 2004, GoFish Technologies adopted a 2004 Stock Plan (the “2004 Plan”).
The 2004 Plan authorized the Board of Directors to grant incentive stock options and nonstatutory stock options to employees, directors, and consultants for up to 2,000,000 shares of common stock. Under the Plan, incentive stock options and nonqualified stock options are to be granted at a price that is no less than 100% of the fair value of the stock at the date of grant. Options will be vested over a period according to the Option Agreement, and are exercisable for a maximum period of ten years after date of grant. Options granted to stockholders who own more than 10% of the outstanding stock of the Company at the time of grant must be issued at an exercise price no less than 110% of the fair value of the stock on the date of grant.
In May 2006, the Company increased the shares reserved for issuance under the 2004 Plan from 2,000,000 to 4,588,281. Upon completion of the Mergers, the Company decreased the shares reserved under the 2004 Plan from 4,588,281 to 804,188 and froze the 2004 Plan resulting in no additional options being available for grant under the 2004 Plan.
In 2006, the Company’s Board of Directors adopted a 2006 Stock Plan (the “2006 Plan”).
The 2006 Plan authorized the Board of Directors to grant incentive stock options and nonstatutory stock options to employees, directors, and consultants for up to 2,000,000 shares of common stock. In October 2006, the Board of Directors approved an additional issuance of 2,000,000 shares. Under the Plan, incentive stock options and nonqualified stock options are to be granted at a price that is no less than 100% of the fair value of the stock at the date of grant. Options will be vested over a period according to the Option Agreement, and are exercisable for a maximum period of ten years after date of grant. Options granted to stockholders who own more than 10% of the outstanding stock of the Company at the time of grant must be issued at an exercise price no less than 110% of the fair value of the stock on the date of grant. In March 2008, the Board of Directors froze the 2006 Plan resulting in no additional options being available for grant under the 2006 Plan.
15
GoFish Corporation
Notes to the Condensed Consolidated Financial Statements (Unaudited)
On October 24, 2007, the Company board of directors approved the Non-Qualified Stock Option Plan (the “Non-Qualified Plan”). The purposes of the Non-Qualified Plan are to attract and retain the best available personnel, to provide additional incentives to employees, directors and consultants and to promote the success of the Company’s business. The Non-Qualified Plan initially provided for a maximum aggregate of 3,600,000 shares of the Company’s common stock that may be issued upon the exercise of options granted pursuant to the Non-Qualified Plan. On October 31, 2007, the Company board of directors adopted an amendment to the Non-Qualified Plan to increase the total number of shares of the Company’s common stock that may be issued pursuant to the Non-Qualified Plan from 3,600,000 shares to 4,000,000 shares. On December 18, 2007, the Company’s board of directors adopted a further amendment to the Non-Qualified Plan to increase the total number of shares of the Company’s common stock that may be issued pursuant to the Non-Qualified Plan from 4,000,000 shares to 5,500,000 shares. On February 5, 2008, the Company’s board of directors adopted an additional amendment to the Non-Qualified Plan to increase the total plan shares that may be issued from 5,500,000 shares to 10,500,000 shares. On June 4, 2008, the Company’s board of directors further increased the number of shares reserved under the 2007 Plan to 16,500,000. The Company board of directors (or any committee composed of members of the Company board of directors appointed by it to administer the Non-Qualified Plan), has the authority to administer and interpret the Non-Qualified Plan. The administrator has the authority to, among other things, (i) select the employees, consultants and directors to whom options may be granted, (ii) grant options, (iii) determine the number of shares underlying option grants, (iv) approve forms of option agreements for use under the Non-Qualified Plan, (v) determine the terms and conditions of the options and (vi) subject to certain exceptions, amend the terms of any outstanding option granted under the Non-Qualified Plan. The Non-Qualified Plan authorizes grants of nonqualified stock options to eligible employees, directors and consultants. The exercise price for an Option shall be determined by the administrator. The term of each option under the Non-Qualified Plan shall be no more than ten years from the date of grant. The Non-Qualified Plan became effective upon its adoption by the Company’s board of directors, and will continue in effect for a term of ten years, unless sooner terminated. The Company board of directors may at any time amend, suspend or terminate the Non-Qualified Plan. The Non-Qualified Plan also contains provisions governing: (i) the treatment of options under the Non-Qualified Plan upon the occurrence of certain corporate transactions (including merger, consolidation, sale of all or substantially all the assets of the Company, or complete liquidation or dissolution of the Company) and changes in control of the Company, (ii) transferability of options and (iii) tax withholding upon the exercise or vesting of an option.
On March 31, 2008, the Board adopted a new plan, the GoFish Corporation 2008 Stock Incentive Plan (as amended, the “2008 Plan”). The 2008 Plan is intended to replace the frozen 2006 Plan and permits options and other equity compensation to be awarded to most California employees. As originally adopted, the 2008 Plan provided for the issuance of up to 2,400,000 shares of the Company’s common stock pursuant to awards granted thereunder, up to 2,200,000 of which may be issued pursuant to incentive stock options granted thereunder. However, no awards (as defined in the 2008 Plan) were issued under the 2008 Plan.
On June 4, 2008, the Board adopted an amendment to the 2008 Plan to (i) decrease the maximum aggregate number of shares of Common Stock that may be issued pursuant to awards granted under the plan from 2,400,000 shares to 1,500,000 shares and (ii) decrease the maximum aggregate number of shares the Company’s common stock that may be issued pursuant to incentive stock options granted under the plan from 2,200,000 shares to 1,500,000 shares. On June 4, 2008, the Board also granted initial awards under the 2008 Plan, which were granted to certain non-officer employees and consultants of the Company. The Board intends to solicit stockholder approval for the 2008 Plan prior to March 31, 2009. The 2008 Plan is administered, with respect to grants to employees, directors, officers, and consultants, by the plan administrator, which is defined as the Board or one or more committees designated by the Board. The 2008 Plan will initially be administered by the Board. The Board froze the 2004 Plan on October 27, 2006 and the 2006 Plan on March 31, 2008. As of September 30, 2008, there were 297,737 shares under the 2004 Plan and 3,073,229 shares under the 2006 Plan that were unavailable for further issuance.
16
GoFish Corporation
Notes to the Condensed Consolidated Financial Statements (Unaudited)
A summary of stock option transactions is as follows:
Options Outstanding | ||||||||||
Options available for grant | Number of options | Weighted average exercise price | ||||||||
Balances at December 31, 2007 | 3,021,584 | 7,194,770 | $ | 0.91 | ||||||
Additional shares reserved | 12,500,000 | — | ||||||||
Shares frozen under the 2004 and 2006 Plans | (3,370,966 | ) | — | |||||||
Options granted | (11,032,000 | ) | 11,032,000 | $ | 0.41 | |||||
Options exercised | — | — | ||||||||
Options cancelled | 1,385,667 | (1,385,667 | ) | $ | 1.20 | |||||
Balances at September 30, 2008 | 2,504,285 | 16,841,103 | $ | 0.56 |
The following table summarizes information concerning outstanding options as of September 30, 2008:
Options Outstanding and Exercisable | ||||||||||||||||||||
Options Outstanding | Options Exercisable | |||||||||||||||||||
Exercise price | Number of Options | Weighted Average Remaining Contractual Life (in Years) | Aggregate Intrinsic Value | Number of Options | Weighted Average Remaining Contractual Life (in Years) | Aggregate Intrinsic Value | ||||||||||||||
$ | 0.06 | 364,300 | 5.68 | 356,759 | 5.68 | |||||||||||||||
$ | 0.23 | 4,525,000 | 9.53 | 952,083 | 9.53 | |||||||||||||||
$ | 0.24 | 147,000 | 9.68 | 13,125 | 9.68 | |||||||||||||||
$ | 0.25 | 100,000 | 9.84 | — | — | |||||||||||||||
$ | 0.27 | 400,000 | 9.08 | 122,222 | 9.08 | |||||||||||||||
$ | 0.29 | 400,000 | 9.50 | 54,321 | 9.50 | |||||||||||||||
$ | 0.35 | 4,840,000 | 9.34 | 2,356,529 | 9.34 | |||||||||||||||
$ | 0.37 | 1,703,692 | 9.04 | 919,064 | 9.04 | |||||||||||||||
$ | 0.42 | 130,000 | 9.28 | — | — | |||||||||||||||
$ | 0.80 | 2,500,000 | 9.68 | 208,333 | 9.68 | |||||||||||||||
$ | 1.50 | 1,366,840 | 8.62 | 735,337 | 8.62 | |||||||||||||||
$ | 3.08 | 50,000 | 8.22 | 26,667 | 8.22 | |||||||||||||||
$ | 3.65 | 64,271 | 8.12 | 64,271 | 8.12 | |||||||||||||||
$ | 3.78 | 15,000 | 8.64 | 5,000 | 8.64 | |||||||||||||||
$ | 3.80 | 65,000 | 8.55 | 23,021 | 8.55 | |||||||||||||||
$ | 5.79 | 170,000 | 8.34 | 70,417 | 8.34 | |||||||||||||||
16,841,103 | 9.25 | $ | 612,091 | 5,907,149 | 8.90 | $ | 202,221 |
17
GoFish Corporation
Notes to the Condensed Consolidated Financial Statements (Unaudited)
The weighted-average grant date fair value of the options granted during the nine month periods ended September 30, 2008 and 2007 were $0.17 and $2.27, respectively.
At September 30, 2008, there was $1,889,312 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plans. This cost is expected to be recognized over the weighted average period of 2.16 years.
During the nine month period ended September 30, 2007, the Company accelerated vesting for certain employees who terminated their employment. As a result, of these modifications the Company recognized additional compensation expense of $151,435 for the nine month period ended September 30, 2007.
The Company did not realize any tax benefits from tax deductions of share-based payment arrangements during the nine month periods ended September 30, 2008 and 2007.
Stock-based compensation expense related to stock options, warrants and restricted stock granted to nonemployees is recognized as earned. At each reporting date, the Company re-values the stock-based compensation using the Black-Scholes option pricing model. As a result, stock-based compensation expense will fluctuate as the estimated fair market value of the Company’s common stock fluctuates.
A summary of outstanding Common Stock Warrants as of September 30, 2008 is as follows:
Securities into which warrants are convertible | Shares | Exercise Price | Expiration Date | |||||||
Common Stock | 80,510 | $ | 0.60 | October 2008 | ||||||
Common Stock | 3,909,375 | $ | 1.75 | June 2013 | ||||||
Common Stock | 193,125 | $ | 1.60 | June 2012 | ||||||
Common Stock | 3,133,333 | $ | 1.75 | October 2011 | ||||||
Common Stock | 1,713,309 | $ | 1.75 | April 2013 | ||||||
Common Stock | 2,284,414 | $ | 1.75 | June 2013 | ||||||
Common Stock | 115,875 | $ | 1.75 | June 2012 | ||||||
Common Stock | 380,000 | $ | 1.75 | February 2013 | ||||||
Common Stock | 166,667 | $ | 3.00 | �� | January 2012 | |||||
Total | 11,976,608 |
In February 2008, the Company issued warrants to purchase 170,000 shares of the Company’s common stock at the exercise price of $1.75 in exchange for services rendered to the Company. In August 2008, one of the service providers terminated its engagement with the Company resulting in the expiration of 90,000 of unvested shares.
