d20f.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
20-F
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o |
|
REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE
SECURITIES
EXCHANGE ACT OF 1934
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OR
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x |
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT
OF 1934
for
the fiscal year ended December 31, 2008
|
|
OR
|
|
o |
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
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|
OR
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|
o |
|
SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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Date
of event requiring this shell company report
____________________
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|
For the transition period
from
to
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|
Commission
file number 0-17164
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|
COPERNIC
INC.
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(Exact
name of registrant as specified in its charter)
(formerly
MAMMA.COM)
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|
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(Translation
of Registrant’s name into English)
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PROVINCE
OF ONTARIO (CANADA)
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(Jurisdiction
of incorporation or organization)
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360
Franquet Street, Suite 60
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Sainte-Foy,
Quebec
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Canada,
G1P 4N3
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(Address
of principal executive offices)
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|
Marc
Ferland
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Telephone:
(418) 527-0528, E-mail address: mferland@copernic.com, Facsimile: (418)
527-1751, Address: 360 Franquet Street, Suite 60, Sainte-Foy, Quebec, G1P
4N3
|
Securities
registered or to be registered pursuant to Section 12(b) of the
Act.
None
Securities
registered or to be registered pursuant to Section 12(g) of the
Act.
Common
Shares, no par value
Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act.
None
Indicate
the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual
report.
Indicate
by check mark if the registrant is a well-know seasoned issuer, as defined in
Rule 405 of the Act.
If this
report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
Note-
Checking the box above will not relieve any registrant required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1932 from
their obligations under those Sections.
Indicate
by a 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.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b of the Exchange Act
(Check one):
Large
Accelerated Filer o
|
|
Accelerated
Filer o
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|
Non-Accelerated
Filer x
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Indicate
by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:
U.S.
GAAP o
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|
International
Financial Reporting Standards as issued by the International Accounting
Standards Board o
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Other x
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If
“Other” has been checked in response to the previous question, indicate by check
mark which financial statement item the registrant has elected to
follow.
If this
is an annual report, indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
(APPLICABLE ONLY TO ISSUERS
INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.
EXPLANATORY NOTES
On June
14, 2007, the Company changed its name from Mamma.com Inc. to Copernic
Inc.
In this
Annual Report on Form 20-F, unless otherwise indicated or the context otherwise
requires, all monetary amounts are expressed in United States
dollars.
TABLE
OF CONTENTS
SPECIAL NOTE ON FORWARD-LOOKING
STATEMENTS
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4
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PART I
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5
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IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
ADVISERS
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5
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OFFER STATISTICS AND EXPECTED
TIMETABLE
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5
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KEY INFORMATION
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5
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INFORMATION ON THE COMPANY
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17
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OPERATING AND FINANCIAL REVIEW AND
PROSPECTS
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25
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DIRECTORS, SENIOR MANAGEMENT AND
EMPLOYEES
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51
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MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS
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63
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FINANCIAL INFORMATION
|
64
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THE OFFER AND LISTING
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66
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ADDITIONAL INFORMATION
|
70
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
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74
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DESCRIPTION OF SECURITIES OTHER THAN EQUITY
SECURITIES
|
75
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PART II
|
75
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DEFAULTS, DIVIDEND ARREARAGES AND
DELINQUENCIES
|
75
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MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
HOLDERS AND USE OF PROCEEDS
|
76
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CONTROLS AND PROCEDURES
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76
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AUDIT COMMITTEE FINANCIAL
EXPERT
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76
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CODE OF ETHICS
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77
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PRINCIPAL ACCOUNTANT FEES AND
SERVICES
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77
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EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
COMMITTEES
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82
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PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND
AFFILIATED PURCHASERS
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83
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FINANCIAL STATEMENTS
|
83
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EXHIBITS
|
114
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SIGNATURES
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114
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SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
INFORMATION
CONTAINED IN THIS ANNUAL REPORT ON FORM 20-F INCLUDES FORWARD-LOOKING
STATEMENTS, WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY
SUCH AS “BELIEVES,” “EXPECTS,” “MAY,” “DESIRES,” “WILL,” “SHOULD,” “PROJECTS,”
“ESTIMATES,” “CONTEMPLATES,” “ANTICIPATES,” “INTENDS,” OR ANY NEGATIVE SUCH AS
“DOES NOT BELIEVE” OR OTHER VARIATIONS THEREOF OR COMPARABLE TERMINOLOGY. NO
ASSURANCE CAN BE GIVEN THAT POTENTIAL FUTURE RESULTS OR CIRCUMSTANCES DESCRIBED
IN THE FORWARD-LOOKING STATEMENTS WILL BE ACHIEVED OR OCCUR. SUCH INFORMATION
MAY ALSO INCLUDE CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS WITH
RESPECT TO SUCH FORWARD-LOOKING STATEMENTS, INCLUDING CERTAIN RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO VARY MATERIALLY FROM THE
PROJECTIONS AND OTHER EXPECTATIONS DESCRIBED IN SUCH FORWARD-LOOKING STATEMENTS.
PROSPECTIVE INVESTORS, CUSTOMERS, VENDORS AND ALL OTHER PERSONS ARE CAUTIONED
THAT FORWARD-LOOKING STATEMENTS ARE NOT ASSURANCES, FORECASTS OR GUARANTEES OF
FUTURE PERFORMANCE DUE TO RELATED RISKS AND UNCERTAINTIES, AND THAT ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED. FACTORS WHICH COULD CAUSE
RESULTS OR EVENTS TO DIFFER FROM CURRENT EXPECTATIONS INCLUDE, AMONG OTHER
THINGS: THE SEVERITY AND DURATION OF THE ADJUSTMENTS IN OUR BUSINESS SEGMENTS;
THE EFFECTIVENESS OF OUR RESTRUCTURING ACTIVITIES, INCLUDING THE VALIDITY OF THE
ASSUMPTIONS UNDERLYING OUR RESTRUCTURING EFFORTS; FLUCTUATIONS IN OPERATING
RESULTS; THE IMPACT OF GENERAL ECONOMIC, INDUSTRY AND MARKET CONDITIONS; THE
ABILITY TO RECRUIT AND RETAIN QUALIFIED EMPLOYEES; FLUCTUATIONS IN CASH FLOW;
INCREASED LEVELS OF OUTSTANDING DEBT; EXPECTATIONS REGARDING MARKET DEMAND FOR
PARTICULAR PRODUCTS AND SERVICES AND THE DEPENDENCE ON NEW PRODUCT/SERVICE
DEVELOPMENT; DELAYS IN MARKET ACCEPTANCE OF NEW PRODUCTS; THE ABILITY TO MAKE
ACQUISITIONS AND/OR INTEGRATE THE OPERATIONS AND TECHNOLOGIES OF ACQUIRED
BUSINESSES IN AN EFFECTIVE MANNER; THE IMPACT OF RAPID TECHNOLOGICAL AND MARKET
CHANGE; THE IMPACT OF PRICE AND PRODUCT COMPETITION; THE UNCERTAINTIES IN THE
MARKET FOR INTERNET-BASED PRODUCTS AND SERVICES; STOCK MARKET VOLATILITY; THE
TRADING VOLUME OF OUR STOCK; THE POSSIBILITY THAT OUR STOCK MAY NOT SATISFY OUR
REQUIREMENTS FOR CONTINUED LISTING ON THE NASDAQ CAPITAL MARKET INCLUDING
WHETHER THE MINIMUM BID PRICE FOR THE STOCK FALLS BELOW $1; AND THE ADVERSE
RESOLUTION OF LITIGATION OR RELATED EVENTS COULD HAVE A NEGATIVE IMPACT ON THE
COMPANY, INCREASE COMPANY EXPENSES OR CAUSE EVENTS OR RESULTS TO DIFFER FROM
CURRENT EXPECTATIONS. FOR ADDITIONAL INFORMATION WITH RESPECT TO THESE AND
CERTAIN OTHER FACTORS THAT MAY AFFECT ACTUAL RESULTS, SEE THE REPORTS AND OTHER
INFORMATION FILED OR FURNISHED BY THE COMPANY WITH THE UNITED STATES SECURITIES
AND EXCHANGE COMMISSION (“SEC”) AND/OR THE ONTARIO SECURITIES COMMISSION (“OSC”)
RESPECTIVELY ACCESSIBLE ON THE INTERNET AT WWW.SEC.GOV AND WWW.SEDAR.COM, OR THE
COMPANY’S WEB SITE AT WWW.COPERNIC-INC.COM. ALL INFORMATION CONTAINED IN THIS
ANNUAL REPORT ON FORM 20-F IS QUALIFIED IN ITS ENTIRETY BY THE FOREGOING AND
REFERENCE TO THE OTHER INFORMATION THE COMPANY FILES WITH THE OSC AND SEC.
UNLESS OTHERWISE REQUIRED BY APPLICABLE SECURITIES LAWS, THE COMPANY DISCLAIMS
ANY INTENTION OR OBLIGATION TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS,
WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
PERIOD-TO-PERIOD COMPARISONS
A VARIETY
OF FACTORS MAY CAUSE PERIOD-TO-PERIOD FLUCTUATIONS IN THE COMPANY’S OPERATING
RESULTS, INCLUDING BUSINESS ACQUISITIONS, REVENUES AND EXPENSES RELATED TO THE
INTRODUCTION OF NEW PRODUCTS AND SERVICES OR NEW VERSIONS OF EXISTING PRODUCTS,
NEW OR STRONGER COMPETITORS IN THE MARKETPLACE AS WELL AS CURRENCY FLUCTUATIONS,
ECONOMIC RECESSIONS AND RECOVERIES. HISTORICAL OPERATING RESULTS ARE NOT
INDICATIVE OF FUTURE RESULTS AND PERFORMANCE.
PART
I
ITEM 1.
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|
IDENTITY OF DIRECTORS, SENIOR
MANAGEMENT AND ADVISERS
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Not Applicable
|
|
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ITEM 2.
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OFFER STATISTICS AND EXPECTED
TIMETABLE
|
Not
Applicable
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ITEM 3.
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|
KEY
INFORMATION
|
SELECTED
FINANCIAL DATA
The
following consolidated statements of operations data for the years ended
December 31, 2008, 2007 and 2006, and consolidated balance sheets data as at
December 31, 2008 and 2007 is derived from the audited consolidated financial
statements included in Item 17. All other financial information below is
unaudited and derived from sources not included in Item 17. The
selected consolidated financial data in the following tables should be read in
conjunction with our audited consolidated financial statements, including the
notes thereto, and “Item 5 – Operating and Financial Review and Prospects”,
included elsewhere in this Form 20-F.
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CANADIAN
GAAP
YEAR ENDED DECEMBER 31st
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2008
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2007
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2006
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2005
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|
2004
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$
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|
$
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$
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|
$
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|
$
|
Consolidated Statements
of
|
|
|
|
|
|
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Operations
Data
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Revenues
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7,011,631
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8,116,408
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9,596,402
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9,443,975
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|
14,636,318
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Earnings (loss) from
continuing
|
|
|
|
|
|
|
|
|
|
|
operations
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|
(6,490,704)
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|
(14,430,826)
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|
(4,358,708)
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|
(3,342,983)
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|
370,753
|
Results of
discontinued
|
|
|
|
|
|
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|
|
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|
operations,
net of income taxes
|
|
-
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|
-
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|
89,328
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|
(2,315,335)
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|
733,654
|
Net earnings (loss) for the
year
|
|
(6,490,704)
|
|
(14,430,826)
|
|
(4,269,380)
|
|
(5,658,318)
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|
1,104,407
|
Basic and diluted earnings
(loss)
|
|
|
|
|
|
|
|
|
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|
per share from
continuing
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
(0.44)
|
|
(0.99)
|
|
(0.31)
|
|
(0.27)
|
|
0.03
|
Basic and diluted earnings
(loss)
|
|
|
|
|
|
|
|
|
|
|
per share from
discontinued
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
-
|
|
-
|
|
0.01
|
|
(0.19)
|
|
0.07
|
Basic and diluted net
earnings
|
|
|
|
|
|
|
|
|
|
|
(loss) per
share
|
|
(0.44)
|
|
(0.99)
|
|
(0.30)
|
|
(0.46)
|
|
0.10
|
Weighted average number
of
|
|
|
|
|
|
|
|
|
|
|
shares –
basic
|
|
14,637,531
|
|
14,564,894
|
|
14,340,864
|
|
12,168,117
|
|
10,758,604
|
Weighted average number
of
|
|
|
|
|
|
|
|
|
|
|
shares –
diluted
|
|
14,637,531
|
|
14,564,894
|
|
14,340,864
|
|
12,168,117
|
|
11,209,906
|
|
Consolidated Balance
Sheets
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
Data
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
Total
assets
|
|
10,782,059
|
|
18,357,856
|
|
33,339,488
|
|
38,327,198
|
|
35,166,098
|
Total
liabilities
|
|
1,509,843
|
|
2,557,462
|
|
4,444,838
|
|
5,810,217
|
|
3,130,526
|
Net
assets
|
|
9,272,216
|
|
15,800,394
|
|
28,894,650
|
|
32,516,981
|
|
32,035,572
|
Working
capital
|
|
5,051,474
|
|
6,413,044
|
|
8,533,546
|
|
8,944,985
|
|
27,528,003
|
Capital
stock
|
|
96,556,485
|
|
96,556,485
|
|
95,298,234
|
|
95,298,234
|
|
90,496,088
|
Additional paid-in
capital
|
|
5,747,028
|
|
5,784,502
|
|
5,706,183
|
|
5,249,902
|
|
3,921,806
|
Accumulated
other
|
|
|
|
|
|
|
|
|
|
|
comprehensive
gain
|
|
561,137
|
|
561,137
|
|
561,137
|
|
370,369
|
|
360,884
|
Accumulated
deficit
|
|
(93,592,434)
|
|
(87,101,730)
|
|
(72,670,904)
|
|
(68,401,524)
|
|
(62,743,206)
|
Shareholders’
equity
|
|
9,272,216
|
|
15,800,394
|
|
28,894,650
|
|
32,516,981
|
|
32,035,572
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
U.S.
GAAP
YEAR
ENDED DECEMBER
31st
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
Consolidated
Statements
of
|
|
|
|
|
|
|
|
|
|
|
Operations
Data
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
7,011,631
|
|
8,116,408
|
|
9,596,402
|
|
9,443,975
|
|
14,636,318
|
Earnings (loss) from
continuing
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
(6,490,704)
|
|
(14,430,826)
|
|
(4,358,708)
|
|
(3,342,983)
|
|
370,753
|
Results of
discontinued
|
|
|
|
|
|
|
|
|
|
|
operations, net of income
taxes
|
|
-
|
|
-
|
|
89,328
|
|
(2,315,335)
|
|
733,654
|
Net earnings (loss) for the
year
|
|
(6,490,704)
|
|
(14,430,826)
|
|
(4,269,380)
|
|
(5,658,318)
|
|
1,104,407
|
Basic and diluted earnings
(loss)
|
|
|
|
|
|
|
|
|
|
|
per share from
continuing
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
(0.44)
|
|
(0.99)
|
|
(0.31)
|
|
(0.27)
|
|
0.03
|
Basic and diluted earnings
(loss)
|
|
|
|
|
|
|
|
|
|
|
per share from
discontinued
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
-
|
|
-
|
|
0.01
|
|
(0.19)
|
|
0.07
|
Basic and diluted net
earnings
|
|
|
|
|
|
|
|
|
|
|
(loss) per
share
|
|
(0.44)
|
|
(0.99)
|
|
(0.30)
|
|
(0.46)
|
|
0.10
|
Weighted average number
of
|
|
|
|
|
|
|
|
|
|
|
shares –
basic
|
|
14,637,531
|
|
14,564,894
|
|
14,340,864
|
|
12,168,117
|
|
10,758,604
|
Weighted average number
of
|
|
|
|
|
|
|
|
|
|
|
shares –
diluted
|
|
14,637,531
|
|
14,564,894
|
|
14,340,864
|
|
12,168,117
|
|
11,209,906
|
|
Consolidated
Balance
Sheets
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
Data
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
Total
assets
|
|
10,782,059
|
|
18,357,856
|
|
33,339,488
|
|
38,327,198
|
|
35,166,098
|
Total
liabilities
|
|
1,509,843
|
|
2,557,462
|
|
4,444,838
|
|
5,810,217
|
|
3,130,526
|
Net
assets
|
|
9,272,216
|
|
15,800,394
|
|
28,894,650
|
|
32,516,981
|
|
32,035,572
|
Working
capital
|
|
5,051,474
|
|
6,413,044
|
|
8,533,546
|
|
8,944,985
|
|
27,528,003
|
Capital
stock
|
|
113,326,055
|
|
113,326,055
|
|
112,067,804
|
|
112,067,804
|
|
107,265,658
|
Additional paid-in
capital
|
|
6,784,718
|
|
6,822,192
|
|
6,743,873
|
|
6,287,592
|
|
4,959,496
|
Accumulated
other
|
|
|
|
|
|
|
|
|
|
|
comprehensive
gain
|
|
561,137
|
|
561,137
|
|
561,137
|
|
370,369
|
|
360,884
|
Accumulated
deficit
|
|
(111,399,694)
|
|
(104,908,990)
|
|
(90,478,164)
|
|
(86,208,784)
|
|
(80,550,466)
|
Shareholders’
equity
|
|
9,272,216
|
|
15,800,394
|
|
28,894,650
|
|
32,516,981
|
|
32,035,572
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
CAPITALIZATION
AND INDEBTEDNESS
|
The
following tables set forth the consolidated cash and consolidated capitalization
of the Company as at December 31, 2008 prepared in accordance with Canadian GAAP
and United States GAAP, respectively.
(Prepared
in accordance with Canadian GAAP)
|
|
As
at December 31,
2008
$
|
|
Cash
and cash equivalents
|
|
|
2,067,705 |
|
Temporary
investments
|
|
|
3,005,227 |
|
Indebtedness
|
|
|
|
|
Current
liabilities
|
|
|
1,210,003 |
|
Obligations
under capital leases
|
|
|
39,992 |
|
Future
income taxes
|
|
|
259,848 |
|
Shareholders’
Equity
|
|
|
|
|
Capital
stock
|
|
|
96,556,485 |
|
Additional
paid-in capital
|
|
|
5,747,028 |
|
Cumulative
translation adjustment
|
|
|
561,137 |
|
Accumulated
deficit
|
|
|
(93,592,434 |
) |
Total
shareholders’ equity
|
|
|
9,272,216 |
|
Total
capitalization
|
|
|
10,782,059 |
|
|
|
|
|
(Prepared
in accordance with US GAAP)
|
|
As
at December 31,
2008
$
|
|
Cash
and cash equivalents
|
|
|
2,067,705 |
|
Temporary
investments
|
|
|
3,005,227 |
|
Indebtedness
|
|
|
|
|
Current
liabilities
|
|
|
1,210,003 |
|
Obligations
under capital leases
|
|
|
39,992 |
|
Future
income taxes
|
|
|
259,848 |
|
Shareholders’
Equity
|
|
|
|
|
Capital
stock
|
|
|
113,326,055 |
|
Additional
paid-in capital
|
|
|
6,784,718 |
|
Cumulative
translation adjustment
|
|
|
561,137 |
|
Accumulated
deficit
|
|
|
(111,399,694 |
) |
Total
shareholders’ equity
|
|
|
9,272,216 |
|
Total
capitalization
|
|
|
10,782,059 |
|
|
|
Reasons for
the Offer and Use of Proceeds
|
|
|
|
|
|
|
Not
Applicable.
|
|
|
|
|
Our
revenues depend to some degree on our relationship with one customer, the loss
of which would adversely affect our business and results of
operations.
For the
year ended December 31, 2008, approximately 13% of our revenues were derived
from an agreement with our largest customer. Revenues from this customer
represented 14% of our revenues in 2007 and 11% of our revenues in
2006. Although we monitor our accounts receivable for credit risk deterioration
and this customer has been paying its payables to Copernic Inc. in accordance
with the terms of its agreement with the Company, there can be no assurance that
it will continue to do so or that it will continue to do so at the volume of
business it has done historically. Our loss of this customer’s business would
adversely affect our business and results of operations.
Our
operating results may fluctuate, which makes our results difficult to predict
and could cause our results to fall short of expectations.
Our
operating results may fluctuate as a result of a number of factors, many of
which are outside of our control. For these reasons, comparing our operating
results on a period-to-period basis may not be meaningful, and you should not
rely on our past results as an indication of our future performance. Our
operating results may fluctuate as a result of many factors related to our
business, including the competitive conditions in the industry, loss of
significant customers, delays in the development of new services and usage of
the Internet, as described in more detail below, and general factors such as
size and timing of orders and general economic conditions. Our
quarterly and annual expenses as a percentage of our revenues may be
significantly different from our historical or projected rates. Our operating
results in future quarters may fall below expectations. Any of these events
could cause our stock price to fall. Each of the risk factors listed in this
“Risk Factors” section, and the following factors, may affect our operating
results:
|
·
|
Our
ability to continue to attract users to our Web
sites.
|
|
·
|
Our
ability to monetize (or generate revenue from) traffic on our Web sites
and our network of advertisers’ Web
sites.
|
|
·
|
Our
ability to attract advertisers.
|
|
·
|
The
amount and timing of operating costs and capital expenditures related to
the maintenance and expansion of our businesses, operations and
infrastructure.
|
|
·
|
Our
focus on long term goals over short term
results.
|
|
·
|
The
results of any investments in risky
projects.
|
|
·
|
Payments
that may be made in connection with the resolution of litigation
matters.
|
|
·
|
General
economic conditions and those economic conditions specific to the Internet
and Internet advertising.
|
|
·
|
Our
ability to keep our Web sites operational at a reasonable cost and without
service interruptions.
|
|
·
|
Geopolitical
events such as war, threat of war or terrorist
actions.
|
|
·
|
Our
ability to generate CDS revenues through licensing and revenue
share.
|
Because
our business is changing and evolving, our historical operating results may not
be useful to you in predicting our future operating results. In addition,
advertising spending has historically been cyclical in nature, reflecting
overall economic conditions as well as budgeting and buying patterns. Also, user
traffic tends to be seasonal.
We
rely on our Web site partners for a significant portion of our net revenues, and
otherwise benefit from our association with them. The loss of these Web site
partners could prevent us from receiving the benefits we receive from our
association with them, which could adversely affect our business.
We
provide advertising, Web search and other services to members of our partner Web
sites. We consider this network to be critical in the future growth of our
revenues. However, some of the participants in this network may compete with us
in one or more areas. Therefore, they may decide in the future to terminate
their agreements with us. If our Web site partners decide to use a competitor’s
or their own Web search or advertising services, our revenues would
decline.
We
face significant competition from Microsoft, Yahoo, Google and
Ask.com.
We face
formidable competition in every aspect of our business, and particularly from
other companies that seek to connect people with information on the Web and
provide them with relevant advertising. Currently, we consider our primary
competitors to be Microsoft, Yahoo, Google and Ask.com. Microsoft, Yahoo, Google
and Ask.com have a variety of Internet products, services and content that
directly competes with our products, services, content and advertising
solutions. We expect that Microsoft will increasingly use its
financial and engineering resources to compete with us.
Microsoft,
Yahoo, Google and Ask.com have more employees and cash resources than we do.
These companies also have longer histories operating search engines and more
established relationships with customers. They can use their experience and
resources against us in a variety of competitive ways, including by making
acquisitions, investing more aggressively in research and development and
competing
more
aggressively for advertisers and Web sites. Microsoft and Yahoo also may have a
greater ability to attract and retain users than we do because they operate
Internet portals with a broad range of products and services. If Microsoft,
Yahoo, Google or Ask.com are successful in providing similar or better Web
search results compared to ours or leverage their platforms to make their Web
search services easier to access than ours, we could experience a significant
decline in user traffic. Any such decline in user traffic could negatively
affect our net revenues.
We
face competition from other Internet companies, including Web search providers,
Internet advertising companies and destination Web sites that may also bundle
their services with Internet access.
In
addition to Microsoft, Yahoo, Google and Ask.com, we face competition from other
Web search providers, including companies that are not yet known to us. We
compete with Internet advertising companies, particularly in the areas of
pay-for-performance and keyword-targeted Internet advertising. Also, we may
compete with companies that sell products and services online because these
companies, like us, are trying to attract users to their Web sites to search for
information about products and services. Barriers to entry in our
business are generally low and products, once developed, can be distributed
quickly and to a wide range of customers at a reasonably low cost.
We also
compete with destination Web sites that seek to increase their search-related
traffic. These destination Web sites may include those operated by Internet
access providers, such as cable and DSL service providers. Because our users
need to access our services through Internet access providers, they have direct
relationships with these providers. If an access provider or a computer or
computing device manufacturer offers online services that compete with ours, the
user may find it more convenient to use the services of the access provider or
manufacturer. In addition, the access provider or manufacturer may make it hard
to access our services by not listing them in the access provider’s or
manufacturer’s own menu of offerings. Also, because the access provider gathers
information from the user in connection with the establishment of a billing
relationship, the access provider may be more effective than we are in tailoring
services and advertisements to the specific tastes of the user.
There has
been a trend toward industry consolidation among our competitors, and so smaller
competitors today may become larger competitors in the future. If our
competitors are more successful than we are at generating traffic and
advertising, our revenues may decline.
We
face competition from traditional media companies, and we may not be included in
the advertising budgets of large advertisers, which could harm our operating
results.
In
addition to Internet companies, we face competition from companies that offer
traditional media advertising opportunities. Most large advertisers have set
advertising budgets, a very 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 operating
results would be harmed.
Our
revenues declined in 2008 and we are experiencing downward pressure on our
operating margin, which we expect will intensify in the future.
We
believe our operating margin may decline as a result of increasing competition
and increased expenditures for all aspects of our business as a percentage of
our revenues, including product development and sales and marketing expenses.
Also, our operating margin has declined as a result of increases in the
proportion of our revenues generated from our partner Web sites. The margin on
revenues we generate from our partner Web sites is generally significantly less
than the margin on revenues we generate from advertising on our Web sites.
Additionally, the margin we earn on revenues generated from our partner Web
sites could decrease in the future if our partners require a greater portion of
the advertising fees.