18
GoFish Corporation
Notes to the Condensed Consolidated Financial Statements (Unaudited)
7. | Warrant liability |
As discussed in Note 5, in two separate closings, on April 18, 2008 and June 30, 2008, the Company sold the 2008 Notes and the 2008. The 2008 Warrants have a five-year term and are exercisable after 181 days from issuance until April 18, 2013 at an exercise price of $1.75 per share. The 2008 Warrant contains a net cash settlement feature, which is available to the warrant holders at their option, in certain change of control circumstances. As a result, under EITF 00-19, the warrants are required to be classified as a liability at their current fair value, estimated using the Black-Scholes option-pricing model. Warrants that are classified as a liability are revalued at each reporting date until the warrants are exercised or expire with changes in the fair value reported as interest expense. Accordingly, we recorded additional interest expense of $4,592 and $51,178 during the three and nine month periods ended September 30, 2008, respectively. The increase represents the change in fair value of the warrant liability from the date of issuance, April 18, 2008, through September 30, 2008. The aggregate fair value and the assumptions used for the Black-Scholes option-pricing models as of September 30, 2008 were as follows:
September 30, | ||||
2008 | ||||
Aggregate fair value | $ | 328,036 | ||
Expected volatility | 73.08 | % | ||
Weighted average remaining contractual term(years) | 4.68 | |||
Risk-free interest rate | 3.08 | % | ||
Expected dividend yield | 0 | % | ||
Common stock price | $ | 0.33 |
8. | Related Party Transactions |
The following is the activity between the Company and a stockholder related to amounts due to this individual:
September 30, | December 31, | ||||||
2008 | 2007 | ||||||
Beginning balance | $ | — | $ | — | |||
Amounts received by the Company | 610,000 | — | |||||
Amounts reclassed to convertible debt | (210,000 | ) | — | ||||
Due to stockholder | $ | 400,000 | $ | — |
9. | Cash Flow Information: |
Cash paid during the nine months ended September 30, 2008 and 2007 is as follows:
September 30, | September 30, | ||||||
2008 | 2007 | ||||||
Interest | $ | 279,000 | $ | — | |||
Income taxes | $ | — | $ | — |
19
GoFish Corporation
Notes to the Condensed Consolidated Financial Statements (Unaudited)
Supplemental disclosure of non-cash investing and financing activities for the nine months ended September 30, 2008 and 2007 is as follows:
September 30, | September 30, | ||||||
2008 | 2007 | ||||||
Issuance of common stock to a vendor | $ | 102,000 | $ | — | |||
Common stock issued upon conversion of convertible notes | $ | 40,000 | $ | — | |||
Initial recording of warrant liability | $ | 213,175 | $ | — | |||
Initial recording of beneficial conversion factor | $ | 772,500 | $ | — | |||
Convertible notes issued upon conversion of amounts due to a stockholder | $ | 210,000 | $ | — | |||
Issuance of warrants to placement agents | $ | — | $ | 374,291 | |||
Issuance of warrants with convertible notes | $ | — | $ | 4,924,202 |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
This Management’s Discussion and Analysis of Financial Condition and Results of Operations provides information that we believe is relevant to an assessment and understanding of our financial condition and results of operations. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited consolidated financial statements and related notes thereto included under the heading “Financial Statements” in Part I, Item 1 of this Quarterly Report on Form 10-Q.
This Quarterly Report on Form 10-Q, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains, in addition to historical information, forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” and the like, and/or future-tense or conditional constructions (e.g., “will,” “may,” “could,” “should,” etc.) or similar expressions identify certain of these forward-looking statements. The forward-looking statements contained in this Quarterly Report on Form 10-Q include, among other things: (i) management’s expectation that revenues will increase as a result of the Company’s planned continued expansion of the GoFish Network’s reach, scale and scope; (ii) the Company’s expectation regarding the incurrence of additional expenses for the development and expansion of its publisher network, marketing campaigns for a number of its programming launches and the continuing integration of its businesses; (iii) the Company’s anticipation of gains in operating efficiencies as a result of the increase to its sales and marketing organization; (iv) the Company’s expectation that operating losses and negative cash flows will continue for the foreseeable future; (v) the Company’s anticipation that losses will decrease from current levels to the extent that the Company continues to grow and develop; (vi) the Company’s expectations regarding the impact of the adoption of accounting standards on the Company’s financial statements; (vii) the Company’s belief that the Company is well positioned to continue growth in 2008 and into 2009; (viii) the Company’s belief that vertical advertising networks, such as the GoFish Network, will receive an increasing share of advertising dollars spent online; (ix) the Company’s expectations that the sales cycle for the sites in the GoFish Network will continue to mature; (x) the Company’s expectations regarding the Company’s diversification of sources of revenue; and (xi) the Company’s projection that revenues for the full fiscal year 2008 will be in the range of $8.5 million to $11 million.
The forward-looking statements contained in this Quarterly Report on Form 10-Q are subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q, and in particular, the risks discussed under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and those discussed in other documents we file with the Securities and Exchange Commission (the “SEC”). We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q.
Overview
GoFish Corporation (the “Company,” “GoFish,” “we,” or “our”) operates an online entertainment and media network (the “GoFish Network”) with a focus on reaching kids, teens and moms. According to comScore Media Metrix, the GoFish Network reached roughly 25 million unique U.S. users per month as of October 31, 2008, currently ranking as the third-largest online destination in comScore’s Kids-Entertainment and Teen-Community categories and the second largest online destination in the Women-Community category. The sites in the GoFish Network reach more than 68 million users worldwide, more than any other online property in those same comScore’s categories.
21
We generate revenue by selling advertising on the websites in the GoFish Network. The GoFish Network is comprised of our owned and operated websites, as well as third-party websites (“publishers”) aimed at the 6-17 year old demographic and their co-viewing parents, for which GoFish is the exclusive brand advertising monetization partner. We aim to attract publishers to the GoFish Network by providing them with access to relevant, high quality, advertising, as well as sponsorship and video and other content opportunities at higher revenue rates than could be obtained by these sites independently. The collection of these websites into the GoFish Network provides a platform for advertisers to reach our core constituency of kids, teens and moms. The GoFish Network focuses on brand immersion experiences that reach kids, teens and moms in a deeply engaged state of mind.
Trends in Our Business
We recently refined our strategic focus to narrow our target audience to the 6-17 year old demographic and their co-viewing parents. We seek to enter into contractual relationships with publishers that we believe appeal to a similar target audience, under which we assume responsibility for selling their inventory of available advertising opportunities, as well as syndicating video content to them. Our revenues have generally increased since implementing this change. In the youth advertising market, the first half of the year tends to experience lower spending, while the second half of the year tends to experience higher spending.
The sales cycle for the sites in the GoFish Network continues to mature and we are diversifying our sources of revenue to build a robust and diverse sales pipeline. Nearly 100% of our revenues for the three months ended March 31, 2008 were for sites that were in the GoFish Network as of December 31, 2007. For the three months ended June 30, 2008 and September 30, 2008, the percentage of our revenue for sites in the GoFish Network as of December 31, 2007 was approximately 92% and 83%, respectively. We expect this percentage to continue to decrease as the sales cycle for the newer sites in the GoFish Network matures and we fully incorporate all of the publishers in the GoFish Network into our ad campaigns.
Since the formal launch of the GoFish Network in February 2008, we have continued to see an increase in demand for our services, which contributed to our revenue growth rate during the three months ended September 30, 2008. In general, since the launch of the GoFish Network, we have received more requests for proposals and been invited to pitch more business. As a result, we believe that we have built a robust sales pipeline. We continue to anticipate that our revenue will show growth for the rest of fiscal year 2008 as the launch of the GoFish Network, the anticipated increase in the size of the GoFish Network and the sales cycle all are expected to continue to mature.
It is estimated that over 300 online advertising networks began operating in the past several years. The recent economic downturn has affected online ad spending and there are reports that many of these advertising networks are now shutting down or seeking buyers. Although we believe that the economic downturn may affect the Company’s results, we believe that we are well positioned to continue our growth in 2008 and into 2009. Most of the online advertising networks represent a large number of unrelated or loosely related sites and tend to sell advertising to direct marketing companies on the basis of cost-per-action (such as clicks). GoFish, on the other hand, focuses on selecting a limited number of high quality, high-traffic and high engagement websites and catering to large, brand advertisers, whom we believe may be less affected by the economic downturn. We specialize in delivering custom solutions and immersive experiences that are lacking in the other advertising opportunities on the Internet.
We believe that a shift in consumer behavior online, known as “Deportalization,” is affecting and will continue to affect the distribution of advertising dollars on the Internet. Deportalization is a term that describes the phenomenon where Internet traffic is moving from large portals to smaller, disparate sites. From February 2000 to October 2006, the number of websites grew from 10 million to 100 million. During the following 18 months, the number of websites grew to 162 million. The drivers of this trend are search and increased user confidence with regard to the medium. We expect that, in the next several years, the large sites will continue to lose traffic to smaller sites. We believe there is a significant disparity between the amount of adversiting dollars that the portals receive (roughly 75%) and the engagement with consumers that they are able to deliver. As a result, we believe there is an opportunity for a brand-focused vertical advertising network to displace the portals as the leading destination for brand advertising dollars.
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We are seeking to invest significantly in building the employee and systems infrastructures that we believe are necessary to manage our growth and develop and promote our products and services in order to take advantage of the trends described above, which will require us to continue to use significant cash resources in the near future. In general, the demand for high quality salespeople in online advertising sales is very competitive and requires paying competitive market salaries in order to obtain the results we seek to grow our business. In addition, we believe that attracting, hiring and retaining mid-level digital advertising executives is important to building our business and the market for these executives in our industry is also very competitive.
Results of Operations - Three and Nine Months Ended September 30, 2008 Compared to Three and Nine Months Ended September 30, 2007
Revenues
Total revenues increased to $2,786,139 for the three months ended September 30, 2008 from $485,812 for the three months ended September 30, 2007, representing an increase of $2,300,327. Total revenues increased to $4,725,728 for the nine months ended September 30, 2008 from $541,572 for the nine months ended September 30, 2007, representing an increase of $4,184,156. The increase reflects higher sales from advertising that was sold across the GoFish Network. Revenues for the three and nine months ended September 30, 2008 consisted of advertising fees, primarily from graphical and rich-media ads, and reflect the Company’s refined strategic focus. Revenues for the three and nine months ended September 30, 2007 consisted both of advertising fees on our owned and operated sites, primarily from banner and text-based ads, and advertising sold on one site in the GoFish Network beginning on August 14, 2007.
We continue to project that revenues for the full fiscal year 2008 will be in the range of $8.5 million to $11 million. While management believes this projection has a reasonable basis, this projection is subject to risks and uncertainties that could cause actual results or events to differ materially from those expressed or implied by such projection, including those identified under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and those discussed in other documents we file with the SEC.
Costs of Revenues
Cost of revenues consist primarily of direct payments to publishers for revenue share on advertising revenues, costs associated with hosting our websites and ad serving costs for impressions delivered in connection with advertising revenues.
Cost of revenues increased to $2,058,456 for the three months ended September 30, 2008 from $637,598 for the three months ended September 30, 2007, representing an increase of $1,420,858. The increase included $1,414,732 of payments made to publishers, $38,853 for ad serving costs, $12,288 for licensing expenses, $75,569 for advergame development and $44,538 for share-based compensation expenses related to SFAS No, 123(R). These increases were partly offset by a reduction in video production costs of $89,607 and a reduction in web hosting costs of $75,515.
For the nine months ended September 30, 2008, cost of revenues increased to $4,213,193 from $1,424,258 for the nine months ended September 30, 2007, representing an increase of $2,788,935. The increase included $2,962,680 of payments made to publishers, $173,747 for ad serving costs, $111,768 for share based compensation expenses related to SFAS No, 123(R), $78,039 for licensing expenses and $75,569 for advergame development costs. These increases were partly offset by a reduction in video production costs of $575,692 and a reduction in web hosting costs of $37,176.
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Sales and Marketing
Sales and marketing expenses consist primarily of advertising and other marketing related expenses, compensation-related expenses, sales commissions, and travel costs.
Sales and marketing expenses increased to $1,630,472 for the three months ended September 30, 2008 from $1,398,815 for the three months ended September 30, 2007, representing an increase of $231,657. The increase was attributable to a $419,161 increase in personnel and other benefits related costs, including a $1,103 decrease in share-based compensation expenses related to SFAS No, 123(R), a $68,739 increase in travel expenses and a $155,269 increase in allocation of facilities, IT and other operating expenses. These increases were partly offset by a $335,302 decrease in professional services for public relations and related development research expense and a $76,210 reduction in advertising and other marketing related expenses.