If
we do not continue to innovate and provide products and services that are useful
to users, we may not remain competitive, and our revenues and operating results
could suffer.
Our
success depends on providing products and services that people use for a high
quality Internet experience. Our competitors are constantly developing
innovations in Web search, online advertising and providing information to
people. As a result, we must continue to invest significant resources in
research and development in order to enhance our Web search technology and our
existing products and services and introduce new high-quality products and
services that people will use. If we are unable to predict user preferences or
industry changes, or if we are unable to modify our products and services on a
timely basis, we may lose users, advertisers and Web site partners. Our
operating results would also suffer if our innovations were not responsive to
the needs of our users, advertisers and Web site partners are not appropriately
timed with market opportunity, effectively brought to market or well received in
the market place. As search technology continues to develop, our
competitors may be able to offer search results that are, or that are perceived
to be, substantially similar or better than those generated by our search
services. This may force us to compete on bases in addition to quality of search
results and to expend significant resources in order to remain
competitive.
Our
business depends on a strong brand, and if we are not able to maintain and
enhance our brands, our ability to expand our base of users and advertisers will
be impaired and our business and operating results will be harmed.
We
believe that the brand identity that we have developed has significantly
contributed to the success of our business. We also believe that maintaining and
enhancing the Company’s brands are critical to expanding our base of users and
advertisers. Maintaining and enhancing our brands may require us to make
substantial investments and these investments may not be successful. If we fail
to promote and maintain the Mamma® and Copernic® brands, or if we incur
excessive expenses in this effort, our business, operating results and financial
condition will be materially and adversely affected. We anticipate that, as our
market becomes increasingly competitive, maintaining and enhancing our brands
may become increasingly difficult and expensive. Maintaining and enhancing our
brands will depend largely on our ability to continue to provide high quality
products and services, which we may not do successfully.
We
generated a significant portion of our revenues in 2008 from our advertisers.
Our advertisers can generally terminate their contracts with us at any time.
Advertisers will not continue to do business with us if their investment in
advertising with us does not generate sales leads, and ultimately customers, or
if we do not deliver their advertisements in an appropriate and effective
manner.
New
technologies could block our ads, which would harm our business.
Technologies
are being developed that can block the display of our ads. Most of our revenues
are derived from fees paid to us by advertisers in connection with the display
of ads on Web pages. As a result, ad-blocking technology could, in the future,
adversely affect our operating results.
We
generate all of our revenue from advertising and software licensing, and the
reduction of spending by or loss of customers could seriously harm our
business.
If we are
unable to remain competitive and provide value to our advertisers, they may stop
placing ads with us, which could negatively affect our net revenues and
business. Copernic has on-going efforts to maintain a high quality network of
publishers in order to offer advertisers high quality users that will provide
for a satisfactory ROI. Therefore, from time to time we cease sending
advertisements to what we determine are low quality publishers. This can reduce
our revenues in the short term in order to create advertiser retention in the
long term.
We
make investments in new products and services that may not be
profitable.
We have
made and will continue to make investments in research, development and
marketing for new products, services and technologies. Our success in
this area depends on many factors including our innovativeness, development
support, marketing and distribution. We may not achieve significant
revenue from a new product for a number of years, if at all. For the
years 2007 and 2008, we did not generate significant revenues from licensing
Copernic® software and we cannot assure you that we will generate significant
revenue from the licensing of Copernic® software going forward. In addition, our
competitors are constantly improving their competing software, and if we fail to
innovate and remain competitive our revenues from software licensing will
decline.
Volatility
of stock price and trading volume could adversely affect the market price and
liquidity of the market for our Common Shares.
Our
Common Shares are subject to significant price and volume fluctuations, some of
which result from various factors including (a) changes in our business,
operations, and future prospects, (b) general market and economic conditions,
and (c) other factors affecting the perceived value of our Common Shares.
Significant price and volume fluctuations have particularly impacted the market
prices of equity securities of many technology companies including without
limitation those providing communications software or Internet-related products
and services. Some of these fluctuations appear to be unrelated or
disproportionate to the operating performance of such companies. The market
price and trading volume of our Common Shares have been, and may likely continue
to be, volatile, experiencing wide fluctuations. In addition, the stock market
in general, and market prices for Internet-related companies in particular, have
experienced volatility that often has been unrelated to the operating
performance of such companies. These broad market and industry
fluctuations have adversely affected the price of our stock, regardless of our
operating performance.
On June
16, 2008 a notice from NASDAQ Listing Qualifications was received by the
Company. The notice stated that for the last 30 consecutive business days,
the bid price of the Company’s common stock had closed below the minimum $1.00
per share requirement for continued inclusion under Marketplace Rule 4310(c)(4)
(the “Rule”). Therefore, in accordance with Marketplace Rule
4310(c)(8)(D), the Company will be provided 180 calendar days, or until December
15, 2008 to regain compliance. If, at anytime before December 15, 2008,
the bid price of the Company’s common stock closes at $1.00 per share or more
for a minimum of 10 consecutive business days, NASDAQ Staff will provide written
notification that it complies with the Rule. If compliance with this Rule cannot
be demonstrated by December 15, 2008, NASDAQ Staff will determine whether the
Company meets The NASDAQ Capital Market initial listing criteria as set forth in
Marketplace Rule 4310(c), except for the bid price requirement. If it
meets the initial listing criteria, NASDAQ Staff will notify the Company that it
has been granted an additional 180 calendar day compliance period. If the
Company is not eligible for an additional compliance period, NASDAQ Staff will
provide written notification that the Company’s securities will be
delisted. At that
time, the
Company may appeal NASDAQ Staff’s determination to delist its securities to a
Listing Qualifications Panel (the “Panel”). These circumstances may adversely
impact trading in our Common Shares and may also adversely affect our ability to
access capital.
On
October 22, 2008, the Company received a NASDAQ Notice, indicating that the
Company has received an extension to comply with the minimum bid price
requirement for continued listing.
The
notice stated: “Given these extraordinary market conditions, NASDAQ has
determined to suspend enforcement of the bid price and market value of publicly
held shares requirements through Friday, January 16, 2009. In that regard, on
October 16, 2008, NASDAQ filed an immediately effective rule change with the
Securities and Exchange Commission to implement the suspension. As a result, all
companies presently in a bid price or market value of publicly held shares
compliance period will remain at that same stage of the process and will not be
subject to being delisted for these concerns. These rules will be reinstated on
Monday, January 19, 2009 and the first relevant trade date will be Tuesday,
January 20, 2009.
Since
your company had 59 calendar days remaining in its compliance period as of
October 16th, it
will, upon reinstatement of the rules, still have this number of days, or until
March 19, 2009, to regain compliance. The company can regain compliance, either
during the suspension or during the compliance period resuming after the
suspension, by achieving a $1 closing bid price for a minimum of 10 consecutive
trading days”.
On
December 19, 2008, NASDAQ issued an issuer alert #2008-005A stating “Given the
continued extraordinary market conditions, NASDAQ is extending the suspension of
the bid price and market value of publicly held shares requirements. Enforcement
of these rules is scheduled to resume on Monday, April 20, 2009. Any company in
the compliance process for a bid price or market value of publicly held shares
concern will continue to be “frozen” at the same stage of the process until the
end of the suspension. However, a company could be delisted for other reasons
during the suspension. NASDAQ staff will contact each company affected by this
extension and notify those that regain compliance with these requirements during
the suspension. NASDAQ will continue to monitor closely these circumstances.”
The Company had 59 calendar days remaining in its compliance period, therefore,
with the new extension, it has until June 18, 2009 to effect
compliance.
As at
December 31, 2008, the Company’s closing stock price was at $0.13.
Infringement
and liability claims could damage our business.
Companies
in the Internet, technology and media industries own large numbers of patents,
copyrights, trademarks and trade secrets and frequently enter into litigation
based on allegations of infringement or other violations of intellectual
property rights. As we face increasing competition and become increasingly high
profile, the possibility of intellectual property rights claims against us
grows. Our technologies may not be able to withstand any third-party claims or
rights against their use. Any intellectual property claims, with or without
merit, could be time-consuming, expensive to litigate or settle and could divert
resources and attention. In addition, many of our agreements with our
advertisers require us to indemnify certain third-party intellectual property
infringement claims, which would increase our costs as a result of defending
such claims and may require that we pay damages if there were an adverse ruling
in any such claims. An adverse determination also could prevent us from offering
our services to others and may require that we procure substitute services for
these members.
With
respect to any intellectual property rights claim, to resolve these claims, we
may enter into royalty and licensing agreements on less favorable terms, pay
damages or stop using technology or content found to be in violation of a third
party’s rights. We may have to seek a license for the technology or content,
which may not be available on reasonable terms and may significantly increase
our operating expenses. The technology or content also may not be available for
license to us at all. As a result, we may also be required to develop
alternative non-infringing technology, which could require significant effort
and expense, or stop using the content. If we cannot license or develop
technology or content for the infringing aspects of our business, we may be
forced to limit our product and service offerings and may be unable to compete
effectively. Any of these results could harm our brand and operating
results.
In
addition, we may be liable to third-parties for content in the advertising we
deliver if the artwork, text or other content involved violates copyright,
trademark, or other intellectual property rights of third-parties or if the
content is defamatory. Any claims or counterclaims could be time-consuming,
could result in costly litigation and could divert management’s
attention.
Additionally,
we may be subject to legal actions alleging patent infringement, unfair
competition or similar claims. Others may apply for or be awarded patents or
have other intellectual property rights covering aspects of our technology or
business. For example, we understand that Overture Services, Inc. (acquired by
Yahoo) purports to be the owner of U.S. Patent No. 6,269,361, which was issued
on July 31, 2001 and is entitled “System and method for influencing a position
on a search result list generated by a computer network search engine.” Overture
has aggressively pursued its alleged patent rights by filing lawsuits against
other pay-per-click search engine companies such as MIVA (formerly known as
FindWhat.com) and Google. MIVA and Google have asserted counter-claims against
Overture including, but not limited to, invalidity, unenforceability and
non-infringement. While it is our understanding that the lawsuits
against MIVA and Google have been settled, there is no guarantee Overture (owned
by Ask.com) will not pursue its alleged patent rights against
other
companies. In addition, X1 has won a patent to provide search results as you
type a function utilised by other companies including Copernic Inc.
An
inability to protect our intellectual property rights could damage our
business.
We rely
upon a combination of trade secret, copyright, trademark, patents and other laws
to protect our intellectual property assets. We have entered into
confidentiality agreements with our management and key employees with respect to
such assets and limit access to, and distribution of, these and other
proprietary information. However, the steps we take to protect our intellectual
property assets may not be adequate to deter or prevent misappropriation. We may
be unable to detect unauthorized uses of and take appropriate steps to enforce
and protect our intellectual property rights. Additionally, the
absence of harmonized patent laws between the United States and Canada makes it
more difficult to ensure consistent respect for patent
rights. Although senior management believes that our services and
products do not infringe on the intellectual property rights of others, we
nevertheless are subject to the risk that such a claim may be asserted in the
future. Any such claims could damage our business.
Historical
net results include net losses for the years ended December 31, 1999 to December
31, 2003 and for the years ended December 31, 2005 to December 31, 2008. Working
capital may be inadequate.
For the
years ended December 31, 1999 through the year ended December 31, 2003 and for
the years ended December 31, 2005 to December 31, 2008, we have reported net
losses and net losses per share. We have been financing operations mainly from
funds obtained in several private placements, and from exercised warrants and
options. Management considers that liquidities as at December 31, 2008 will be
sufficient to meet normal operating requirements throughout 2009. In the long
term, we may require additional liquidity to fund growth, which could include
additional equity offerings or debt finance. No assurance can be given that we
will be successful in getting required financing in the future.
Goodwill
may be written-down in the future.
Goodwill
is evaluated for impairment annually, or when events or changed circumstances
indicate impairment may have occurred. Management monitors goodwill for
impairment by considering estimates including discount rate, future growth
rates, amounts and timing of estimated future cash flows, general economic,
industry conditions and competition. Future adverse changes in these factors
could result in losses or inability to recover the carrying value of the
goodwill. Consequently, our goodwill, which amounts to approximately $3.0M as at
December 31, 2008, may be written-down in the future which could adversely
affect our financial position.
Long-lived
assets may be written-down in the future.
The
Company assesses the carrying value of its long-lived assets, which include
property and equipment and intangible assets, for future recoverability when
events or changed circumstances indicate that the carrying value may not be
recoverable. Management monitors long-lived assets for impairment by considering
estimates including discount rate, future growth rates, general economic,
industry conditions and competition. Future adverse changes in these factors
could result in losses or inability to recover the carrying value of the
long-lived assets. Consequently, our long-lived assets, which amount to
approximately $1.2M as at December 31, 2008, may be written-down in the
future.
Reduced
Internet use may adversely affect our results.
Our
business is based on Internet driven products and services including direct
online Internet marketing. The emerging nature of the commercial uses of the
Internet makes predictions concerning a significant portion of our future
revenues difficult. As the industry is subject to rapid changes, we believe that
period-to-period comparisons of its results of operations will not necessarily
be meaningful and should not be relied upon as indicative of our future
performance. It is also possible that in some fiscal quarters, our operating
results will be below the expectations of securities analysts and investors. In
such circumstances, the price of our Common Shares may decline. The success of a
significant portion of our operations depends greatly on increased use of the
Internet by businesses and individuals as well as increased use of the Internet
for sales, advertising and marketing. It is not clear how effective Internet
related advertising is or will be, or how successful Internet-based sales will
be. Our results will suffer if commercial use of the Internet, including the
areas of sales, advertising and marketing, fails to grow in the
future.
Our
business depends on the continued growth and maintenance of the Internet
infrastructure.
The
success and availability of our Internet based products and services depend on
the continued growth, maintenance and use of the Internet. Spam,
viruses, worms, spyware, denial of service attacks, phishing and other acts of
malice may affect not only the Internet’s speed and reliability but also its
desirability for use by customers. If the Internet is unable to meet
these threats placed upon it, our business, advertiser relationships, and
revenues could be adversely affected.
Our
long-term success may be materially adversely affected if the market for
e-commerce does not grow or grows slower than expected.
Because
many of our customers’ advertisements encourage online purchasing and/or
Internet use, our long-term success may depend in part on the growth and market
acceptance of e-commerce. Our business will be adversely affected if the market
for e-commerce does not continue to grow or grows slower than expected. A number
of factors outside of our control could hinder the future growth of
e-commerce,
including the following:
|
·
|
the
network infrastructure necessary for substantial growth in Internet usage
may not develop adequately or our performance and reliability may
decline;
|
|
·
|
insufficient
availability of telecommunication services or changes in telecommunication
services could result in inconsistent quality of service or slower
response times on the Internet;
|
|
·
|
negative
publicity and consumer concern surrounding the security of e-commerce
could impede our growth; and
|
|
·
|
financial
instability of e-commerce
customers.
|
Security
breaches and privacy concerns may negatively impact our business.
Consumer
concerns about the security of transmissions of confidential information over
public telecommunications facilities is a significant barrier to increased
electronic commerce and communications on the Internet that are necessary for
growth of the Company’s business. Many factors may cause compromises or breaches
of the security systems we use or other Internet sites use to protect
proprietary information, including advances in computer and software
functionality or new discoveries in the fields of cryptography and processor
design. A compromise of security on the Internet would have a negative effect on
the use of the Internet for commerce and communications and negatively impact
our business. Security breaches of their activities or the activities of their
customers and sponsors involving the storage and transmission of proprietary
information, such as credit card numbers, may expose our operating business to a
risk of loss or litigation and possible liability. We cannot assure you that the
measures in place are adequate to prevent security breaches.
If
we fail to detect click fraud or other malicious applications or activity of
others, we could lose the confidence of our advertisers as well as face
potential litigation, government regulation or legislation, thereby causing our
business to suffer.
We are
exposed to the risk of fraudulent clicks on our ads and other clicks that
advertisers may perceive as undesirable. Click fraud occurs when a person clicks
on an ad displayed on a Web site for a reason other than to view the underlying
content. These types of fraudulent activities could hurt our brands. If
fraudulent clicks are not detected, the affected advertisers may experience a
reduced return on their investment in our advertising programs because the
fraudulent clicks will not lead to potential revenue for the
advertisers. Advertiser dissatisfaction with click fraud and other
traffic quality related claims has lead to litigation and possible governmental
regulation of advertising. Any increase in costs due to any such litigation,
government regulation, or refund could negatively impact our
profitability.
Index
spammers could harm the integrity of our Web search results, which could damage
our reputation and cause our users to be dissatisfied with our products and
services.
There is
an ongoing and increasing effort by “index spammers” to develop ways to
manipulate our Web search results. Although they cannot manipulate our results
directly, “index spammers” can manipulate our suppliers, which can result in our
search engine pages producing poor results. We take this problem very seriously
because providing relevant information to users is critical to our success. If
our efforts to combat these and other types of manipulation are unsuccessful,
our reputation for delivering relevant information could be diminished. This
could result in a decline in user traffic, which would damage our
business.
Our
business is subject to a variety of U.S. and foreign laws that could subject us
to claims or other remedies based on the nature and content of the information
searched or displayed by our products and services, and could limit our ability
to provide information regarding regulated industries and products.
The laws
relating to the liability of providers of online services for activities of
their users are currently unsettled both within the U.S. and abroad. Claims have
been threatened and filed under both U.S. and foreign law for defamation, libel,
invasion of privacy and other data protection claims, tort, unlawful activity,
copyright or trademark infringement, or other theories based on the nature and
content of the materials searched and the ads posted or the content generated by
our users. Increased attention focused on these issues and legislative proposals
could harm our reputation or otherwise affect the growth of our
business.
The
application to us of existing laws regulating or requiring licenses for certain
businesses of our advertisers, including, for example, distribution of
pharmaceuticals, adult content, financial services, alcohol or firearms and
online gambling, can be unclear. Existing or new legislation could expose us to
substantial liability, restrict our ability to deliver services to our users,
limit our ability to grow and cause us to incur significant expenses in order to
comply with such laws and regulations.
Several
other federal laws could have an impact on our business. Compliance with these
laws and regulations is complex and may impose significant additional costs on
us. For example, the Digital Millennium Copyright Act has provisions that limit,
but do not eliminate, our liability for listing or linking to third-party Web
sites that include materials that infringe copyrights or other rights, so long
as we comply
with the
statutory requirements of this act. The Children’s Online Protection Act and the
Children’s Online Privacy Protection Act restrict the distribution of materials
considered harmful to children and impose additional restrictions on the ability
of online services to collect information from minors. In addition, the
Protection of Children from Sexual Predators Act of 1998 requires online service
providers to report evidence of violations of federal child pornography laws
under certain circumstances. Any failure on our part to comply with these
regulations may subject us to additional liabilities.
If
the technology that we currently use to target the delivery of online
advertisements and to prevent fraud on our networks is restricted or becomes
subject to regulation, our expenses could increase and we could lose customers
or advertising inventory.
Web sites
typically place small files of non-personalized (or “anonymous”) information,
commonly known as cookies, on an Internet user’s hard drive, generally without
the user’s knowledge or consent. Cookies generally collect information about
users on a non-personalized basis to enable Web sites to provide users with a
more customized experience. Cookie information is passed to the Web site through
an Internet user’s browser software. We currently use cookies to track an
Internet user’s movement through the advertiser’s Web site and to monitor and
prevent potentially fraudulent activity on our network. Most currently available
Internet browsers allow Internet users to modify their browser settings to
prevent cookies from being stored on their hard drive, and some users currently
do so. Internet users can also delete cookies from their hard drives at any
time. Some Internet commentators and privacy advocates have suggested limiting
or eliminating the use of cookies, and legislation (including, but not limited
to, Spyware legislation such as U.S. House of Representatives Bill HR 29 the
“Spy Act”) has been introduced in some jurisdictions to regulate the use of
cookie technology. The effectiveness of our technology could be limited by any
reduction or limitation in the use of cookies. If the use or effectiveness of
cookies were limited, we would have to switch to other technologies to gather
demographic and behavioural information. While such technologies currently
exist, they are substantially less effective than cookies. We would also have to
develop or acquire other technology to prevent fraud. Replacement of cookies
could require significant reengineering time and resources, might not be
completed in time to avoid losing customers or advertising inventory, and might
not be commercially feasible. Our use of cookie technology or any other
technologies designed to collect Internet usage information may subject us to
litigation or investigations in the future. Any litigation or government action
against us could be costly and time-consuming, could require us to change our
business practices and could divert management’s attention.
Increased
regulation of the Internet may adversely affect our business.
If the
Internet becomes more strongly regulated, a significant portion of our operating
business may be adversely affected. For example, there is increased pressure to
adopt and where adopted, strengthen laws and regulations relating to Internet
unsolicited advertisements, privacy, pricing, taxation and content. The
enactment of any additional laws or regulations in Canada, Europe, Asia or the
United States, or any state or province of the United States or Canada may
impede the growth of the Internet and our Internet-related business, and could
place additional financial burdens on us and our Internet-related
business.
Changes
in key personnel, labour availability and employee relations could disrupt our
business.
Our
success is dependent upon the experience and abilities of our senior management
and our ability to attract, train, retain and motivate other high-quality
personnel, in particular for our technical and sales teams. There is significant
competition in our industries for qualified personnel. Labour market conditions
generally and additional companies entering industries which require similar
labour pools could significantly affect the availability and cost of qualified
personnel required to meet our business objectives and plans. There can be no
assurance that we will be able to retain our existing personnel or that we will
be able to recruit new personnel to support our business objectives and plans.
Currently, none of our employees are unionized. There can be no assurance,
however, that a collective bargaining unit will not be organized and certified
in the future. If certified in the future, a work stoppage by a collective
bargaining unit could be disruptive and have a material adverse effect on us
until normal operations resume.
Possible
future exercise of warrants and options could dilute existing and future
shareholders.
As at
March 25, 2009, we had 646,392 warrants at a weighted average exercise price of
$15.60 expiring from April to July 2009 and 693,993 stock options at a weighted
average exercise price of $1.54 outstanding. As at March 25, 2009, the exercise
prices of all outstanding warrants and options, were higher than the market
price of our Common Shares. When the market value of the Common Shares is above
the respective exercise prices of all options and warrants, their exercise could
result in the issuance of up to an additional 1,320,385 Common Shares. To the
extent such shares are issued, the percentage of our Common Shares held by our
existing stockholders will be reduced. Under certain circumstances the
conversion or exercise of any or all of the warrants or stock options might
result in dilution of the net tangible book value of the shares held by existing
Company stockholders. For the life of the warrants and stock options, the
holders are given, at prices that may be less than fair market value, the
opportunity to profit from a rise in the market price of the shares of Common
Shares, if any. The holders of the warrants and stock options may be expected to
exercise them at a time when the Company may be able to obtain needed capital on
more favourable terms. In addition, we reserve the right to issue additional
shares of Common Shares or securities convertible into or exercisable for shares
of Common Shares, at prices, or subject to conversion and exercise terms,
resulting in reduction of the percentage of outstanding Common Shares held by
existing stockholders and, under certain circumstances, a reduction in the net
tangible book value of existing stockholders’ Common Shares.
Strategic
acquisitions and market expansion present special risks.
A future
decision to expand our business through acquisitions of other businesses and
technologies presents special risks. Acquisitions entail a number of particular
problems, including (i) difficulty integrating acquired technologies,
operations, and personnel with the existing businesses, (ii) diversion of
management’s attention in connection with both negotiating the acquisitions and
integrating the assets as well as the strain on managerial and operational
resources as management tries to oversee larger operations, (iii) exposure to
unforeseen liabilities relating to acquired assets, and (iv) potential issuance
of debt instruments or securities in connection with an acquisition possessing
rights that are superior to the rights of holders of our currently outstanding
securities, any one of which would reduce the benefits expected from such
acquisition and/or might negatively affect our results of operations. We may not
be able to successfully address these problems. We also face competition
from other acquirers, which may prevent us from realizing certain desirable
strategic opportunities.
We
do not plan to pay dividends on the Common Shares.
The
Company has never declared or paid dividends on its shares of Common Shares. The
Company currently intends to retain any earnings to support its working capital
requirements and growth strategy and does not anticipate paying dividends in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of the Company’s Board of Directors after taking into account various
factors, including the Company’s financial condition, operating results, current
and anticipated cash needs and plans for expansion.
Rapidly
evolving marketplace and competition may adversely impact our
business.
The
markets for our products and services are characterized by (i) rapidly changing
technology, (ii) evolving industry standards, (iii) frequent new product and
service introductions, (iv) shifting distribution channels, and (v) changing
customer demands. The success of the Company will depend on its ability to adapt
to its rapidly evolving marketplaces. There can be no assurance that the
introduction of new products and services by others will not render our products
and services less competitive or obsolete. We expect to continue spending funds
in an effort to enhance already technologically complex products and services
and develop or acquire new products and services. Failure to develop and
introduce new or enhanced products and services on a timely basis might have an
adverse impact on our results of operations, financial condition and cash flows.
Unexpected costs and delays are often associated with the process of designing,
developing and marketing enhanced versions of existing products and services and
new products and services. The market for our products and services is highly
competitive, particularly the market for Internet products and services which
lacks significant barriers to entry, enabling new businesses to enter this
market relatively easily. Competition in our markets may intensify in the
future. Numerous well-established companies and smaller entrepreneurial
companies are focusing significant resources on developing and marketing
products and services that will compete with the Company’s products and
services. Many of our current and potential competitors have greater financial,
technical, operational and marketing resources. We may not be able to compete
successfully against these competitors. Competitive pressures may also force
prices for products and services down and such price reductions may reduce our
revenues.
To
the extent that some of our revenues and expenses are paid in foreign
currencies, and currency exchange rates become unfavourable, we may lose some of
the economic value in U.S. dollar terms.
Although
we currently transact a majority of our business in U.S. dollars, as we expand
our operations, more of our customers may pay us in foreign currencies.