For the nine months ended September 30, 2008, sales and marketing expenses decreased to $4,726,805 from $4,827,905 for the nine months ended September 30, 2007, representing a decrease of $101,100. The decrease was attributable to a $1,347,302 reduction in advertising and other marketing related expenses and a $629,426 decrease in professional services for public relations and related development research expense. These decreases were partly offset by a $1,261,310 increase in personnel and other benefits related costs, including a $27,509 increase in share-based compensation expenses related to SFAS No, 123 (R), a $152,391 increase in travel expenses and a $461,927 increase in allocation of facilities, IT and other operating expenses.
The growth in direct sales personnel was responsible for the increases in personnel and other benefits related costs, sales commission and travel. The reduction in advertising, other marketing expenses, public relations and related development research expenses correlated to the refinement of our strategic focus and a reduced need for advertising campaigns.
Employees in sales and marketing at September 30, 2008, and 2007 were 29 and 17, respectively.
Product Development
Product development expenses consist primarily of compensation-related expenses incurred for the development of, and enhancement to, systems that enable us to drive and support revenue generating activities across the GoFish Network.
Product development expenses decreased to $248,100 for the three months ended September 30, 2008 from $483,139 for the three months ended September 30, 2007, representing a decrease of $235,039. The decrease was attributable primarily to decrease in compensation related expenses of $164,842, including a $35,068 decrease in share-based compensation expenses related to SFAS No, 123(R) and the allocation of approximately $70,197 of facilities, IT and other operating expenses.
For the nine months ended September 30, 2008, product development expense decreased to $588,044 from $2,074,290 for the nine months ended September 30, 2007, representing a decrease of $1,486,246. The decrease was attributed primarily to a decrease in compensation related expenses of $1,341,770, including a $149,340 decrease in share-based compensation expenses related to SFAS No, 123(R) and the reduction in allocation of approximately $144,476 of facilities, IT and other operating expenses.
Employees in product development at September 30, 2008 and 2007 were 5 and 12, respectively.
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General and Administrative
General and administrative expenses consist primarily of compensation-related expenses related to our executive management, finance and human resource organizations and legal, accounting, insurance, investor relations and other operating expenses to the extent not otherwise allocated to other functions.
General and administrative expenses increased to $1,210,582 for the three months ended September 30, 2008 from $1,139,752 for the three months ended September 30, 2007, representing an increase of $70,830. The increase was attributable to a $232,151 increase in personnel and other benefits related costs, including a $34,686 increase in share-based compensation expenses related to SFAS No, 123(R) and an $80,415 increase in unallocated facilities, IT and other operating expenses. These increases were partly offset by a $234,107 reduction in accounting, investor relations and other professional services and a $7,629 decrease in the amortization of deferred financing costs related to the debt issuance costs of the June 2007 Notes and the 2008 Notes.
For the nine months ended September 30, 2008, general and administrative expenses increased to $4,092,548 from $3,805,953 for the nine months ended September 30, 2007, representing an increase of $286,595. The increase was attributable to a $379,936 increase in personnel and other benefits related costs, including a $318,810 increase in share-based compensation expenses related to SFAS No, 123(R), a $238,101 increase in the amortization of deferred financing costs related to the debt issuance costs of the June 2007 Notes and the 2008 Notes and a $260,041 increase in unallocated facilities, IT and other operating expenses. These increases were partly offset by a $437,187 decrease in accounting, investor relations and other professional services and a $154,296 reduction in travel expenses. The issuance of employee options was primarily responsible for the increase in share-based compensation and facilities expenses increased due to the new leasing agreements for office space in San Francisco, California in April 2007 and in New York, New York in October 2007.
Employees in general and administrative at September 30, 2008 and 2007 were 7 and 9, respectively.
Other Income and Expenses
Other expense increased to $887,565 for the three months ended September 30, 2008 from $547,030 for the three months ended September 30, 2007, representing an increase of $340,535. This increase was a result of increased interest expense and reduction in interest income.
For the nine months ended September 30, 2008, other expense increased to $2,095,624 from $588,430 for the nine months ended September 30, 2007, representing an increase of $1,507,194. This increase was a result of increased interest expense and reduction in interest income.
Interest income is derived primarily from short-term interest earned on operating cash balances.
Interest expense recorded in the three and nine months ended September 30, 2008 relates to the June 2007 Notes, including the discounts on warrants and the amortization of the discounts on the 2008 Notes and related warrants.
Liquidity and Capital Resources
As of September 30, 2008, we had $46,072 in cash and cash equivalents. To date, we have funded our operations primarily through private sales of securities and borrowings. Because we expect to continue to incur an operating loss in fiscal 2008, we will need to raise additional capital in the future, which may not be available on reasonable terms or at all. Failure to generate sufficient cash flows from operations or raise additional capital would have a material adverse effect on our ability to achieve our intended business objectives. These factors raise substantial doubt about our ability to continue as a going concern. The raising of additional capital may dilute our current stockholders’ ownership interests. See Part II, Item 1A, “Risk Factors -- We will need to raise additional capital to meet our business requirements in the future and such capital raising may be costly or difficult to obtain, especially in light of the recent downturn in the economy and dislocations in the credit and capital markets, and could dilute current stockholders’ ownership interests.”
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In two separate closings, on April 18, 2008 and June 30, 2008, we sold to certain accredited investors the 2008 Notes in the aggregate principal amount of $4,117,647 and the 2008 Warrants to purchase an aggregate of 3,997,723 shares of our common stock in a private placement transaction for an aggregate purchase price of $3,500,000. $2,754,949 in net proceeds from the sale of the 2008 Notes were received by the Company during the three months ended June 30, 2008, and $675,000 in net proceeds from the sale of the 2008 Notes were received by the Company during the three months ended September 30, 2008.
Net cash used in operating activities was $4,278,066 and $9,412,157 for the nine months ended September 30, 2008 and 2007, respectively. During the nine months ended September 30, 2008, the cash used in operating activities was primarily due to a net loss of $7,424,575 which is net of non cash expenses of $3,565,911, and a change in working capital of $3,146,509. The non cash expense items included depreciation and amortization of $195,118, amortization of convertible note fees of $385,089, stock-based compensation of $1,339,841 and non cash interest expense of $1,645,863. For the nine months ended September 30, 2007, the primary use of cash was due to a net loss of $10,879,459, which is net of non-cash expenses of $2,249,266, and a change in working capital of $1,467,302. The non-cash expense items included depreciation and amortization of $158,806, amortization of convertible note fees of $148,954, stock-based compensation of $1,005,950, non cash interest expense of $515,218 and write-off of acquisition advances of $420,338.
Net cash used in investing activities was $583,396 for the nine months ended September 30, 2008 and net cash provided by investing activities was $372,093 for the nine months ended September 30, 2007. For the nine months ended September 30, 2008, net cash used in investing activities consisted of $550,000 deposited as security for a letter of credit and the purchase of property and equipment in the amount of $33,396. For the nine months ended September 30, 2007, net cash provided by investing activities related to acquisition advances of $1,020,338, payment of direct acquisition costs of $350,000, funds released from restricted cash of $1,728,728, funds held as deposits of $160,856, advances to founder and stockholder of $660 and the purchase of property and equipment of $524,781.
Net cash provided by financing activities was $3,798,700 and $10,625,150 for the nine months ended September 30, 2008 and 2007, respectively. The net cash provided by financing activities for the nine months ended September 30, 2008 was $610,000 of advances from a shareholder and the net proceeds of $3,188,700 from the issuance of unsecured discount notes. The net cash from financing activities for the nine months ended September 30, 2007 was derived from the net proceeds from the issuance of our common stock of $1,759,278, repayment to shareholder of $384,793, proceeds from issuance of notes payable of $200,000, repayment of notes payable of $200,000, and net proceeds from the issuance of convertible notes and related warrants of $9,250,665.
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are 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.
An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimate that are reasonably likely to occur, could materially impact the consolidated financial statements. We believe that the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of the consolidated financial statements.
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Revenue Recognition
We recognize revenue from the display of graphical advertisements on the websites of the publishers in the GoFish Network as “impressions” are delivered up to the amount contracted for by the advertiser. An “impression” is delivered when an advertisement appears in pages viewed by users. Arrangements for these services generally have terms of less than one year.
We recognize these revenues as such because the services have been provided, and the other criteria set forth under Staff Accounting Bulletin Topic 13: Revenue Recognition have been met, namely, the fees we charge are fixed or determinable, we and our advertisers understand the specific nature and terms of the agreed-upon transactions and collectibility is reasonably assured. In accordance with Emerging Issues Task Force (“EITF”) Issue No. 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent (“EITF 99-19”), we report our revenues on a gross basis principally because we are the primary obligor to our advertisers.
Costs of Revenues and Expenses
Cost of revenue and expenses primarily consist of payments to publishers in the GoFish Network, personnel-related costs, including payroll, recruitment and benefits for executive, technical, corporate and administrative employees, in addition to professional fees, insurance and other general corporate expenses. We believe the key element to the execution of our strategy is the hiring of personnel in all areas that are vital to our business. Our investments in personnel include business development, sales and marketing, advertising, service and general corporate marketing and promotions.
Other expenses directly related to generating revenue include technology and operational infrastructure, including computer equipment maintenance, co-location and Internet connectivity fees, Web traffic analysis and technology license and usage fees.
Accounting for Stock Based Compensation
On January 1, 2006, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (R), “Share-Based Payment” (“SFAS 123 (R)”), using the modified prospective transition method. Under the fair value recognition provisions of SFAS 123 (R), stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period. Compensation for grants that were outstanding as of January 1, 2006 is being recognized over the remaining service period using the compensation cost previously estimated in our SFAS 123 pro forma disclosures.
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We currently use the Black-Scholes option-pricing model to determine the fair value of stock options. The determination of the fair value of stock based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as by assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. We estimate the volatility of our common stock at the date of the grant based on a combination of the implied volatility of publicly traded options on our common stock and our historical volatility rate. The dividend yield assumption is based on historical dividend payouts. The risk-free interest rate is based on observed interest rates appropriate for the term of our employee options. We use historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest. For options granted, we amortize the fair value on a straight-line basis. All options are amortized over the requisite service periods of the awards, which are generally the vesting periods. If factors change we may decide to use different assumptions under the Black-Scholes option-pricing model and stock-based compensation expense may differ materially in the future from that recorded in the current periods.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation and amortization. Major improvements are capitalized, while repair and maintenance costs that do not improve or extend the lives of the respective assets are expensed as incurred. Depreciation and amortization charges are calculated using the straight-line method over the following estimated useful lives:
Estimated Useful Life | |
Computer equipment and software | 3 years |
Furniture and fixtures | 5 years |
Leasehold improvements | Shorter of estimated useful life or lease term |
Upon retirement or sale, the cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is reflected in operating expenses. If factors change we may decide to use shorter or longer estimated useful lives and depreciation and amortization expense may differ materially in the future from that recorded in the current periods.
Impairment of Long-Lived Assets
We continually evaluate whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance of long-lived assets may not be recoverable. When factors indicate that long-lived assets should be evaluated for possible impairment, we typically make various assumptions about the future prospects the asset relates to, consider market factors and use an estimate of the related undiscounted future cash flows over the remaining life of the long-lived assets in measuring whether they are recoverable. If the estimated undiscounted future cash flows exceed the carrying value of the asset, a loss is recorded as the excess of the asset’s carrying value over its fair value. There have been no such impairments of long-lived assets through September 30, 2008.
Assumptions and estimates about future values are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, different assumptions and estimates could materially affect our reported financial results. More conservative assumptions of the anticipated future benefits could result in impairment charges, which would increase net loss and result in lower asset values on our balance sheet. Conversely, less conservative assumptions could result in smaller or no impairment charges, lower net loss and higher asset values.
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Income Taxes
We are subject to income taxes, federal and state, in the United States of America. We use the asset and liability approach to account for income taxes. This methodology recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax base of assets and liabilities and operating loss and tax carryforwards. We then record a valuation allowance to reduce deferred tax assets to an amount that more likely than not will be realized. In evaluating our ability to recover our deferred income tax assets we consider all available positive and negative evidence, including our operating results, ongoing tax planning and forecasts of future taxable income. We have provided a valuation allowance against our entire net deferred tax asset, primarily consisting of net operating loss carryforwards. In the event we were to determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance which would reduce the provision for income taxes.