Conducting business in currencies other than U.S. dollars subjects us to
fluctuations in currency exchange rates. This could have a negative impact on
our reported operating results. We do not currently engage in hedging
strategies, such as forward contracts, options and foreign exchange swaps
related to transaction exposures to mitigate this risk. If we determine to
initiate such hedging activities in the future, there is no assurance these
activities will effectively mitigate or eliminate our exposure to foreign
exchange fluctuations. Additionally, such hedging programs would expose us to
risks that could adversely affect our operating results, because we have limited
experience in implementing or operating hedging programs. Hedging programs are
inherently risky and we could lose money as a result of poor
trades. In 2008, revenues were decreased by approximately $101,000
and total expenses were increased by $50,000 resulting in a net loss $151,000
due to the fluctuation of foreign currencies.
Higher
inflation could adversely affect our results of operations and financial
condition.
We do not
believe that the relatively moderate rates of inflation experienced in the
United States and Canada in recent years have had a significant effect on our
revenues or profitability. Although higher rates of inflation have been
experienced in a number of foreign countries in which we might transact
business, we do not believe that such rates have had a material effect on our
results of operations, financial condition and cash flows. Nevertheless, in the
future, high inflation could have a material, adverse effect on the Company’s
results of operations, financial condition and cash flows.
Our future growth significantly
depends to a high degree on our ability to successfully commercialize the
Copernic Desktop Search® product, and any failure or delays
in that commercialization would adversely affect our business and results of
operations.
On
December 22, 2005, we completed our acquisition of Copernic, which we believe
positioned the Company as a leader in search technologies and applications and
as a multi-channel online marketing services provider. Although we
have high expectations for the
Copernic
Desktop Search® (CDS) award-winning product, to date our program to
commercialize that product through licensing to large ISP’s and Internet Portals
has not generated significant revenue and we cannot guarantee we will obtain
such significant licensing revenue in the future. However in 2008, we have
generated subscription sales of $636,893 through new products and sales channel
expansion which appears to have reversed the previous trend.
ITEM
4. INFORMATION ON THE COMPANY
The legal
name of the Company is Copernic Inc. and the Company operates under the
commercial names Mamma.com and Copernic. The Company was incorporated
on July 5, 1985, pursuant to the Business Corporations Act
(Ontario), promulgated under the laws of the Province of Ontario, Canada.
The Company’s principal executive officers are located at 360 Franquet Street,
Suite 60, Sainte-Foy, Quebec, Canada G1P 4N3.
The
Company maintains its registered office c/o Fasken Martineau DuMoulin LLP,
Toronto Dominion Bank Tower, P.O. Box 20, Suite 4200, 66 Wellington Street West,
Toronto-Dominion Centre, Toronto, Ontario, M5K 1N6, Canada.
Write-down
of intangible assets and goodwill
In Q4
2008, the Company concluded that its software unit was still facing delays in
execution and changes of market conditions of its commercial deployment
solutions. Based on the Company’s assessment of the fair value of its
assets related to the software unit, the Company concluded that these assets had
suffered a loss in value and the fair values of intangible assets and goodwill
were less than their carrying value. Therefore, write-downs of
$140,000 for trade names, $192,000 for technology and goodwill of $3,995,000
were recorded in 2008.
Normal
course issuer bid
On
November 11, 2008 the Company announced a normal course issuer bid under which
it may purchase up to a maximum of 700,000 of its common shares, representing
approximately 5% of the issued and outstanding common shares of the Company as
of the date hereof. Purchases under the normal course issuer bid may
take place over a twelve month period commencing on the 17th day of
November, 2008 and ending on the 16th day of
November, 2009. The Company reserves the right to discontinue its
normal course issuer bid at any time. As of March 2009, no shares
have been acquired by the Company.
Cost
reduction plan
In Q4
2008, the Company continued to execute its cost reduction plan announced at the
end of Q1 2008. Total costs in 2008 excluding write-downs,
termination costs and restructuring costs were at $6,678,774 compared to
$10,318,889 in 2007.
In
addition, the Company has decided to close its Montreal office in Q1 2009 and
concentrate all its activity in Quebec City.
The total
cost of the restructuring which includes termination costs, head hunters’ fees,
lease termination costs and moving expenses is estimated at approximately
$150,000. In 2008, the Company has recorded $101,012 of restructuring
costs.
Resignation
and departure of officers
Éric
Bouchard, Vice President Marketing and Officer of the Company, for personal
reasons, did not renew his employment contract which expired on December 31,
2008, with the Company. In relation with this departure, 51,999 stock options
were cancelled, resulting in a reversal of employee stock-based compensation
expense of $40,878 that was recorded in Q4 2008.
The
Company accepted the resignation of Mr. Daniel Bertrand, Executive Vice
President and Chief Financial Officer, effective September 8, 2008. Furthermore
Ms. Claire Castonguay, the Company’s Controller for the past three years was
appointed Vice President, Finance and Controller while Mr. Ferland, President
and CEO assumed the additional responsibilities of Chief Financial Officer on an
interim basis. In relation with this resignation, the Company recorded and paid
termination costs of $149,420 in Q3 2008. Furthermore, 121,791 non
vested stock options held by Mr. Bertrand were cancelled, resulting
in a reversal of employee stock-based compensation expense of $104,741 that was
recorded in Q3 2008. In Q4 2008, an additional 52,709 vested stock options held
by Mr. Bertrand were cancelled.
On
February 11, 2008, the Company announced the departure of Patrick Hopf,
Executive Vice President of Business Development. 117,134 options
held by Mr. Hopf were cancelled, resulting in a reversal of employee stock-based
compensation expense of $48,542 which was recorded in Q1 2008.
On
February 8, 2008, the Company announced that its President and Chief Executive
Officer, Martin Bouchard, tendered his resignation, effective March 3, 2008,
citing personal reasons. 155,000 options held by Mr. Bouchard were cancelled,
resulting in a reversal of employee stock-based compensation expense of $49,320
which was recorded in Q1 2008. Mr. Marc Ferland, a director of the
Company, was appointed President and CEO commencing on March 3,
2008.
Notice
from NASDAQ
On June
16, 2008 a notice from NASDAQ Listing Qualifications was received by the
Company. The notice stated that for the last 30 consecutive business days,
the bid price of the Company’s common stock had closed below the minimum $1.00
per share requirement for continued inclusion under Marketplace Rule 4310(c)(4)
(the “Rule”). Therefore, in accordance with Marketplace Rule
4310(c)(8)(D), the Company will be provided 180 calendar days, or until December
15, 2008 to regain compliance. If, at any time before December 15, 2008,
the bid price of the Company’s common stock closes at $1.00 per share or more
for a minimum of 10 consecutive business days, NASDAQ Staff will provide written
notification that it complies with the Rule. If compliance with this Rule cannot
be demonstrated by December 15, 2008, NASDAQ Staff will determine whether the
Company meets The NASDAQ Capital Market initial listing criteria as set forth in
Marketplace Rule 4310(c), except for the bid price requirement. If it
meets the initial listing criteria, NASDAQ Staff will notify the Company that it
has been granted an additional 180 calendar day compliance period. If the
Company is not eligible for an additional compliance period, NASDAQ Staff will
provide written notification that the Company’s securities will be
delisted. At that time, the Company may appeal NASDAQ Staff’s
determination to delist its securities to a Listing Qualifications Panel (the
“Panel”). These circumstances may adversely impact trading in our Common Shares
and may also adversely affect our ability to access capital.
On
October 22, 2008, the Company received a NASDAQ Notice, indicating that the
Company has received an extension to comply with the minimum bid price
requirement for continued listing.
The
notice stated: “Given these extraordinary market conditions, NASDAQ has
determined to suspend enforcement of the bid price and market value of publicly
held shares requirements through Friday, January 16, 2009. In that regard, on
October 16, 2008, NASDAQ filed an immediately effective rule change with the
Securities and Exchange Commission to implement the suspension. As a result, all
companies presently in a bid price or market value of publicly held shares
compliance period will remain at that same stage of the process and will not be
subject to being delisted for these concerns. These rules will be reinstated on
Monday, January 19, 2009 and the first relevant trade date will be Tuesday,
January 20, 2009.
Since
your company had 59 calendar days remaining in its compliance period as of
October 16th, it will, upon reinstatement of the rules, still have this number
of days, or until March 19, 2009, to regain compliance. The company can regain
compliance, either during the suspension or during the compliance period
resuming after the suspension, by achieving a $1 closing bid price for a minimum
of 10 consecutive trading days”.
On
December 19, 2008, NASDAQ issued an issuer alert #2008-005A stating “Given the
continued extraordinary market conditions, NASDAQ is extending the suspension of
the bid price and market value of publicly held shares requirements. Enforcement
of these rules is scheduled to resume on Monday, April 20, 2009. Any company in
the compliance process for a bid price or market value of publicly held shares
concern will continue to be “frozen” at the same stage of the process until the
end of the suspension. However, a company could be delisted for other reasons
during the suspension. NASDAQ staff will contact each company affected by this
extension and notify those that regain compliance with these requirements during
the suspension. NASDAQ will continue to monitor closely these circumstances.”
The Company had 59 calendar days remaining in its compliance period, therefore,
with the new extension, it has until June 18, 2009 to effect
compliance.
As at
December 31, 2008, the Company’s closing stock price was at $0.13.
Granting,
exercising and cancellation of stock options
On April
2, 2008, the Company granted 100,000 stock options to an officer, at an exercise
price of $1.00 expiring in five years.
On June
17, 2008, the Company granted 125,000 stock options to directors and a new
officer, at an exercise price of $0.62 expiring in five years.
On
November 11, 2008, the Company granted 125,000 stock options to two officers and
employees at an exercise price of $0.22 expiring in five years.
As at
December 31, 2008, 785,819 stock options were forfeited.
On June
30, 2004, the Company sold under a securities purchase agreement an aggregate of
1,515,980 common shares and 606,392
warrants
to certain accredited investors for an aggregate price of $16,599,981. Net
proceeds from the offering amounted to $15,541,162, net of issue cost of
$1,058,819, $996,000 of which was paid to Merriman Curhan Ford & Co.
(“MCF”). For this specific transaction, MCF waived their entitlement to a
warrant component of the financing completion fee. Each warrant entitles the
accredited investors to purchase one additional common share at an exercise
price equal to $15.82 per share. The warrants are exercisable beginning six
months after the closing date, and have a term of five years from the closing
date.
On
December 12, 2002, the Company entered into subscription agreements to sell
1,893,939 Units, for a purchase price of $1.32 per Unit or total proceeds of
$2.5 million. Each Unit consisted of one share of Common Shares plus one
nontransferable “A Warrant” that entitled the holder to purchase one additional
Common Share at a price of $1.40 on or before November 30, 2004. Only in the
event and upon the exercise of each respective A Warrant, the holder thereof was
entitled to be issued one “B Warrant” that would entitle such holder to purchase
one additional Common Share at a price of $1.50 on or before November 30, 2006.
A placement fee of 142,045 Units was paid to a placement agent for arranging
this financing and the A and B warrants attached were exercised in September
2004 and November 2004, respectively. A sum of $5,904,354 accrued to the
treasury of the Company and a further 4,071,968 common shares of the Company
were issued.
RECENT
AGREEMENT
ThomasLloyd
Capital LLC
|
On June
7, 2007, the Company retained ThomasLloyd Capital LLC (“ThomasLloyd Capital”) as
its financial and investment banking advisor. In consideration for these
services, the Company committed to pay ThomasLloyd Capital a monthly fee of
$5,000 for seven months beginning June 1, 2007, plus a success fee of
the greater of $1,000,000 (but in no event shall such amount exceed 3% of the
transaction value) or 2% of the transaction value but in no event to exceed
$2,000,000 (less any amounts previously paid as monthly fees) plus an additional
fee of $200,000, credited against the above fees payable upon delivery of a
fairness opinion. This agreement has been terminated in
2008.
OTHER
AGREEMENTS
Merriman
Curhan Ford & Co.
On March
16, 2004, the Company retained Merriman Curhan Ford & Co. (“MCF”) as a
financial advisor and as an investment banking advisor. The Company then signed
two separate agreements. In consideration for financial services, the Company
had committed to pay MCF a monthly fee of $5,000 for a minimum obligation of
$30,000 and 10,000 warrants per month with a minimum issuance of 60,000
warrants; each warrant gives the rights to purchase one common share of the
Company. Warrants are issuable at an exercise price equal to the average closing
bid for the last five trading days at the end of the month of issue, for the
duration of the agreement upon the same terms and conditions. The warrants have
a life of five years from the issuance date. For the investment banking
services, the Company had committed to pay a cash financing completion fee equal
to 6% of the total amount of capital received by the Company from the sale of
its equity securities and warrants to purchase common shares of the Company in
an amount equal to 6% of the number of common shares purchased by investors in
capital raising transactions. The warrants are immediately exercisable at the
higher of the price per share at which the investor can acquire common shares or
the closing price of the Company’s common shares at the date of the capital
raising transaction. For mergers and acquisitions, the Company had committed to
pay a success fee upon closing equal to the sum of 4% of up to $10,000,000
transaction value, 3% of $10,000,000 to $15,000,000 transaction value and 2% of
greater than $15,000,000 transaction value, provided that MCF either introduces
and/or performs specific services for the transaction. The minimum success fee
for a transaction is $200,000. For a sale transaction, the Company had committed
to pay a success fee with the same parameters of an acquisition except for the
minimum fee which is $500,000.