Advertising and Promotion Costs
Expenses related to advertising and promotions of products are charged to expense as incurred. Advertising and promotional costs totaled $10,000 and $129,414 for the three and nine months ended September 30, 2008, respectively, and $118,941 and $1,604,808 for the three and nine months ended September 30, 2007, respectively.
Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (“SFAS”) No. 141 (Revised 2007) (“SFAS 141R”), Business Combinations. This statement will significantly change the accounting for business acquisitions both during the period of the acquisition and in subsequent periods. SFAS 141R provides companies with principles and requirements on how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any non-controlling interest in the acquiree as well as the recognition and measurement of goodwill acquired in a business combination. SFAS 141R also requires certain disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R will be effective January 1, 2009 for the Company and will be applied to any business combinations occurring on or after that date.
Concurrent with the issuance of SFAS No. 141R, the FASB issued SFAS No. 160 (“SFAS 160“), Non-controlling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51. SFAS 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 will also be effective for the Company effective January 1, 2009. Early adoption is not permitted. The Company does not currently expect the adoption of SFAS 160 to have any impact on its financial statements.
In March 2008, the FASB issued SFAS No. 161 (“SFAS 161“), Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133. SFAS 161 intends to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. SFAS 161 also requires disclosure about an entity’s strategy and objectives for using derivatives, the fair values of derivative instruments and their related gains and losses. SFAS is effective for fiscal years and interim periods beginning after November 15, 2008, and will be applicable to the Company in the first quarter of fiscal 2009. The Company does not currently expect the adoption of SFAS 161 to have any impact on its financial statements.
In May 2008, FASB issued SFAS No. 162 (“SFAS 162”), The Hierarchy of Generally Accepted Accounting Principles. SFAS 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 presented in conformity with generally accepted accounting principles in the United States of America. SFAS 162 will be effective 60 days following the SEC’s approval of the PCAOB amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company does not believe SFAS 162 will have a significant impact on the Company’s consolidated financial statements.
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In June 2008, the FASB issued Staff Position FSP EITF No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”). FSP EITF 03-6-1 provides that unvested shares-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earning per share pursuant to the two-class method. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data) to conform to the provisions in this FSP. Early application of this FSP is prohibited. The adoption of FSP EITF 03-6-1 is not anticipated to have a material effect on the Company’s consolidated financial statements.
During the first quarter of fiscal year 2008, the Company adopted the following accounting standard
In February 2008, the FASB issued FASB Staff Position (FSP) Financial Accounting Standard (FAS) 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Its Related Interpretive Accounting Pronouncements That Address Leasing Transactions (“FSP FAS 157-1”) and FSP FAS 157-2, Effective Date of FASB Statement No. 157. FSP FAS 157-1 removes leasing from the scope of SFAS No. 157, Fair Value Measurements. FSP FAS 157-2 delays the effective date of SFAS No. 157 from 2008 to 2009 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, at least annually.
In September 2006, the FASB finalized SFAS No. 157, which became effective January 1, 2008 except as amended by FSP FAS 157-1 and FSP FAS 157-2 as described above. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements; however, it does not require any new fair value measurements. The provisions of SFAS No. 157 were applied prospectively to fair value measurements and disclosures for financial assets and financial liabilities and nonfinancial assets and nonfinancial liabilities recognized or disclosed at fair value in the financial statements on at least an annual basis beginning in the first quarter of 2008. The adoption of this Statement did not have a material effect on the condensed consolidated financial statements for fair value measurements made during the first quarter of 2008. While the Company does not expect the adoption of this Statement to have a material impact on its consolidated financial statements in subsequent reporting periods, the Company continues to monitor any additional implementation guidance that is issued that addresses the fair value measurements for certain financial assets and nonfinancial assets and nonfinancial liabilities not disclosed at fair value in the consolidated financial statements on at least an annual basis.
Off-Balance Sheet Arrangements
We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Not applicable.
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ITEM 4. | CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures
· | Our board of directors has not established adequate financial reporting monitoring activities to mitigate the risk of management override, specifically: |
· | a majority of our board of directors is not independent; |
· | no financial expert on our board of directors has been designated; |
· | no formally documented financial analysis is presented to our board of directors, specifically fluctuation, variance, trend analysis or business performance reviews; |
· | delegation of authority has not been formally communicated; |
· | an effective whistleblower program has not been established; |
· | there is insufficient oversight of external audit specifically related to fees, scope of activities, executive sessions and monitoring of results; and |
· | there is insufficient oversight of accounting principle implementation. |
· | There is a strong reliance on the external auditors to review and adjust the quarterly and annual financial statements, to monitor new accounting principles, and to ensure compliance with SEC disclosure requirements. |
· | We have not maintained sufficient competent evidence to support the effective operation of our internal controls over financial reporting, specifically related to our board of directors’ oversight of quarterly and annual SEC filings; and management’s review of SEC filings, journal entries, account analyses and reconciliations, and critical spreadsheet controls. |
· | We have not sufficiently restricted access to data or adequately divided, or compensated for, incompatible functions among personnel to reduce the risk that a potential material misstatement of the financial statements would occur without being prevented or detected. Specifically we have not divided the authorizing of transactions, recording of transactions, reconciling of information, and maintaining custody of assets within the financial closing and reporting, revenue and accounts receivable, purchases and accounts payable, and cash receipts and disbursements processes. |
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As previously disclosed in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007 filed with the SEC on March 31, 2008, we have been in the process of implementing remediation efforts with respect to the material weaknesses noted above as follows:
· | We plan on continuing our search for an independent director to fill the remaining vacancy on our seven-member board of directors. In addition, we plan, over the course of the next year, to evaluate the composition of our board of directors and to determine whether to add two independent directors or to replace an inside director with an independent director, in both cases, in order to have a majority of our board of directors become independent. We will determine whether any of its current directors is a financial expert and, if not, will ensure that one of the new directors is a financial expert. |
· | We plan on drafting quarterly financial statement variance analysis of actual versus budget with relevant explanations of variances for distribution to our board of directors. |
· | We are currently working on formally documenting the delegation of authority. There will be a document that specifies exactly what requires board approval. Other than the specific items that our board of directors must authorize, delegate all other authority to the Chief Accounting Officer and point to the further delegation from the Chief Accounting Officer to employees. |
· | We are in the process of developing, documenting, and communicating a formal whistleblower program to employees. We expect to post the policy on the web site in the governance section and in the common areas in the office. We plan on providing a 1-800 number for reporting complaints and will hire a specific 3rd party whistleblower company to monitor the hotline and provide monthly reports of activity to our board of directors. |
· | Management intends to decrease its reliance on the external auditors by subscribing to a service that provides regular updates and research capabilities related to SEC and GAAP accounting pronouncements, and where needed, hiring external consultants with appropriate SEC and GAAP expertise to assist in financial statement review, account analysis review, review and filing of SEC reports, policy and procedure compilation assistance, and other related advisory services. |
· | We intend on developing internal control over financial reporting evidence policy and procedures which contemplates, among other items, a listing of all identified key internal controls over financial reporting, assignment of responsibility to process owners within the Company, communication of such listing to all applicable personnel, and specific policies and procedures around the nature and retention of evidence of the operation of controls. For example, all reviews must be evidenced via sign-off (signature and date). |
· | We intend on undertaking restricted access review to analyze all financial modules (Quickbooks, HR, etc.) and the list of persons authorized to have edit access to each. Remove or add authorized personnel as appropriate to mitigate the risks of management or other override. |
· | We are considering hiring additional accounting personnel in 2008 and re-assign roles and responsibilities in order to improve segregations of duties. |
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the third quarter ended September 30, 2008 that 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. |
From time to time we may be named in claims arising in the ordinary course of business. Currently, no legal proceedings, government actions, administrative actions, investigations or claims are pending against us or involve us that, in the opinion of our management, could reasonably be expected to have a material adverse effect on our business and financial condition.
ITEM 1A. |
We face a variety of risks that may affect our financial condition, results of operations or business, and many of those risks are driven by factors that we cannot control or predict. The following discussion addresses those risks that management believes are the most significant, although there may be other risks that could arise, or may prove to be more significant than expected, that may affect our financial condition, results of operations or business.
Risks Related to our Company
We have a history of operating losses which we expect to continue, and we may not be able to achieve profitability.
We have a history of losses and expect to continue to incur operating and net losses for the foreseeable future. We incurred a net loss of approximately $5.3 million for the year ended December 31, 2006, a net loss of approximately $16.4 million for the year ended December 31, 2007 and a net loss of approximately $11.0 million for the nine months ended September 30, 2008. As of September 30, 2008, our accumulated deficit was approximately $35.1 million. We have not achieved profitability on a quarterly or on an annual basis. We may not be able to achieve profitability. Our revenues for the nine months ended September 30, 2008 were $4,725,728 If our revenues grow more slowly than anticipated or if our operating expenses exceed expectations, then we may not be able to achieve profitability in the near future or at all, which may depress the price for our common stock.
The current downturn in the global economy and related economic uncertainties may materially and negatively affect our business, financial condition, growth and results of operations.
During 2008, there has been a significant downturn in the global economy, slower economic activity, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions, and liquidity concerns. The recent economic downturn has affected online ad spending and there are reports that many advertising networks are now shutting down or seeking buyers. In addition, these conditions make it difficult for our customers and us to accurately forecast and plan future business activities, and they could cause our customers to slow or defer spending on our products and services, which would delay and lengthen sales cycles, or change their willingness to enter into business arrangements with us. Furthermore, during challenging economic times, our customers may face issues gaining timely access to sufficient credit, which could result in an impairment of their ability to make timely payments to us and could negatively affect our financial condition and results of operations. We cannot predict the timing, strength, or duration of the current economic slowdown or any subsequent economic recovery. If the downturn in the general economy or markets in which we operate persists or worsens from present levels, our business, financial condition, growth and results of operations could be materially and negatively affected.
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A limited number of advertisers account for a significant percentage of our revenue, and a loss of one or more of these advertisers could materially adversely affect our results of operations.
We generate almost entirely all of our revenues from advertisers on the GoFish Network. For the nine months ended September 30, 2008, revenue from our five largest advertisers accounted for 48% of our revenue. Our largest advertiser accounted for 21% of our revenue for the nine months ended September 30, 2008. Our advertisers can generally terminate their contracts with us at any time. The loss of one or more of the advertisers that represent a significant portion of our revenue could materially adversely affect our results of operations. In addition, our relationships with publishers participating in the GoFish Network require us to bear the risk of non-payment of advertising fees from advertisers. Accordingly, the non-payment or late payment of amounts due to us from a significant advertiser could materially adversely affect our financial condition and results of operations.
For the nine months ended September 30, 2008, advertising revenue connected to our largest publisher accounted for approximately 68% of our revenues. Until the sales cycle on the newest sites in our publisher network matures, a small number of publishers will account for a substantial percentage of our revenue. We cannot assure you that any of the publishers participating in the GoFish Network will continue their relationships with us. Moreover, we may lose publishers to competing publisher networks that have longer operating histories, the ability to attract higher ad rates, greater brand recognition, or the ability to generate greater financial, marketing and other resources. Furthermore, we cannot assure you that we would be able to replace a departed publisher with another publisher with comparable traffic patterns and demographics, if at all. Accordingly, our failure to develop and sustain long-term relationships with publishers or the reduction in traffic of a current publisher in the GoFish Network could limit our ability to generate revenue.
Our future financial results, including our expected revenues, are unpredictable and difficult to forecast.
Our revenues, expenses and operating results fluctuate from quarter to quarter and are unpredictable which could increase the volatility of the price of our common stock. We expect that our operating results will continue to fluctuate in the future due to a number of factors, some of which are beyond our control. These factors include:
· | our ability to attract and incorporate publishers into the GoFish Network; |
· | the ability of the publishers in the GoFish Network to attract visitors to their websites; |
· | the amount and timing of costs relating to the expansion of our operations, including sales and marketing expenditures; |
· | our ability to control our gross margins; |
· | our ability to generate revenue through third-party advertising and our ability to be paid fees for advertising on the GoFish Network; and |
· | our ability to obtain cost-effective advertising throughout the GoFish Network. |
Due to all of these factors, our operating results may fall below the expectations of investors, which could cause a decline in the price of our common stock. In addition, since we expect that our operating results will continue to fluctuate in the future, it is difficult for us to accurately forecast our revenues.
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Our limited operating history in the operation of an online entertainment and media network of websites makes evaluation of our business difficult, and our revenues are currently insufficient to generate positive cash flows from our operations.
We have limited historical financial data upon which to base planned operating expenses or forecast accurately our future operating results. We formally launched the gofish.com website in October 2004 and only began building the GoFish Network during 2007. We formally launched the GoFish Network in February 2008. The revenue received currently is insufficient to generate positive cash flows from our operations.
We will need to raise additional capital to meet our business requirements in the future and such capital raising may be costly or difficult to obtain, especially in light of the recent downturn in the economy and dislocations in the credit and capital markets, and could dilute current stockholders’ ownership interests.
We will need to raise additional capital in the future, which may not be available on reasonable terms or at all, especially in light of the recent downturn in the economy and dislocations in the credit and capital markets. The raising of additional capital may dilute our current stockholders’ ownership interests. We will need to raise additional funds through public or private debt or equity financings to meet various objectives including, but not limited to:
· | pursuing growth opportunities, including more rapid expansion; |
· | acquiring complementary businesses; |
· | growing the GoFish Network, including the number of publishers and advertisers in the GoFish Network; |
· | hiring qualified management and key employees; |
· | responding to competitive pressures; and |
· | maintaining compliance with applicable laws. |
In addition, the raising of any additional capital through the sale of equity or equity-backed securities would dilute our current stockholders’ ownership percentages and would also result in a decrease in the fair market value of our equity securities because our assets would be owned by a larger pool of outstanding equity. The terms of those securities issued by us in future capital transactions may be more favorable to new investors, and may include preferences, superior voting rights and the issuance of warrants or other derivative securities, which may have a further dilutive effect.
Furthermore, the June 2007 Notes, the June 2007 Warrants, the June 2007 Placement Agent Warrants, the 2008 Notes, the 2008 Warrants and certain other warrants are also subject to full-ratchet anti-dilution protection. If we issue common stock or securities convertible into common stock at a price per share lower than the $1.60 per share conversion price of the June 2007 Notes, the $2.06 per share conversion price of the 2008 Notes or the $1.75 per share exercise price of the June 2007 Warrants, the June 2007 Placement Agent Warrants and the 2008 Warrants, such conversion or exercise price, as applicable, would be automatically adjusted to equal the lower price. This “full ratchet anti-dilution” provision could operate to create substantial additional dilution for our then-existing stockholders if we need to raise additional funds at a time when the price an investor would pay for our common stock is less than $1.60 per share (in the case of the June 2007 Notes), $2.06 per share (in the case of the 2008 Notes) or $1.75 per share (in the case of the June 2007 Warrants, the June 2007 Placement Agent Warrants and the 2008 Warrants).
If we are unable to obtain required additional capital, we may have to curtail our growth plans or cut back on existing business and, further, we may not be able to continue operating if we do not generate sufficient revenues from operations needed to stay in business.
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We may incur substantial costs in pursuing future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we issue, such as convertible notes and warrants, which may adversely impact our financial condition.
Our substantial indebtedness could adversely affect our financial condition and our ability to operate our business.
We have a substantial amount of indebtedness and, subject to restrictions in agreements governing our June 2007 Notes and our 2008 Notes, we may incur additional indebtedness in the future. Our substantial indebtedness could have important consequences to us and your investment in our common stock, including the following:
· | it may be difficult for us to satisfy our obligations, including debt service requirements under our outstanding indebtedness, and we may be unable to generate sufficient cash flow to service our debt and meet our other commitments; |
· | our ability to obtain additional financing for working capital, capital expenditures, debt service requirements or other general corporate purposes may be impaired; |
· | we must use a significant portion of our cash flow for payments on our debt, which may reduce the funds available to reinvest in the Company and its business; |
· | we are more vulnerable to economic downturns and adverse industry conditions and our flexibility to plan for, or react to, changes in our business or industry is more limited; |
· | our ability to capitalize on business opportunities and to react to competitive pressures, as compared to our competitors, may be compromised due to our high level of debt; and |
· | our ability to borrow additional funds or to refinance debt may be limited. |
Negative covenants in agreements governing our June 2007 Notes and our 2008 Notes limit, among other things, our ability to incur debt, pay dividends, raise additional capital, create liens on our properties and/or issue equity securities with registration rights, which may impair our ability to pursue our objectives.
The purchase agreement governing our June 2007 Notes and the subscription agreement governing our 2008 Notes contain various negative covenants that limit, among other things, our ability to incur debt (except for certain excepted issuances), pay dividends, raise additional capital, create liens on our properties and issue equity securities with registration rights (except for certain excepted issuances), without the consent of holders of greater than 75% of the aggregate principal amount of the June 2007 Notes then outstanding. In addition, the subscription agreement governing our 2008 Notes contain various negative covenants that limit, among other things, our ability to create liens on our properties (except for certain permitted liens), pay dividends and incur obligations for borrowed money (except for certain excepted issuances and permitted liens), without the consent of the holders of the 2008 Notes. While certain holders of the June 2007 Notes had consented to the execution of the subscription agreement governing our 2008 Notes and the issuance of our 2008 Notes and our 2008 Warrants thereunder, we cannot assure you that we would be able to obtain similar consents under such indebtedness as may be necessary in the future. Accordingly, these negative covenants may impair our ability to pursue our objectives.
Any failure to comply with those covenants may constitute a breach under the purchase agreement governing our June 2007 Notes and/or the subscription agreement governing our 2008 Notes, as the case may be, that would provide the holders of such notes with, among other things, the right to require us to purchase all or any part of the then outstanding principal amount of the June 2007 Notes and the 2008 Notes, as the case may be. We may not have sufficient funds to repay all amounts payable under the June 2007 Notes or the 2008 Notes upon such a breach.
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We are required to pay liquidated damages to certain of our investors under our October 27, 2006 Registration Rights Agreement and our June 7, 2007 Registration Rights Agreement.
We entered into a registration rights agreement on October 27, 2006 in connection with our October 2006 private offering and a registration rights agreement on June 7, 2007 in connection with our June 2007 private placement. These registration rights agreements require us to pay partial liquidated damages under certain circumstances if we do not satisfy our obligations under such registration rights agreements, including our obligations to file or obtain or maintain the effectiveness of registration statements as required under these registration rights agreements. If we are unable to satisfy our obligations under these registration rights agreements and we are obligated to pay partial liquidated damages, it may adversely impact our financial condition.
While the registration statement filed pursuant to the October 27, 2006 Registration Rights Agreement (File No. 333-142460) was declared effective by the SEC on October 25, 2007, we did not satisfy our obligations in the manner set forth in that registration rights agreement. As a result, we incurred partial liquidated damages at a rate equal to 1% of the October 2006 private placement purchase price for each of the shares being registered for resale under such registration statement on their behalf for every 30 days that we were in default (pro rated for any period less than 30 days) to the extent that the shares were held by the selling stockholder during the period of such non-compliance.
Our June 7, 2007 Registration Rights Agreement also contains a partial liquidated damages provision for our failure to have the registration statement declared effective by the SEC by a certain date, subject to certain exceptions. While we had registration statements filed pursuant to the June 7, 2007 Registration Rights Agreement (File Nos. 333-145406 and 333-152921) declared effective by the SEC on February 8, 2008 and October 14, 2008, we did not satisfy our obligations in the manner set forth in that registration rights agreement. As a result, we incurred partial liquidated damages under that registration rights agreement equal to 1% of the outstanding principal amount of the June 2007 Notes that were not convertible into underlying shares covered by an effective registration statement until February 8, 2008.
Our auditors have indicated that our inability to generate sufficient revenue raises substantial doubt as to our ability to continue as a going concern.
Our audited consolidated financial statements for the fiscal year ended December 31, 2007 were prepared on a going concern basis in accordance with United States generally accounting principles. The going concern basis of presentation assumes that we will continue in operation for the foreseeable future and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business. However, our auditors have indicated that our inability to generate sufficient revenue raises substantial doubt as to our ability to continue as a going concern. In the absence of significant revenues and profits, we are seeking to raise additional funds to meet our working capital needs principally through the additional sales of our securities or debt financings. However, we cannot guarantee that we will be able to obtain sufficient additional funds when needed, or that such funds, if available, will be obtainable on terms satisfactory to us. In the event that these plans cannot be effectively realized, there can be no assurance that we will be able to continue as a going concern.
If we acquire or invest in other companies, assets or technologies and we are not able to integrate them with our business, or we do not realize the anticipated financial and strategic goals for any of these transactions, our financial performance may be impaired.
As part of our growth strategy, we routinely consider seeking to acquire or make investments in companies, assets or technologies that we believe are strategic to our business. We do not have extensive experience in integrating new businesses or technologies, and if we do succeed in acquiring or investing in a company or technology, we will be exposed to a number of risks, including:
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· | we may find that the acquired company or technology does not further our business strategy, that we overpaid for the acquired company or technology or that the economic conditions underlying our acquisition decision have changed; |
· | we may have difficulty integrating the assets, technologies, operations or personnel of an acquired company, or retaining the key personnel of the acquired company; |
· | our ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the complexity of managing geographically or culturally diverse enterprises; |
· | we may encounter difficulty entering and competing in new markets or increased competition, including price competition or intellectual property litigation; and |
· | we may experience significant problems or liabilities associated with technology and legal contingencies relating to the acquired business or technology, such as intellectual property or employment matters. |
If we were to proceed with one or more significant acquisitions or investments in which the consideration included cash, we could be required to use a substantial portion of our available cash. To the extent we issue shares of capital stock or other rights to purchase capital stock, including options and warrants, existing shareholders would be diluted.
Our business depends on enhancing our brand, and failing to enhance our brand would hurt our ability to expand our base of users, advertisers and publishers in the GoFish Network.
Enhancing our brand is critical to expanding our base of users, advertisers, publishers in the GoFish Network and other partners. We believe that the importance of brand recognition will increase due to the relatively low barriers to entry in the internet market. If we fail to enhance our brand, or if we incur excessive expenses in this effort, our business, operating results and financial condition will be materially and adversely affected. Enhancing our brand will depend largely on our ability to provide high-quality products and services, which we may not do successfully.
We intend to expand our operations and increase our expenditures in an effort to grow our business. If we are unable to achieve or manage significant growth and expansion, or if our business does not grow as we expect, our operating results may suffer.
Our business plan anticipates continued additional expenditure on development and other growth initiatives. We may not achieve significant growth. If achieved, significant growth would place increased demands on our management, accounting systems, network infrastructure and systems of financial and internal controls. We may be unable to expand associated resources and refine associated systems fast enough to keep pace with expansion. If we fail to ensure that our management, control and other systems keep pace with growth, we may experience a decline in the effectiveness and focus of our management team, problems with timely or accurate reporting, issues with costs and quality controls and other problems associated with a failure to manage rapid growth, all of which would harm our results of operations.
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We recently experienced a significant change in our top management.
On June 5, 2008, we announced the resignation of Michael Downing as our Chief Executive Officer and a director and the appointment of Matt Freeman as our Chief Executive Officer and a director. Although the board of directors believes that this management change is in our best interests and that our new Chief Executive Officer will have a positive impact on the Company, a significant personnel change may have the effect of disrupting our day-to-day operations until such time as our new Chief Executive Officer is integrated and fully informed with respect to our business and operations.
Losing key personnel or failing to attract and retain other highly skilled personnel could affect our ability to successfully grow our business.
Our future performance depends substantially on the continued service of our senior management, sales and other key personnel. We do not currently maintain key person life insurance. If our senior management were to resign or no longer be able to serve as our employees, it could impair our revenue growth, business and future prospects. In addition, the success of our monetization and sales plans depends on our ability to retain people in direct sales and to hire additional qualified and experienced individuals into our sales organization.