For the
period ended December 31, 2004, 40,000 warrants were issued to MCF at an average
price of $12.31, the fair value of which was $260,301 estimated as of the grant
date using the Black-Sholes pricing model, and charged to expense with a
corresponding credit to additional paid-in capital. The following weighted
average assumptions were used:
Expected
option life
|
|
3.5
years
|
Volatility
|
|
86%
|
Risk-free
interest rate
|
|
3.99%
|
Dividend
yield
|
|
nil
|
On July
16, 2004, the agreement for financial services, dated March 16, 2004 was
amended. The Company committed to pay MCF a monthly fee of $5,000 for eight
months from July 16, 2004. The agreement for investment banking services was
amended on July 16, 2004, on September 8, 2004 and subsequently on October 12,
2005. The Company then was committed to pay a success fee upon closing equal to
the sum of 3% of up to $20,000,000 transaction value, 1.5% of the excess of
$20,000,000. If an acquisition transaction is less than 50% interest in the
Company or the Target, a fee shall be payable in cash for 7% of the transaction
value. If transaction is not consummated and the Company is entitled to receive
break-up fee and other form of compensation, the Company then will pay to MCF
30% of Company’s entire entitlement. In the event that the Board deems it
necessary or appropriate for a fairness opinion to be rendered
in
connection with an acquisition transaction, MCF will receive a Fairness Opinion
Fee of $200,000 for rendering its opinion, payable upon delivery of the Fairness
Opinion and will be credited against the M&A Completion Fee due to
MCF.
At the
completion of the Copernic Technologies Inc. acquisition, total fees paid to MCF
were $618,468 including the fairness opinion fee of $200,000.
On
January 29, 2003, the Company retained Maxim Group LLC (“Maxim”), on a
non-exclusive basis, as its investment banker, strategic advisor and financial
advisor. In consideration for these services, the Company paid a retainer of
$25,000 for the first month and a monthly fee of $5,000 for the duration of the
agreement. Upon execution of the agreement, the Company issued a warrant to
purchase 25,000 of the Company’s Common Shares at an exercise price of $2.15
expiring on June 30, 2006. Under the agreement, on a monthly basis, commencing
30 days after execution of the agreement, the Company was obligated to issue
additional warrants, each to purchase 8,000 Common Shares, at an exercise price
equal to the market price, for the duration of the agreement upon the same terms
and conditions. For any Transaction completed by the Company with Maxim Group
LLC, the Company agreed to pay a success fee upon closing equal to the sum of
2½% of the aggregate transaction value, provided that Maxim either introduced
and/or performed specific services for the Transaction. The minimum success fee
for any transaction was $200,000. On May 5, 2003, an amendment was made to the
agreement to increase the success fee for a specific Transaction from 2½% to
3½%.
The term
of this agreement was indefinite. However, the Company or Maxim could terminate
it upon 30 days written notice. If such a notice was sent by the Company, the
monetary consideration was payable by the Company for the ensuing five months;
however, the warrant consideration would cease after the 30 days written notice.
If Maxim sent such a notice, both the monetary and warrant consideration
will cease immediately. The preceding statements notwithstanding, the agreement
could also be terminated upon 30 days written notice by either party any time
after the 6th
month anniversary of the agreement. On October 30, 2003 the Company advised
Maxim of termination of this agreement effective November 30, 2003. In 2003, the
Company granted a total of 105,000 warrants at an average price of $2.50 to
Maxim Group LLC for financial advisory fees.
Maxim
Group was paid a $200,000 success fee related to the acquisition of Digital
Arrow in June 2004.
As at
March 30, 2005, Maxim Group, LLC had exercised all its warrants.
ACQUISITIONS,
DIVESTITURES AND DISCONTINUED OPERATIONS
Acquisition
of Copernic Technologies Inc.
On
December 22, 2005, the Company acquired 100% of the issued and outstanding
securities of Copernic Technologies Inc. including an amount to settle Copernic
Technologies Inc.’s outstanding stock appreciation right
obligations.
The
consideration for the acquisition, including costs directly related to the
acquisition, consisted of $15,851,922 in cash including $3,297,007 paid to
settle Copernic Technologies Inc.’s stock appreciation right and severance
obligations net of cash acquired. The Company also issued 2,380,000 common
shares as part of the consideration paid. The fair value of the Company’s common
shares issued to owners of Copernic Technologies Inc. has been determined to be
$2.958 per share. This value has been determined using the average closing price
of the Company’s common shares for the two days before and after August 17,
2005, the date the significant terms and conditions of the transaction were
agreed to and publicly announced.
This
acquisition has been accounted for using the purchase method and the results of
operations have been included in the Company’s statement of operations from the
date of acquisition. The purchase price allocation was finalized upon receipt of
a valuation report.
On May
31, 2006, Copernic Technologies Inc. was wound up into the
Company. The wind-up allows the Company to use carry forward tax
losses where needed.
In 2006,
the purchase price allocation was adjusted to reflect additional assets and
liabilities assumed by the Company. These adjustments resulted by
increasing accounts receivable by $480,091, liabilities by $22,286 and
consequently decreasing original goodwill by $457,805. The increase in accounts
receivable, which was not accounted for in the audited closing balance sheet of
Copernic Technologies Inc. at the date of acquisition, was due to revenue
recognition adjustment related to a specific contract that existed prior to the
date of the transaction.
In 2006,
$379,382 was received by the Company from the sellers of Copernic Technologies
Inc. to compensate for a reduction of research and development tax credits prior
to the acquisition date, the purchase price and goodwill were then reduced
accordingly.
Discontinued
Digital Arrow LLC and High Performance Broadcasting Inc. (“Digital Arrow”)
Operations
In
September 2005, following the poor performance of Digital Arrow LLC and High
Performance Broadcasting, Inc. (“Digital Arrow”)
located
in Florida, management decided to discontinue its subsidiary’s
operations. The Company has therefore not renewed the lease in
Florida and recorded closing costs.
Consequently,
the results of the operations of Digital Arrow were recorded as discontinued
operations and the results of the Company for the years ended December 31, 2005
and 2004 were reclassified to account for the closure of the subsidiary’s
operations.
Digital
Arrow, which the Company acquired on June 10, 2004, was a privately held
marketing company that was engaged in the distribution of online, opt-in e-mail
marketing solutions via the Internet. In that acquisition, the Company’s
wholly-owned subsidiary, Mamma.com USA, Inc., entered into a Securities Purchase
Agreement with Digital Arrow and their equity holders, pursuant to which
Mamma.com USA, Inc. acquired all equity interests in Digital Arrow. The
consideration for the acquisition, including costs directly related to the
acquisition, consisted of $1,264,210 in cash, net of cash acquired, and 90,000
of the Company’s common shares. The fair value of the Company shares
issued to owners of Digital Arrow was determined to be $8.23 per
share. The operations of the business have been included in the
Company’s consolidated financial statements since June 1, 2004.
This
acquisition has been accounted for using the purchase method. The
fair value of the net assets acquired was $1,535,744, which with goodwill of
$556,196, resulted in a total purchase price of $2,091,940. From this purchase
price, $740,782 was paid by issuance of the Company’s common shares, $86,948 for
cash acquired at the transaction for a cash paid net of cash acquired of
$1,264,210. Digital Arrow LLC and High Performance Broadcasting, Inc. have since
been liquidated.
INCUBATOR
ACTIVITIES
Prior to
February 2001, when the Company announced a moratorium on new incubator
activities, the Company had engaged in incubator management services and held
positions in companies in the analog circuit, new media and telecommunications
sectors. These companies included LTRIM Technologies Inc., (“LTRIM”), interWAVE
communications International, Ltd. Tri-Link Technologies Inc., TEC Technology
Evaluation.com Corporation, uPath.com Inc. and ESP Media Inc. The Company had
written down completely or disposed of its interest in all of these companies,
except for LTRIM.
LTRIM is
engaged in the design and development of high-performance analog integrated
circuit products. LTRIM’s proprietary core technology consists of a laser-based
fine-tuning system designed to set the electrical characteristics of
high-performance analog integrated circuits by precisely adjusting the
resistance of silicon-embedded resistive elements that are fabricated through
standard semiconductor manufacturing processes. It is expected that this
technology will have advantages over conventional circuit fine-tuning
techniques, in terms of manufacturing cost, integration, and time-to-market,
when applied to the production of high-performance analog semiconductor
products.
On May 4,
2000, the Company initiated a series of transactions pursuant to which it
subscribed to a CDN $850,000 secured debenture convertible into 12.75% of the
equity of LTRIM. On February 23, 2001, the Company started acquiring preferred
shares by step purchase and by May 2001, a total of 207,323 preferred shares
were subscribed to and entirely paid. These shares were subsequently split 10
for 1, resulting in 2,073,230 shares.
On
December 13, 2002, LTRIM closed the first round of an intended two-round
financing transaction with new investors. As part of the transaction, the
Company converted all preference shares and the secured debenture into 4,891,686
Class A Common Shares. Accrued interest on the debenture in the amount of CDN
$137,014 (US $80,038) was converted into 359,281 Class A preference shares. On
February 11, 2004, LTRIM closed the second round of financing.
In 2006,
based on its assessment of the fair value of the Company’s investment in LTRIM,
the Company concluded that its investment had suffered a loss in value other
than a temporary decline and therefore recorded a write-down of
$570,000.
As at
December 31, 2006, the investment in LTRIM was carried at a value of $150,000
for approximately 4% of LTRIM.
In 2007,
based on its assessment of the fair value of the Company’s investment in LTRIM,
the Company concluded that its investment had suffered a loss in value other
than a temporary decline due to significant corporate restructuring and
therefore recorded a write-down of $150,000 to bring its investment value to
nil.
Copernic
Inc. is a leading provider of award winning search technology for both the web
and desktop space delivered through its online properties, including
www.mamma.com and www.copernic.com.
Through
its award winning Copernic Desktop Search® software search engine product, the
Company develops cutting edge search solutions bringing the power of a
sophisticated, yet easy-to-use search engine to the user’s PC. It allows for
instant searching of files, calendar, emails, and email attachments stored
anywhere on a PC hard drive. The desktop search application won the CNET
Editors’ Choice Award, as well as the PC World World Class award in 2005.
In 2007, PC Pro, the UK’s most respected IT magazine for professionals,
and Micro Hebdo, one of France’s most read IT magazines, each selected Copernic
Desktop Search® 2.0 software search engine as the top desktop search tool. At
the CTIA Wireless 2008® Copernic’s Desktop Search won first prize for innovation
in the enterprise solutions category. Also in 2008, Copernic Desktop
Search® 3.0 received the prestigious “Gizmo’s Top Pick” award in the “Best Free
Desktop Search Utility” category at Gizmo’s popular Best-ever Freeware
site.
In Q3
2008, the Company launched version 3.0 of its business-oriented desktop search
product. The upgraded Copernic Desktop Search (“CDS”) Corporate Edition further
increases its competitive edge by adding Intranet integration features and
expanding its MS Outlook® search capabilities. CDS Professional Edition also
specifically targets knowledge workers with features such as the indexing of
Microsoft Outlook’s calendar, tasks and notes. Some advanced search functions
are now exclusive to the Professional and Corporate products: network drive
indexing, “as you type” display of results, and saving of queries for frequently
used searches. CDS Home Edition offers a unique competitive advantage with the
new “One Search” feature which simultaneous searches the desktop and the
Internet. Although the Home Edition is free to consumers, it does provide for
contextual advertised sponsored banner ads based on search queries.
Through
its well established media placement channels, Copernic Inc. provides both
online advertising as well as pure content to its partnerships worldwide.
Copernic’s search division handles over 1 billion search requests per month and
has media placement partnerships established not only in North America, but in
Europe and elsewhere. The revenue models of the Company are based
on:
Pay-Per-Click
search listing placement – advertisers bid or pay a fixed price for position on
search listing advertisements on www.mamma.com and within the Copernic Media
Solutions™ Publisher Network.
Graphic
Ad Units – priced on a CPM (Cost-Per-Thousand) basis and are distributed through
the Copernic Media Solutions™ Publisher Network.
Copernic
Media Solutions™ Publisher Network has over 98 active publishers (combined
search and graphic ad publishers).
Copernic
Agent® and Copernic Desktop Search® users generate Web searches and clicks from
pay-per-click advertising listings.
Copernic
Desktop Search® licensing to ISPs, portals, enterprise search providers and
e-commerce sites generates license, maintenance and customization
revenues.
Copernic
Agent® Personal Pro, Copernic Summarizer® and Copernic Tracker® software are
sold from our e-commerce store.