To meet our expected growth, we believe that our future success will depend upon our ability to hire, train and retain other highly skilled personnel. Competition for quality personnel is intense among technology and Internet-related businesses such as ours. We cannot be sure that we will be successful in hiring, assimilating or retaining the necessary personnel, and our failure to do so could cause our operating results to fall below our projected growth and profit targets.
Decreased effectiveness of equity compensation could adversely affect our ability to attract and retain employees and harm our business.
We have historically used stock options as a key component of our employee compensation program in order to align employees’ interests with the interests of our stockholders, encourage employee retention, and provide competitive compensation packages. Volatility or lack of positive performance in our stock price may adversely affect our ability to retain key employees, many of whom have been granted stock options, or to attract additional highly-qualified personnel. As of September 30, 2008, a majority of our employees have outstanding stock options with exercise prices in excess of the stock price on that date.
Rules issued under the Sarbanes-Oxley Act of 2002 may make it difficult for us to retain or attract qualified officers and directors, which could adversely affect the management of our business and our ability to retain the trading status of our common stock on the OTC Bulletin Board.
We may be unable to attract and retain those qualified officers, directors and members of board committees required to provide for our effective management because of rules and regulations that govern publicly held companies, including, but not limited to, certifications by principal executive officers. The enactment of the Sarbanes-Oxley Act of 2002 has resulted in the issuance of rules and regulations and the strengthening of existing rules and regulations by the SEC. The perceived increased personal risk associated with these recent changes may deter qualified individuals from accepting roles as directors and executive officers.
We may have difficulty attracting and retaining directors with the requisite qualifications. If we are unable to attract and retain qualified officers and directors, the management of our business and our ability to retain the quotation of our common stock on the OTC Bulletin Board or obtain a listing of our common stock on a stock exchange or NASDAQ could be adversely affected.
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Our management has identified a number of material weaknesses in our internal control over financial reporting as of December 31, 2007, which, if not sufficiently remediated, could result in material misstatements in our annual or interim financial statements in future periods.
In connection with our management’s assessment of our internal control over financial reporting as required under Section 404 of the Sarbanes-Oxley Act of 2002, our management identified a number of material weaknesses in our internal control over financial reporting as of December 31, 2007. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As a result, our management has concluded that we did not maintain effective internal control over financial reporting as of December 31, 2007. In addition, based on an evaluation as of September 30, 2008 and the identification of a number of material weaknesses in our internal control over financial reporting, our Chief Executive Officer and our Chief Accounting Officer also concluded that we did not maintain effective disclosure controls and procedures as of September 30, 2008.
We have been in the process of implementing remediation efforts with respect to these material weaknesses. For more information regarding these remediation efforts, please see Part I, Item 4, “Controls and Procedures.” However, if these remediation efforts are insufficient to address these material weaknesses, or if additional material weaknesses in our internal control over financial reporting are discovered in the future, we may fail to meet our future reporting obligations, our financial statements may contain material misstatements and our financial conditions and results of operations may be adversely impacted. Any such failure could also adversely affect our results of periodic management assessment regarding the effectiveness of our internal control over financial reporting, as required by the SEC’s rules under Section 404 of the Sarbanes-Oxley Act of 2002. The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements or failure to meet reporting obligations, which in turn could cause investors to lose confidence in reported financial information leading to a decline in our stock price.
Although we believe that these remediation efforts will enable us to improve our internal control over financial reporting, we cannot assure you that these remediation efforts will remediate the material weaknesses identified or that any additional material weaknesses will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting. Furthermore, there are inherent limitations to the effectiveness of controls and procedures, including the possibility of human error and circumvention or overriding of controls and procedures.
We may have undisclosed liabilities that could harm our revenues, business, prospects, financial condition and results of operations.
Our present management had no affiliation with Unibio Inc. (which changed its name to GoFish Corporation on September 14, 2006) prior to the October 27, 2006 mergers. Although the October 27, 2006 Agreement and Plan of Merger contained customary representations and warranties regarding our pre-merger operations and customary due diligence was performed, all of our pre-merger material liabilities may not have been discovered or disclosed. We do not believe this to be the case but can offer no assurance as to claims which may be made against us in the future relating to such pre-merger operations. The Agreement and Plan of Merger and Reorganization contained a limited, upward, post-closing, adjustment to the number of shares of common stock issuable to pre-merger GoFish Technologies Inc. and Internet Television Distribution Inc. shareholders as a means of providing a remedy for breaches of representations made by us in the Agreement and Plan of Merger and Reorganization, including representations related to any undisclosed liabilities, however, there is no comparable protection offered to our other stockholders. Any such undisclosed pre-merger liabilities could harm our revenues, business, prospects, financial condition and results of operations upon our acceptance of responsibility for such liabilities.
Regulatory requirements may materially adversely affect us.
We are subject to various regulatory requirements, including the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002 requires the evaluation and determination of the effectiveness of a company’s internal control over its financial reporting. In connection with management’s assessment of our internal control over financial reporting as required under Section 404 of the Sarbanes-Oxley Act of 2002, we identified material weaknesses in our internal control over financial reporting as of December 31, 2007. As a result, we have incurred additional costs and may suffer adverse publicity and other consequences of this determination.
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We may be subject to claims relating to certain actions taken by our former external legal counsel.
In February 2007, we learned that approximately half of the three million shares of our common stock issued as part of a private placement transaction we consummated in October 2006 to entities controlled by Louis Zehil, who at the time of the purchase was a partner of our former external legal counsel for the private placement transaction, McGuireWoods LLP, may have been improperly traded. We believe that Mr. Zehil improperly caused our former transfer agent not to place a required restrictive legend on the certificate for these three million shares and that Mr. Zehil then caused the entities he controlled to resell certain of these shares. Mr. Zehil’s conduct was reported to the SEC, and the SEC recently sued Mr. Zehil in connection with this matter and further alleged that Mr. Zehil engaged in a similar fraudulent scheme with respect to six additional public companies represented at the relevant time by McGuireWoods LLP. Mr. Zehil also is the subject of criminal charges brought by federal prosecutors in connection with the fraudulent scheme.
It is possible that one or more of our stockholders could claim that they somehow suffered a loss as a result of Mr. Zehil’s conduct and attempt to hold us responsible for their losses. If any such claims are successfully made against us and we are not adequately indemnified for those claims from available sources of indemnification, then such claims could have a material adverse effect on our financial condition. We also may incur significant costs resulting from our investigation of this matter, any litigation we may initiate as a result and our cooperation with governmental authorities. We may not be adequately indemnified for such costs from available sources of indemnification.
Risks Related to our Business
We recently refined our strategic focus, and the success of our business will depend on our ability to effectively implement our refined strategic focus.
We recently refined our strategic focus to narrow our target audience to the 6-17 year old demographic and their co-viewing parents and to seek to enter into contractual relationships with websites (“publishers”) that we believe appeal to a similar target audience, under which we take on responsibility for selling their inventory of available advertising opportunities, as well as syndicating video content to them. In connection with the development and implementation of our refined strategic focus, we have spent, and continue to expect to spend, additional time and costs, including those associated with advertising and marketing efforts and building a network that includes other publishers. If we are unable to effectively implement our refined strategic focus, our business and operating results would be adversely affected.
We may be unable to attract advertisers to the GoFish Network.
Advertising revenues comprise, and are expected to continue to comprise, almost entirely all of our revenues generated from the GoFish Network. Most large advertisers have fixed advertising budgets, only a small portion of which has traditionally been allocated to Internet advertising. In addition, the overall market for advertising, including Internet advertising, has been generally characterized in recent periods by softness of demand, reductions in marketing and advertising budgets, and by delays in spending of budgeted resources. Advertisers may continue to focus most of their efforts on traditional media or may decrease their advertising spending. If we fail to convince advertisers to spend a portion of their advertising budgets with us, we will be unable to generate revenues from advertising as we intend.
Even if we initially attract advertisers to the GoFish Network, they may decide not to advertise to our community if their investment does not have the desired result, or if we do not deliver their advertisements in an appropriate and effective manner. If we are unable to provide value to our advertisers, advertisers may reduce the rates they are willing to pay or may not continue to place ads with us.
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We generate almost entirely all of our revenue from advertising, and the reduction in spending by, or loss of, advertisers could seriously harm our business.
We generate almost entirely all of our revenues from advertisers on the GoFish Network. Our advertisers can generally terminate their contracts with us at any time. If we are unable to remain competitive and provide value to our advertisers, they may stop placing ads with us, which would negatively affect our revenues and business. In addition, expenditures by advertisers tend to be cyclical, reflecting overall economic conditions and budgeting and buying patterns. Any decreases in or delays in advertising spending due to general economic conditions could reduce our revenues or negatively impact our ability to grow our revenues. We also may encounter difficulty collecting from our advertisers. We are a relatively small company and advertisers may choose to pay our bills after paying debts of their larger clients.
If we fail to compete effectively against other Internet advertising companies, we could lose customers or advertising inventory and our revenue and results of operations could decline.
The Internet advertising markets are characterized by rapidly changing technologies, evolving industry standards, frequent new product and service introductions, and changing customer demands. The introduction of new products and services embodying new technologies and the emergence of new industry standards and practices could render our existing products and services obsolete and unmarketable or require unanticipated technology or other investments. Our failure to adapt successfully to these changes could harm our business, results of operations and financial condition.
The market for Internet advertising and related products and services is highly competitive. We expect this competition to continue to increase, in part because there are no significant barriers to entry to our industry. Increased competition may result in price reductions for advertising space, reduced margins and loss of market share. We compete against well-capitalized advertising companies as well as smaller companies.
We compete against self-serve advertising networks such as Google AdSense, Valueclick, Advertising.com and Tribal Fusion that serve impressions onto a wide variety of mostly small and medium sites. We compete against behavioral networks, such as Tacoda and Blue Lithium, which serve the same inventory as general networks, but add behavioral targeting. We also compete against other full-service advertising networks that provide a more complete service when selling advertising, such as Gorilla Nation and Glam.
If existing or future competitors develop or offer products or services that provide significant performance, price, creative or other advantages over those offered by us, our business, results of operations and financial condition could be negatively affected. Many current and potential competitors enjoy competitive advantages over us, such as longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales and marketing resources. As a result, we may not be able to compete successfully. If we fail to compete successfully, we could lose customers or advertising inventory and our revenue and results of operations could decline.
We face competition from websites catering to our target demographic, as well as traditional media companies, and we may not be included in the advertising budgets of large advertisers, which could harm our revenues and results of operations.
In the online advertising market, we compete for advertising dollars with all websites catering to our target demographic, including portals, search engines and websites belonging to other advertising networks. We also compete with traditional advertising media, such as direct mail, television, radio, cable, and print, for a share of advertisers’ total advertising budgets. Most large advertisers have fixed advertising budgets, a small portion of which is allocated to internet advertising. We expect that large advertisers will continue to focus most of their advertising efforts on traditional media. If we fail to convince these companies to spend a portion of their advertising budgets with us, or if our existing advertisers reduce the amount they spend on our programs, our revenues and results of operations would be harmed.
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We may be unable to attract and incorporate high quality publishers into the GoFish Network.
Our future revenues and success depend upon, among other things, our ability to attract and contract with high-quality publishers to participate in the GoFish Network. We cannot assure you that publishers will want to participate, or continue to participate, in the GoFish Network. If we are unable to successfully attract publishers to the GoFish Network, it could adversely affect our ability to generate revenues and could impede our business plan. Even if we do successfully attract publishers, we cannot assure you that we will be able to incorporate these publishers into the GoFish Network without substantial costs, delays or other problems.
Our services may fail to maintain the market acceptance they have achieved or to grow beyond current levels, which would adversely affect our competitive position.
We have not conducted any independent studies with regard to the feasibility of our proposed business plan, present and future business prospects and capital requirements. Our services may fail to gain market acceptance and our infrastructure to enable such expansion is still limited. Even if adequate financing is available and our services are ready for market, we cannot be certain that our services will find sufficient acceptance in the marketplace to fulfill our long and short-term goals. Failure of our services to achieve or maintain market acceptance would have a material adverse effect on our business, financial condition and results of operations.
We may fail to select the best publishers for the GoFish Network.
The number of websites aimed at the 6-17 year old demographic has increased substantially in recent years. Our owned and operated websites, and our publishers’ websites, face numerous competitors both on the Internet, and in the more traditional broadcasting arena. Some of these companies have substantially longer operating histories, significantly greater financial, marketing and technical expertise, and greater resources and name recognition than we do. Moreover, the offerings on the GoFish Network may not be sufficiently distinctive or may be copied by others. If we fail to attain commercial acceptance of our services and to be competitive with these companies, we may not ever generate meaningful revenues. In addition, new companies may emerge at any time with services that are superior, or that the marketplace perceives are superior, to ours.
If we fail to anticipate, identify and respond to the changing tastes and preferences of our target demographic, our business is likely to suffer.
Our business and results of operations depend upon the appeal of the sites in the GoFish Network to consumers. The tastes and preferences of our consumers, particularly those of the 6-17 year old demographic, frequently change, and our success depends on our ability to anticipate, identify and respond to these changing tastes and preferences by incorporating appropriate publishers into the GoFish Network. If we are unable to successfully predict or respond to changing tastes and preferences of consumers, we may not be able to establish relationships with the most popular publishers, which may cause our revenues to decline.
We may be subject to market risk and legal liability in connection with the data collection capabilities of the publishers in the GoFish Network.
Many components of websites on the GoFish Network are interactive Internet applications that by their very nature require communication between a client and server to operate. To provide better consumer experiences and to operate effectively, many of the websites on the GoFish Network collect certain information from users. The collection and use of such information may be subject to U.S. state and federal privacy and data collection laws and regulations, as well as foreign laws such as the EU Data Protection Directive. Recent growing public concern regarding privacy and the collection, distribution and use of information about Internet users has led to increased federal, state and foreign scrutiny and legislative and regulatory activity concerning data collection and use practices. The United States Congress currently has pending legislation regarding privacy and data security measures (e.g., S. 495, the “Personal Data Privacy and Security Act of 2007”). Any failure by us to comply with applicable federal, state and foreign laws and the requirements of regulatory authorities may result in, among other things, in liability and materially harm our business.
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The websites on the GoFish Network post privacy policies concerning the collection, use and disclosure of user data, including that involved in interactions between our client and server products. Because of the evolving nature of our business and applicable law, such privacy policies may now or in the future fail to comply with applicable law. The websites on the GoFish Network are subject to various federal and state laws concerning the collection and use of information regarding individuals. These laws include the Children’s Online Privacy Protection Act, the Federal Drivers Privacy Protection Act of 1994, the privacy provisions of the Gramm-Leach-Bliley Act, the Federal CAN-SPAM Act of 2003, as well as other laws that govern the collection and use of information. We cannot assure you that the websites on the GoFish Network are currently in compliance, or will remain in compliance, with these laws and their own privacy policies. Any failure to comply with posted privacy policies, any failure to conform privacy policies to changing aspects of the business or applicable law, or any existing or new legislation regarding privacy issues could impact the market for our publishers’ websites, technologies and products and this may adversely affect our business.
Activities of advertisers or publishers in the GoFish Network could damage our reputation or give rise to legal claims against us.
The promotion of the products and services by publishers in the GoFish Network may not comply with federal, state and local laws, including but not limited to laws and regulations relating to the Internet. Failure of our publishers to comply with federal, state or local laws or our policies could damage our reputation and adversely affect our business, results of operations or financial condition. We cannot predict whether our role in facilitating our customers’ marketing activities would expose us to liability under these laws. Any claims made against us could be costly and time-consuming to defend. If we are exposed to this kind of liability, we could be required to pay substantial fines or penalties, redesign our business methods, discontinue some of our services or otherwise expend resources to avoid liability.
We also may be held liable to third parties for the content in the advertising we deliver on behalf of our publishers. We may be held liable to third parties for content in the advertising we serve if the music, artwork, text or other content involved violates the copyright, trademark or other intellectual property rights of such third parties or if the content is defamatory, deceptive or otherwise violates applicable laws or regulations. Any claims or counterclaims could be time consuming, result in costly litigation or divert management’s attention.
We depend on third-party Internet, telecommunications and technology providers for key aspects in the provision of our services and any failure or interruption in the services that third parties provide could disrupt our business.
We depend heavily on several third-party providers of Internet and related telecommunication services, including hosting and co-location facilities, as well as providers of technology solutions, including software developed by third party vendors, in delivering our services. In addition, we use third party vendors to assist with product development, campaign deployment and support services for some of our products and services. These companies may not continue to provide services or software to us without disruptions in service, at the current cost or at all.
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If the products and services provided by these third-party vendors are disrupted or not properly supported, our ability to provide our products and services would be adversely impacted. In addition, any financial or other difficulties our third party providers face may have negative effects on our business, the nature and extent of which we cannot predict. While we believe our business relationships with our key vendors are good, a material adverse impact on our business would occur if a supply or license agreement with a key vendor is materially revised, is not renewed or is terminated, or the supply of products or services were insufficient or interrupted. The costs associated with any transition to a new service provider could be substantial, require us to reengineer our computer systems and telecommunications infrastructure to accommodate a new service provider and disrupt the services we provide to our customers. This process could be both expensive and time consuming and could damage our relationships with customers.
In addition, failure of our Internet and related telecommunications providers to provide the data communications capacity in the time frame we require could cause interruptions in the services we provide. Unanticipated problems affecting our computer and telecommunications systems in the future could cause interruptions in the delivery of our services, causing a loss of revenue and potential loss of customers.
More individuals are using non-PC devices to access the Internet. We may be unable to capture market share for advertising on these devices.
The number of people who access the Internet through devices other than personal computers, including mobile telephones, smart phones, handheld computers and video game consoles, has increased dramatically in the past few years. Most of the publishers in the GoFish Network originally designed their services for rich, graphical environments such as those available on desktop and laptop computers. The lower resolution, functionality and memory associated with alternative devices make the use of these websites difficult and the publishers in the GoFish Network developed for these devices may not be compelling to users of alternative devices. In addition, the creative advertising solutions that thrive in rich environments may be less attractive to advertisers on these devises. The use of such creative advertising is part what makes our services attractive to advertisers and is what most contributes to our margins. If we are slow to develop services and technologies that are more compatible with non-PC communications devices or if we are unable to attract and retain a substantial number of publishers that focus on alternative device users to our online services, we will fail to capture a significant share of an increasingly important portion of the market for online services, which could adversely affect our business.
Risks Related to our Industry
Anything that causes users of websites on the GoFish Network to spend less time on their computers, including seasonal factors and national events, may impact our profitability.
Anything that diverts users of the GoFish Network from their customary level of usage could adversely affect our business. Geopolitical events such as war, the threat of war or terrorist activity, and natural disasters such as hurricanes or earthquakes all could adversely affect our profitability. Similarly, our results of operations historically have varied seasonally because many of our users reduce their activities on our website with the onset of good weather during the summer months, and on and around national holidays.
If the delivery of Internet advertising on the Web is limited or blocked, demand for our services may decline.
Our business may be adversely affected by the adoption by computer users of technologies that harm the performance of our services. For example, computer users may use software designed to filter or prevent the delivery of Internet advertising, including pop-up and pop-under advertisements; block, disable or remove cookies used by our ad serving technologies; prevent or impair the operation of other online tracking technologies; or misrepresent measurements of ad penetration and effectiveness. We cannot assure you that the proportion of computer users who employ these or other similar technologies will not increase, thereby diminishing the efficacy of our products and services. In the event that one or more of these technologies became more widely adopted by computer users, demand for our products and services would decline.
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Advertisers may be reluctant to devote a portion of their budgets to marketing technology and data products and services or online advertising.
Companies doing business on the Internet, including us, must compete with traditional advertising media, including television, radio, cable and print, for a share of advertisers’ total marketing budgets. Potential customers may be reluctant to devote a significant portion of their marketing budget to online advertising or marketing technology and data products and services if they perceive the Internet or direct marketing to be a limited or ineffective marketing medium. Any shift in marketing budgets away from marketing technology and data products or services or online advertising spending, or our offerings in particular, could materially and adversely affect our business, results of operations or financial condition. In addition, online advertising could lose its appeal to those advertisers using the Internet as a result of its ad performance relative to other media.
The lack of appropriate measurement standards or tools may cause us to lose customers or prevent us from charging a sufficient amount for our products and services.
Because many online marketing technology and data products and services remain relatively new disciplines, there is often no generally accepted methods or tools for measuring the efficacy of online marketing and advertising as there are for advertising in television, radio, cable and print. Therefore, many advertisers may be reluctant to spend sizable portions of their budget on online marketing and advertising until more widely accepted methods and tools that measure the efficacy of their campaigns are developed. In addition, direct marketers are often unable to accurately measure campaign performance across all response channels or identify which of their marketing methodologies are driving customers to make purchases. Therefore, our customers may not be able to assess the effectiveness of our services and as a result, we could lose customers, fail to attract new customers or existing customer could reduce their use of our services.
We could lose customers or fail to gain customers if our services do not utilize the measuring methods and tools that may become generally accepted. Further, new measurement standards and tools could require us to change our business and the means used to charge our customers, which could result in a loss of customer revenues and adversely impact our business, financial condition and results of operation.
We may infringe on third-party intellectual property rights and could become involved in costly intellectual property litigation.
Other parties claiming infringement by the software on our owned and operated sites or other aspects of our business could sue us. We may be liable to third parties for content available or posted on our owned and operated websites, including music videos and clips from movies or television, which may violate the copyright, trademark or other intellectual property rights of such third parties, or we may be liable if the content is defamatory.
In addition, any future claims, with or without merit, could impair our business and financial condition because they could:
· | result in significant litigation costs; |
· | divert the attention of management; |
· | divert resources; or |
· | require us to enter into royalty and licensing agreements that may not be available on terms acceptable to us or at all. |
We may experience unexpected expenses or delays in service enhancements if we are unable to license third-party technology on commercially reasonable terms.
We rely on a variety of technology that we license from third parties. These third-party technology licenses might not continue to be available to us on commercially reasonable terms or at all. If we are unable to obtain or maintain these licenses on favorable terms, or at all, our ability to efficiently deliver advertisements at the best rates available might be impaired and this would adversely impact our business.
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It is not yet clear how laws designed to protect children that use the Internet may be interpreted and enforced, and whether new similar laws will be enacted in the future which may apply to our business in ways that may subject us to potential liability.
The Children’s Online Privacy Protection Act (“COPPA”) imposes civil penalties for collecting personal information from children under the age of 13 without complying with the requirements of COPPA. While we have narrowed our target audience on the GoFish Network to the 6-17 year old demographic and their co-viewing parents, we do not allow users under 13 to register on our owned and operated websites and we do not collect personal information from children under the age of 13. However, we are not able to control the ways in which consumers use our technology, and our technology may be used for purposes that violate these laws. In addition, publishers in the GoFish Network may violate COPPA on their websites.
Although COPPA is a relatively new law, the Federal Trade Commission (“FTC”) has recently been more active in enforcing violations with COPPA. In the last 18 months, the FTC has brought a number of actions against website operators for failure to comply with COPPA requirements, and has imposed fines of up to $1 million. Future legislation similar to these Acts could subject us to potential liability if we were deemed to be noncompliant with such rules and regulations.
We may also be subject to the provisions of the Child Online Protection Act (“COPA”), which restricts the distribution of certain materials deemed harmful to children. COPA is also designed to restrict access to such materials by children, and accordingly, the provisions of COPA may apply to certain Internet product and service providers even though such companies are not engaged in the business of distributing the harmful materials. Although some court decisions have cast doubt on the constitutionality of COPA, and we have instituted processes for voluntary compliance with provisions of COPA that may be relevant to our business, COPA could subject us to liability.
Increasing governmental regulation of the Internet could harm our business.