Although
we operate in the global on-line market, and now engage in the development and
sale of information management and search solution products, the majority of our
users and customers are concentrated in the U.S., Europe and Canada. Our total
revenues in 2008 can be divided into several categories: search and graphic
advertising, software licensing, customized development and maintenance support
revenues. The following table gives a breakdown of the total revenues by
category for the last five financial years. The operations of Copernic
Technologies Inc. have been included since December 23, 2005.
|
|
|
|
|
|
|
|
|
search
and graphic
|
|
Software
|
|
Customized
Development
and
|
year
|
|
advertising
|
|
Licensing
|
|
Maintenance
Support
|
|
|
US
$
|
|
US
$
|
|
US
$
|
2008
|
|
5,606,383
|
|
951,022
|
|
454,226
|
2007
|
|
7,354,709
|
|
415,263
|
|
346,436
|
2006
|
|
8,024,972
|
|
957,488
|
|
613,942
|
2005
|
|
9,426,772
|
|
6,671
|
|
10,532
|
2004
|
|
14,624,222
|
|
-
|
|
12,096
|
SEASONALITY
AND FLUCTUATION IN REVENUES
|
The
Company is subject to seasonal fluctuations affecting its operations and
results. Historically, the first and third quarters have shown significant
decreases in search and graphic revenues, which the Company believes are
respectively attributable to decreased advertising and Internet use during the
post-Christmas lull and the Summer holiday season.
Although
not seasonal, our software licensing revenues fluctuate from quarter to quarter
based upon the quarters in which we obtain new agreements or existing agreements
terminate.
MARKETING
CHANNELS AND SALES METHODS
The
Company maintains its own sales and marketing staff and has its own experienced
direct sales force to address the new and evolving requirements of its target
markets. Although the Company itself does not expend significant resources on
public relations, the Company markets itself through on-line advertising, press
releases, internally sponsored events and trade shows.
The
Company solicits revenues by direct sales force, e-mail directly to the end
client, or through specialized search engines through advertising agencies or
network distribution business associates who mainly specialize in the online
advertising market. Search listings are solicited either directly or through
on-line marketing campaigns from the end client.
DEPENDENCE
ON INTELLECTUAL PROPERTY AND OTHER MATTERS MATERIAL TO
PROFITABILITY
We rely
upon a combination of trade secret, copyright, trademark, patent and other laws
to protect our intellectual property assets. We have entered into
confidentiality agreements with our management and key employees with respect to
such assets and limit access to, and
distribution
of, these assets and other proprietary information. However, the steps we take
to protect our intellectual property assets may not be adequate to deter or
prevent misappropriation. We may be unable to detect unauthorized uses of and
take appropriate steps to enforce and protect our intellectual property rights.
Although senior management believes that our services and products do not
infringe on the intellectual property rights of others, we nevertheless are
subject to the risk that such a claim may be asserted in the future. Any such
claims could damage our business.
The laws
relating to the liability of providers of online services for activities of
their users are currently unsettled both within the U.S. and abroad. Claims have
been threatened and filed under both U.S. and foreign law for defamation, libel,
invasion of privacy and other data protection claims, tort, unlawful activity,
copyright or trademark infringement, or other theories based on the nature and
content of the materials searched and the ads posted or the content generated by
users of other services similar to ours. Increased attention focused on these
issues and legislative proposals could harm our reputation or otherwise affect
the growth of our business.
The
application to us of existing laws regulating or requiring licenses for certain
businesses of our advertisers, including, for example, distribution of
pharmaceuticals, adult content, financial services, online gambling, alcohol or
firearms, can be unclear. Existing or new legislation could expose us to
substantial liability, restrict our ability to deliver services to our users,
limit our ability to grow and cause us to incur significant expenses in order to
comply with such laws and regulations.
Several
other federal laws could have an impact on our business. Compliance with these
laws and regulations is complex and may impose significant additional costs on
us. For example, the Digital Millennium Copyright Act has provisions that limit,
but do not eliminate, our liability for listing or linking to third-party web
sites that include materials that infringe copyrights or other rights, so long
as we comply with the statutory requirements of this act. The Children’s Online
Protection Act and the Children’s Online Privacy Protection Act restrict the
distribution of materials considered harmful to children and impose additional
restrictions on the ability of online services to collect information from
minors. In addition, the Protection of Children from Sexual Predators Act of
1998 requires online service providers to report evidence of violations of
federal child pornography laws under certain circumstances. Any failure on our
part to comply with these and similar regulations in other jurisdictions may
subject us to additional liabilities.
The
Company primarily competes in the areas of on-line advertising and software
licensing which includes sales of licenses, customization and maintenance
support. The
market for these services is in a constant state of flux and competition is
intense.
The
Company faces intense competition expects this competition will continue to
intensify. The Company’s markets are subject to rapid changes in technology and
marketing strategies and the Company is significantly affected by new product
introductions and other market activities of its existing and potential
competitors. The Company believes the principal competitive factors in this
market are name recognition, product performance and functionality, ease of use,
size of the Web index, user traffic, the speed with which search results return
and the relevance of results, pricing and quality of customer support. Many of
the Company’s current and potential competitors in on-line advertising and
software licensing, includes Google, Ask.com, Miva, Looksmart, Findwhat,
Microsoft, Yahoo!, Value Click, FastClick, Burst Media, Tribal Fusion and X1
have significant operating histories, larger customer bases, greater brand name
recognition, greater access to proprietary content and significantly greater
financial, marketing and other resources which give them a competitive
advantage.
The
markets for our products and services are characterized by (i) rapidly changing
technology, (ii) evolving industry standards, (iii) frequent new product and
service introductions, (iv) shifting distribution channels, and (v) changing
customer demands. The success of the Company will depend on its ability to adapt
to its rapidly evolving marketplaces. There can be no assurance that the
introduction of new products and services by others will not render our products
and services less competitive or obsolete. We expect to continue spending funds
in an effort to enhance already technologically complex products and services
and develop or acquire new products and services. Failure to develop and
introduce new or enhanced products and services on a timely basis might have an
adverse impact on our results of operations, financial condition and cash flows.
Unexpected costs and delays are often associated with the process of designing,
developing and marketing enhanced versions of existing products and services and
new products and services. The market for our products and services is highly
competitive, particularly the market for Internet products and services which
lacks significant barriers to entry, enabling new businesses to enter this
market relatively easily. Competition in our markets may intensify in the
future. Numerous well-established companies and smaller entrepreneurial
companies are focusing significant resources on developing and marketing
products and services that will compete with the Company’s products and
services. Many of our current and potential competitors have greater financial,
technical, operational and marketing resources. We may not be able to compete
successfully against these competitors. Competitive pressures may also force
prices for products and services down and such price reductions may reduce our
revenues.
On May
31, 2004, the wholly owned subsidiary, Mamma.com Enterprises Inc. was wound up
into the Company. The transaction has allowed the Company to use carry forward
tax losses. On May 31, 2006, the wholly owned subsidiary, Copernic
Technologies Inc. which was acquired on December 22, 2005, was wound up into the
Company. During 2007 and 2008, a few non-active companies were wound
up into the Company. As at March 27, 2009 the Company had an active
wholly-owned subsidiary, Mamma.com USA, Inc.
The
Company leases two office locations. They are in Quebec City, Canada with 13,000
square feet and Montreal, Canada with 3,400 square feet. The Montreal office
will be closed March 31, 2009.
ITEM
5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion and analysis of the consolidated financial condition and
results of operations of Copernic Inc. for the three years ended December 31,
2008, 2007 and 2006 should be read in conjunction with its consolidated
financial statements and the related notes. All statements in the
following discussion, which are not reports of historical information or
descriptions of current accounting policy, are forward-looking
statements. Please consider our forward-looking statements in light
of the risks referred to in this Management’s Discussion and Analysis of
Financial Condition and Results of Operations cautionary note. The
Company’s consolidated financial statements are reported in US dollars and have
been prepared in accordance with generally accepted accounting principles as
applied in Canada (“Canadian GAAP”). As a registrant with the
Securities and Exchange Commission in the United States, the Company is required
to reconcile its financial results for significant measurement differences
between Canadian GAAP and generally accepted accounting principles as applied in
the United States (“U.S. GAAP”) as they specifically relate to the Company as
described in note 27 to its consolidated financial statements. This Management’s
Discussion and Analysis of Financial Condition and Results of Operations is
dated March 27, 2009.
Business
overview
Copernic
Inc. is a leading provider of award winning search technology for both the web
and desktop space delivered through its online properties, including
www.mamma.com and www.copernic.com.
Through
its award winning Copernic Desktop Search® software search engine product, the
Company develops cutting edge search solutions bringing the power of a
sophisticated, yet easy-to-use search engine to the user’s PC. It allows for
instant searching of files, calendar, emails, and email attachments stored
anywhere on a PC hard drive. The desktop search application won the CNET
Editors’ Choice Award, as well as the PC World World Class award in 2005.
In 2007, PC Pro, the UK’s most respected IT magazine for professionals,
and Micro Hebdo, one of France’s most read IT magazines, each selected Copernic
Desktop Search® 2.0 software search engine as the top desktop search tool. At
the CTIA Wireless 2008® Copernic’s Desktop Search won first prize for innovation
in the enterprise solutions category. Also in 2008, Copernic Desktop
Search® 3.0 received the prestigious “Gizmo’s Top Pick” award in the “Best Free
Desktop Search Utility” category at Gizmo’s popular Best-ever Freeware
site.
In Q3
2008, the Company launched version 3.0 of its business-oriented desktop search
product. The upgraded Copernic Desktop Search (“CDS”) Corporate Edition further
increases its competitive edge by adding Intranet integration features and
expanding its MS Outlook® search capabilities. CDS Professional Edition also
specifically targets knowledge workers with features such as the indexing of
Microsoft Outlook’s calendar, tasks and notes. Some advanced search functions
are now exclusive to the Professional and Corporate products: network drive
indexing, “as you type” display of results, and saving of queries for frequently
used searches. CDS Home Edition offers a unique competitive advantage with the
new “One Search” feature which simultaneous searches the desktop and the
Internet. Although the Home Edition is free to consumers, it does provide for
contextual advertised sponsored banner ads based on search queries.
Through
its well established media placement channels, Copernic Inc. provides both
online advertising as well as pure content to its partnerships worldwide.
Copernic’s search division handles over 1 billion search requests per month and
has media placement partnerships established not only in North America, but in
Europe and elsewhere. The revenue models of the Company are based
on:
Pay-Per-Click
search listing placement – advertisers bid or pay a fixed price for position on
search listing advertisements on www.mamma.com and within the Copernic Media
Solutions™ Publisher Network.
Graphic
Ad Units – priced on a CPM (Cost-Per-Thousand) basis and are distributed through
the Copernic Media Solutions™ Publisher Network.
Copernic
Media Solutions™ Publisher Network has over 98 active publishers (combined
search and graphic ad publishers).
Copernic
Agent® and Copernic Desktop Search® users generate Web searches and clicks from
pay-per-click advertising listings.
Copernic
Desktop Search® licensing to ISPs, portals, enterprise search providers and
e-commerce sites generates license, maintenance and customization
revenues.
Copernic
Agent® Personal Pro, Copernic Summarizer® and Copernic Tracker® software are
sold from our e-commerce store.
Search
and graphic advertising
Approximately
80% of our revenues come from our search based businesses which
are: search property Mamma.com, “The Mother of All Search Engines®”
and its search publisher network of approximately 98 partners representing 68%
of these revenues and Copernic Agent® and Copernic Desktop Search® for 12% of
these revenues respectively. The revenue model in this sector is
simply a pay-per-click fee that is charged to the advertiser when a user clicks
on a sponsored link. The business model consists of advertisers buying keywords.
When these keywords are searched by a user, the advertiser’s Web site will be
listed in a premium position in the search results, identified as a sponsored
result. The Company aggregates advertisers from other search-based businesses
and from its own direct sales efforts (through direct sales and automated
online marketing initiatives). Advertising revenues generated through third
party search properties have associated payout costs; these payout costs
represent a percentage of the revenues generated from the distribution of search
advertisements onto third party search property. Higher margins are
obtained through our own properties as there are no payout costs associated with
these revenues.
The other
revenue model is CPM based (cost per one thousand impressions published).
The business model is based on advertisers buying impressions for ad campaigns
(these are creative based campaigns: different size banners, pop-ups, rich media
advertising) and targeting them through our network of publishers. Campaigns can
be targeted in several ways: geo-targeting (by region), or by site category
(e.g.: travel, entertainment, finance).
Software
licensing
Approximately
14% of our revenues came from software licensing. The business model is based on
selling licenses of Copernic Desktop Search® to ISPs, portals, enterprises,
international distributors and resellers as well as Copernic Agent®
Personal/Pro, Copernic Summarizer® and Copernic Tracker® through our e-commerce
store.
Customized
development and maintenance support
Approximately
6% of our revenues were the result of customized development and maintenance
support. The business model is based on billing our technical team
for software customization and maintenance support.
Recent
events
Write-down
of intangible assets and goodwill
In Q4
2008, the Company concluded that its software unit was still facing delays in
execution and changes of market conditions of its commercial deployment
solutions. Based on the Company’s assessment of the fair value of its
assets related to the software unit, the Company concluded that these assets had
suffered a loss in value and the fair values of intangible assets and goodwill
were less than their carrying value. Therefore, write-downs of
$140,000 for trade names, $192,000 for technology and goodwill of $3,995,000
were recorded in 2008.
Normal
course issuer bid
On
November 11, 2008 the Company announced a normal course issuer bid under which
it may purchase up to a maximum of 700,000 of its common shares, representing
approximately 5% of the issued and outstanding common shares of the Company as
of the date hereof. Purchases under the normal course issuer bid may
take place over a twelve month period commencing on the 17th day of
November, 2008 and ending on the 16th day of
November, 2009. The Company reserves the right to discontinue its
normal course issuer bid at any time. As of March 2009, no shares have been
acquired by the Company.