The publishers in the GoFish Network are subject to the same federal, state and local laws as other companies conducting business on the Internet. Today there are relatively few laws specifically directed towards conducting business on the Internet. However, due to the increasing popularity and use of the Internet, many laws and regulations relating to the Internet are being debated at the state and federal levels. These laws and regulations could cover issues such as user privacy, freedom of expression, pricing, fraud, quality of products and services, advertising, intellectual property rights and information security. Furthermore, the growth and development of Internet commerce may prompt calls for more stringent consumer protection laws that may impose additional burdens on companies conducting business over the Internet.
Applicability to the Internet of existing laws governing issues such as property ownership, copyrights and other intellectual property issues, libel, obscenity and personal privacy could also harm our business. The majority of these laws was adopted before the advent of the Internet, and do not contemplate or address the unique issues raised by the Internet. The courts are only beginning to interpret those laws that do reference the Internet, such as the Digital Millennium Copyright Act and COPPA, and their applicability and reach are therefore uncertain. These current and future laws and regulations could harm our business, results of operation and financial condition.
In addition, several telecommunications carriers have requested that the Federal Communications Commission regulate telecommunications over the Internet. Due to the increasing use of the Internet and the burden it has placed on the current telecommunications infrastructure, telephone carriers have requested the FCC to regulate Internet service providers and impose access fees on those providers. If the FCC imposes access fees, the costs of using the Internet could increase dramatically which could result in the reduced use of the Internet as a medium for commerce and have a material adverse effect on our Internet business operations.
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We depend on the growth of the Internet and Internet infrastructure for our future growth, and any decrease or less than anticipated growth in Internet usage could adversely affect our business prospects.
Our future revenue and profits, if any, depend upon the continued widespread use of the Internet as an effective commercial and business medium. Factors which could reduce the widespread use of the Internet include:
· | possible disruptions or other damage to the Internet or telecommunications infrastructure; |
· | failure of the individual networking infrastructures of our merchant advertisers and distribution partners to alleviate potential overloading and delayed response times; |
· | a decision by merchant advertisers to spend more of their marketing dollars in offline areas; |
· | increased governmental regulation and taxation; and |
· | actual or perceived lack of security or privacy protection. |
In addition, websites have experienced interruptions in their service as a result of outages and other delays occurring throughout the Internet network infrastructure, and as a result of sabotage, such as electronic attacks designed to interrupt service on many websites. The Internet could lose its viability as a commercial medium due to reasons including increased governmental regulation or delays in the development or adoption of new technologies required to accommodate increased levels of Internet activity. If use of the Internet does not continue to grow, or if the Internet infrastructure does not effectively support our growth, our revenue and results of operations could be materially and adversely affected.
Risks Related to our Common Stock
You may have difficulty trading our common stock as there is a limited public market for shares of our common stock.
Our common stock is currently quoted on the NASD’s OTC Bulletin Board under the symbol “GOFH.OB.” Our common stock is not actively traded and there is a limited public market for our common stock. As a result, a stockholder may find it difficult to dispose of, or to obtain accurate quotations of the price of, our common stock. This severely limits the liquidity of our common stock, and would likely have a material adverse effect on the market price for our common stock and on our ability to raise additional capital. An active public market for shares of our common stock may not develop, or if one should develop, it may not be sustained.
Applicable SEC rules governing the trading of “penny stocks” may limit the trading and liquidity of our common stock which may affect the trading price of our common stock.
Our common stock is currently quoted on the NASD’s OTC Bulletin Board. On November 13, 2008, the closing price of our common stock was $0.16 per share. Stocks such as ours which trade below $5.00 per share are generally considered “penny stocks” and subject to SEC rules and regulations which impose limitations upon the manner in which such shares may be publicly traded. These regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser’s written agreement to a transaction prior to sale. These regulations have the effect of limiting the trading activity of our common stock and reducing the liquidity of an investment in our common stock.
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There is a limited public market for shares of our common stock, which may make it difficult for investors to sell their shares.
There is a limited public market for shares of our common stock. An active public market for shares of our common stock may not develop, or if one should develop, it may not be sustained. Therefore, investors may not be able to find purchasers for their shares of our common stock.
The price of our common stock has been and is likely to continue to be highly volatile, which could lead to losses by investors and costly securities litigation.
The trading price of our common stock has been and is likely to continue to be highly volatile and could fluctuate in response to factors such as:
· | actual or anticipated variations in our operating results; |
· | announcements of technological innovations by us or our competitors; |
· | announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments; |
· | adoption of new accounting standards affecting our industry; |
· | additions or departures of key personnel; |
· | introduction of new services by us or our competitors; |
· | sales of our common stock or other securities in the open market; |
· | conditions or trends in the Internet and online commerce industries; and |
· | other events or factors, many of which are beyond our control. |
The stock market has experienced significant price and volume fluctuations, and the market prices of stock in technology companies, particularly Internet-related companies, have been highly volatile. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been initiated against the Company. Litigation initiated against us, whether or not successful, could result in substantial costs and diversion of our management’s attention and resources, which could harm our business and financial condition.
We do not anticipate dividends to be paid on our common stock, and stockholders may lose the entire amount of their investment.
A dividend has never been declared or paid in cash on our common stock, and we do not anticipate such a declaration or payment for the foreseeable future. We expect to use future earnings, if any, to fund business growth. Therefore, stockholders will not receive any funds absent a sale of their shares. We cannot assure stockholders of a positive return on their investment when they sell their shares, nor can we assure that stockholders will not lose the entire amount of their investment.
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Securities analysts may not initiate coverage or continue to cover our common stock, and this may have a negative impact on our market price.
The trading market for our common stock will depend, in part, on the research and reports that securities analysts publish about us and our business. We do not have any control over these analysts. There is no guarantee that securities analysts will cover our common stock. If securities analysts do not cover our common stock, the lack of research coverage may adversely affect its market price. If we are covered by securities analysts, and our stock is downgraded, our stock price would likely decline. If one or more of these analysts ceases to cover us or fails to publish regular reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.
You may experience dilution of your ownership interests because of the future issuance of additional shares of our common stock and our preferred stock.
In the future, we may issue our authorized but previously unissued equity securities, resulting in the dilution of the ownership interests of our present stockholders. We are currently authorized to issue an aggregate of 310,000,000 shares of capital stock consisting of 300,000,000 shares of common stock and 10,000,000 shares of preferred stock with preferences and rights to be determined by our board of directors. As of October 31, 2008, there were: (i) 25,494,739 shares of common stock outstanding; (ii) 17,561,072 shares reserved for issuance upon the exercise of outstanding options under our 2004 Stock Plan, our 2006 Equity Incentive Plan, our 2007 Non-Qualified Stock Option Plan and our 2008 Stock Incentive Plan; (iii) 3,726,875 shares reserved for issuance upon the exercise of outstanding warrants (other than the June 2007 Warrants, the June 2007 Placement Agent Warrants and the 2008 Warrants); (iv) 35,000,000 shares reserved for issuance upon conversion of the June 2007 Notes and exercise of the June 2007 Warrants; (v) 750,000 shares reserved for issuance upon the exercise of the June 2007 Placement Agent Warrants (309,000 of which are subject to issuance upon exercise of the June 2007 Placement Agent Warrants) and (vi) 5,996,561 shares reserved for issuance upon conversion of the 2008 Notes and exercise of the 2008 Warrants. In the case of our convertible securities, including our June 2007 Notes and our 2008 Notes, warrants and options, the perception of a significant market “overhang” resulting from the existence of our obligations to honor the conversions or exercises may create downward pressure on the trading price of our common stock. In addition, the June 2007 Notes, the June 2007 Warrants, the June 2007 Placement Agent Warrants, the 2008 Notes, the 2008 Warrants and certain other warrants are also subject to full-ratchet anti-dilution protection that, if triggered, could operate to create substantial additional dilution for our then-existing stockholders if we need to raise additional funds at a time when the price an investor would pay for our common stock is less than $1.60 per share (in the case of the June 2007 Notes), $2.06 per share (in the case of the 2008 Notes) or $1.75 per share (in the case of the June 2007 Warrants, the June 2007 Placement Agent Warrants and the 2008 Warrants).
We may also issue additional shares of our common stock or other securities that are convertible into or exercisable for common stock in connection with hiring or retaining employees or consultants, future acquisitions, future sales of our securities for capital raising purposes, or for other business purposes. On August 10, 2007, we entered into an Amended and Restated Strategic Alliance Agreement with Kaleidoscope Sports and Entertainment LLC (“KSE”), pursuant to which, among other things, KSE surrendered its warrants under the original Strategic Alliance Agreement (including its previously-issued warrants to purchase 500,000 shares of common stock) in exchange for warrants to purchase 166,667 shares of common stock. While the Amended and Restated Strategic Alliance Agreement was terminated as of August 4, 2008, KSE continues to have six months from the date of termination within which to exercise its warrants to purchase 166,667 shares of common stock. In November 2007, we issued to an accredited investor warrants to purchase 46,875 shares of our common stock at an exercise price of $1.75. On December 10, 2007, we entered into a stock and warrant issuance agreement with MiniClip Limited, pursuant to which we agreed to issue 300,000 shares of our common stock and a warrant to purchase an additional 300,000 shares of our common stock at an exercise price of $1.75 per share. On December 12, 2007, we entered into a stock issuance and participation rights agreement with MTV Networks, a division of Viacom International Inc., pursuant to which we issued 1,000,000 restricted shares of our common stock. In February 2008, we issued warrants to purchase restricted shares of our common stock at an exercise price of $1.75 per share to certain service providers, of which warrants to purchase an aggregate of 80,000 shares remain outstanding.
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The future issuance of any such additional shares of our common stock or other securities may create downward pressure on the trading price of our common stock. There can be no assurance that we will not be required to issue additional shares, warrants or other convertible securities in the future in conjunction with hiring or retaining employees or consultants, future acquisitions, future sales of our securities for capital raising purposes or for other business purposes, including at a price (or exercise prices) below the price at which shares of our common stock are currently quoted on the OTC Bulletin Board.
Even though we are not a California corporation, our common stock could still be subject to a number of key provisions of the California General Corporation Law.
Under Section 2115 of the California General Corporation Law (the “CGCL”), corporations not organized under California law may still be subject to a number of key provisions of the CGCL. This determination is based on whether the corporation has significant business contacts with California and if more than 50% of its voting securities are held of record by persons having addresses in California. In the immediate future, we will continue the business and operations of GoFish Technologies Inc. and a majority of our business operations, revenue and payroll will be conducted in, derived from, and paid to residents of California. Therefore, depending on our ownership, we could be subject to certain provisions of the CGCL. Among the more important provisions are those relating to the election and removal of directors, cumulative voting, standards of liability and indemnification of directors, distributions, dividends and repurchases of shares, shareholder meetings, approval of certain corporate transactions, dissenters’ and appraisal rights, and inspection of corporate records.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
None.
None.
None.
ITEM 5. |
None.
ITEM 6. |
The exhibits filed as part of this Quarterly Report on Form 10-Q are listed in the Exhibit Index immediately preceding such exhibits, which Exhibit Index is incorporated herein by reference into this Item 6.
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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.
GOFISH CORPORATION | ||
Date: November 14, 2008 | By: | /s/ Matt Freeman |
Name: | Matt Freeman | |
Title: | Chief Executive Officer | |
Date: November 14, 2008 | By: | /s/ Lennox L. Vernon |
Name: | Lennox L. Vernon | |
Title: | Chief Accounting Officer and Director of Operations |
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EXHIBIT INDEX
Exhibit No. | Description | Reference | ||
3.1 | Articles of Incorporation of GoFish Corporation (f/k/a Unibio Inc.) filed with the Nevada Secretary of State on February 2, 2005. | Incorporated by reference to Exhibit 3.1 to Registrant’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on February 7, 2006 (File No. 333-131651). | ||
3.2 | Certificate of Amendment of the Articles of Incorporation of GoFish Corporation (f/k/a Unibio Inc.) filed with the Nevada Secretary of State on September 14, 2006. | Incorporated by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K dated September 14, 2006 filed with the Securities and Exchange Commission on September 22, 2006 (File No. 333-131651). | ||
31.1 | Certification of the Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a). | Filed herewith. | ||
31.2 | Certification of the Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a). | Filed herewith. | ||
32.1 | Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | Filed herewith. | ||
32.2 | Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | Filed herewith. |
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