Cost
reduction plan
In Q4
2008, the Company continued to execute its cost reduction plan announced at the
end of Q1 2008. Total costs in 2008 excluding write-downs,
termination costs and restructuring costs were at $6,678,774 compared to
$10,318,889 in 2007.
In
addition, the Company has decided to close its Montreal office in Q1 2009 and
concentrate all its activity in Quebec City.
The total
cost of the restructuring which includes termination costs, head hunters’ fees,
lease termination costs and moving expenses is estimated at approximately
$150,000. In 2008, the Company has recorded $101,012 of restructuring
costs.
Resignation
and departure of officers
Éric
Bouchard, Vice President Marketing and Officer of the Company, for personal
reasons, did not renew his employment contract which expired on December 31,
2008, with the Company. In relation with this departure, 51,999 stock options
were cancelled, resulting in a reversal of employee stock-based compensation
expense of $40,878 that was recorded in Q4 2008.
The
Company accepted the resignation of Mr. Daniel Bertrand, Executive Vice
President and Chief Financial Officer, effective September 8, 2008. Furthermore
Ms. Claire Castonguay, the Company’s Controller for the past three years was
appointed Vice-President Finance and Controller while Mr. Ferland, President and
CEO assumed the additional responsibilities of Chief Financial Officer on an
interim basis. In relation with this resignation, the Company recorded and paid
termination costs of $149,420 in Q3 2008. Furthermore, 121,791 non
vested stock options held by Mr. Bertrand were cancelled, resulting
in a reversal of employee stock-based compensation expense of $104,741 that was
recorded in Q3 2008. In Q4 2008, an additional 52,709 vested stock options held
by Mr. Bertrand were cancelled.
On
February 11, 2008, the Company announced the departure of Patrick Hopf,
Executive Vice President of Business Development. 117,134 options
held by Mr. Hopf were cancelled, resulting in a reversal of employee stock-based
compensation expense of $48,542 which was recorded in Q1 2008.
On
February 8, 2008, the Company announced that its President and Chief Executive
Officer, Martin Bouchard, tendered his resignation, effective March 3, 2008,
citing personal reasons. 155,000 options held by Mr. Bouchard were cancelled,
resulting in a reversal of employee stock-based compensation expense of $49,320
which was recorded in Q1 2008. Mr. Marc Ferland, a director of the
Company, was appointed President and CEO commencing on March 3,
2008.
Notice
from NASDAQ
On June
16, 2008 a notice from NASDAQ Listing Qualifications was received by the
Company. The notice stated that for the last 30 consecutive business days,
the bid price of the Company’s common stock had closed below the minimum $1.00
per share requirement for continued inclusion under Marketplace Rule 4310(c)(4)
(the “Rule”). Therefore, in accordance with Marketplace Rule
4310(c)(8)(D), the Company will be provided 180 calendar days, or until December
15, 2008 to regain compliance. If, at anytime before December 15, 2008,
the bid price of the Company’s common stock closes at $1.00 per share or more
for a minimum of 10 consecutive business days, NASDAQ Staff will provide written
notification that it complies with the Rule. If compliance with this Rule cannot
be demonstrated by December 15, 2008, NASDAQ Staff will determine whether the
Company meets The NASDAQ Capital Market initial listing criteria as set forth in
Marketplace Rule 4310(c), except for the bid price requirement. If it
meets the initial listing criteria, NASDAQ Staff will notify the Company that it
has been granted an additional 180 calendar day compliance period. If the
Company is not eligible for an additional compliance period, NASDAQ Staff will
provide written notification that the Company’s securities will be
delisted. At that time, the Company may appeal NASDAQ Staff’s
determination to delist its securities to a Listing Qualifications Panel (the
“Panel”). These circumstances may adversely impact trading in our Common Shares
and may also adversely affect our ability to access capital.
On
October 22, 2008, the Company received a NASDAQ Notice, indicating that the
Company has received an extension to comply with the minimum bid price
requirement for continued listing.
The
notice stated: “Given these extraordinary market conditions, NASDAQ has
determined to suspend enforcement of the bid price and market value of publicly
held shares requirements through Friday, January 16, 2009. In that regard, on
October 16, 2008, NASDAQ filed an immediately effective rule change with the
Securities and Exchange Commission to implement the suspension. As a result, all
companies presently in a bid price or market value of publicly held shares
compliance period will remain at that same stage of the process and will not be
subject to being delisted for these concerns. These rules will be reinstated on
Monday, January 19, 2009 and the first relevant trade date will be Tuesday,
January 20, 2009.
Since
your company had 59 calendar days remaining in its compliance period as of
October 16th, it
will, upon reinstatement of the rules, still have this number of days, or until
March 19, 2009, to regain compliance. The company can regain compliance, either
during the suspension or during the compliance period resuming after the
suspension, by achieving a $1 closing bid price for a minimum of 10 consecutive
trading days”.
On
December 19, 2008, NASDAQ issued an issuer alert #2008-005A stating, “Given the
continued extraordinary market conditions, NASDAQ is extending the suspension of
the bid price and market value of publicly held shares requirements. Enforcement
of these rules is scheduled to resume on Monday, April 20, 2009. Any company in
the compliance process for a bid price or market value of publicly held shares
concern will continue to be “frozen” at the same stage of the process until the
end of the suspension. However, a company could be delisted for other reasons
during the suspension. NASDAQ staff will contact each company affected by this
extension and notify those that regain compliance with these requirements during
the suspension. NASDAQ will continue to monitor closely these circumstances.”
The Company had 59 calendar days remaining in its compliance period, therefore,
with the new extension, it has until June 18, 2009 to effect
compliance.
As at
December 31, 2008, the Company’s closing stock price was at $0.13.
Granting,
exercising and cancellation of stock options
On April
2, 2008, the Company granted 100,000 stock options to an officer, at an exercise
price of $1.00 expiring in five years.
On June
17, 2008, the Company granted 125,000 stock options to directors and a new
officer, at an exercise price of $0.62 expiring in five years.
On
November 11, 2008, the Company granted 125,000 stock options to two officers and
employees at an exercise price of $0.22 expiring in five years.
As at
December 31, 2008, 785,819 stock options were forfeited.
Critical
Accounting Policies and Estimates
The
Company prepares its consolidated financial statements in accordance with
accounting principles generally accepted in Canada. In doing so, management has
to make estimates and assumptions that affect reported amounts of assets,
liabilities, revenues and expenses, as well as related disclosure of contingent
assets and liabilities. In many cases, management reasonably has used
different accounting policies and estimates. In some cases, changes
in the accounting estimates are reasonably likely to occur from period to
period. Accordingly, actual results could differ materially from our
estimates. To the extent that there are material differences between these
estimates and actual results, our financial condition or results of operations
will be affected. Management bases its estimates on past experience
and other assumptions that it believes are reasonable under the circumstances,
and it evaluates these estimates on an ongoing basis. Management refers to
accounting estimates of this type as critical accounting policies and estimates,
which are discussed further below. Management has reviewed its critical
accounting policies and estimates with its Board of Directors.
Use of
estimates
Significant
estimates in these financial statements include the allowance for doubtful
accounts, recovery of future income taxes, goodwill and annual goodwill
impairment test, useful lives and impairment of long-lived assets, stock-based
compensation costs and determination of the fair value of the intangible assets
on acquisitions. Each of these critical accounting policies is
described in more detail below.
Allowance
for doubtful accounts
Judgments
are made in the ability to collect outstanding receivables and provide
allowances for the portion of receivables when collection becomes doubtful.
Provisions are made based upon a specific review of all significant outstanding
invoices. The allowance provided for doubtful accounts does not
reflect the future ability to collect outstanding receivables, additional
provisions for doubtful accounts may be needed and our future results of
operations could be adversely impacted.
For this
item, actual results could differ from those estimates.
Recovery
of future income taxes
Significant
judgment is used in determining our consolidated recovery of future income
taxes. Uncertainties may arise with respect to the tax treatment of certain
transactions. Although it is believed that estimates are reasonable, there is no
certainty that the final tax outcome of these matters will not be different than
that which is reflected in our financial statements. Such differences could have
a material effect on our future income taxes in the period in which such
determination is made.
For this
item, actual results could differ from those estimates.
Goodwill
and annual goodwill impairment test
Goodwill
is evaluated for impairment annually on December 31st of each
year or when events or changed circumstances indicate impairment may have
occurred. In connection with the goodwill impairment test, if the
carrying value of the Company’s reporting unit to which goodwill relates exceeds
its estimated fair value, the goodwill related to that reporting unit is tested
for impairment. We have determined that in our case, the reporting
units is the operating segment or a business one level below that operating
segment if discrete financial information is prepared and regularly reviewed by
management at that level. If the carrying value of such goodwill is determined
to be in excess of its fair value, an impairment loss is recognized in the
amount of the excess of the carrying value over the fair value. Management’s
determination of the fair value of each reporting unit incorporates multiple
inputs including discounted cash flow calculations, peer company price to
earnings multiples, the level of the Company’s share price and assumptions that
market participants would make in valuing the reporting unit. Other assumptions
include levels of economic capital, future business growth,
earnings
projections
and weighted average cost of capital used for purpose of discounting. Decreases
in the amount of economic capital allocated to a reporting unit, decreases in
business growth, decreases in earnings projections and increases in the weighted
average cost of capital will all cause the reporting unit’s fair value to
decrease. The Company completed its annual goodwill assessment for the
individual units as of December 31, 2008. Future adverse changes in these
factors could result in losses or inability to recover the carrying value of the
goodwill, thereby possibly requiring an impairment charge in the
future.
For this
item, actual results could differ from those estimates.
Useful
lives and impairment of long-lived assets
The
Company assesses the carrying value of its long-lived assets which include
property and equipment and intangible assets, for future recoverability when
events or changed circumstances indicate that the carrying value may not be
recoverable. Useful lives of long-lived assets are regularly reviewed for their
appropriateness. An impairment loss is recognized if the carrying value of a
long-lived asset exceeds the sum of its estimated undiscounted future cash flows
expected from its use. The amount of impairment loss, if any, is
determined as the excess of the carrying value of the assets over their fair
value. Management assesses long-lived assets for impairment using
estimates including discount rate, future growth rates, general economic,
industry conditions and competition. Future adverse changes in these
factors could result in losses or inability to recover the carrying value of the
long-lived assets, thereby possibly requiring an impairment charge in the
future.
For this
item, actual results could differ from those estimates.
Stock-based
compensation costs
In
determining the fair value of stock options and warrants issued to employees and
service providers, using the Black-Scholes option pricing model, the Company
must make estimates of the forfeiture rate, the period in which the holders of
the options and warrants will exercise the options and warrants and the
volatility of the Company’s stock over that same period. Different estimates
would result in different amounts of compensation being recorded in the
financial statements.
Revenue
recognition
Search
advertising, graphic advertising, software licensing, customized development and
maintenance support revenues are recognized when services are rendered, provided
there is persuasive evidence of an arrangement, the fee is fixed or
determinable, collection is considered probable, and fees are not subject to
forfeiture, refund or other concessions.
With
respect to search advertising and graphic advertising revenues, insertion orders
or signed contracts are generally used as evidence of an arrangement. Revenues
are recognized in accordance with EIC-123, Reporting Revenue Gross as a
Principal Versus Net as an Agent.
Software
licensing agreements are recognized upon delivery of software if persuasive
evidence of an arrangement exists, collection is probable, the fee is fixed or
determinable and vendor-specific evidence of an arrangement exists to allocate
the total fee to the different elements of an arrangement. Vendor-specific
objective evidence is typically based on the price charged when an element is
sold separately, or, in the case of an element not yet sold separately, the
price established by management, if it is probable that the price, once
established, will not change before market introduction.
Revenues
from maintenance support for licenses previously sold and implemented are
recognized ratably over the term of the contract.
Revenues
from customized development, not considered as part of the implementation of
software licenses, are recognized as the services are provided.
Amounts
received in advance of the delivery of products or performance of services are
classified as deferred revenue.
Estimates
of collection likelihood are based on a number of factors, including past
transaction history with the customer and the credit-worthiness of the customer.
If it is determined that collection of a fee is not probable, management defers
the fee and recognizes revenues at the time collection becomes probable, which
is generally upon receipt of cash.
Recent
accounting changes
a) For
changes affecting 2007
Initial
application of primary source of GAAP
On
January 1, 2007, in accordance with the applicable transitional provisions, the
Company applied the recommendations of new Section 1506, “Accounting Changes”,
of the CICA’s Handbook. This new section, effective for the years
beginning on or after January 1, 2007, prescribes the criteria for changing
accounting policies, together with the accounting treatment and disclosure of
changes in accounting policies, changes in accounting estimates and corrections
of errors. Furthermore, the new standard requires the communication
of the new primary sources of GAAP that are issued but not yet effective or not
yet adopted by the Company. The new standard had a negligible effect
on the Company’s financial statements.
Effective
in January 2007, the Company adopted three new accounting standards issued by
the CICA: Section 1530, Comprehensive Income; Section 3855, Financial
Instruments – Recognition and Measurement; and Section 3865, Hedges. These new
accounting standards establish standards for recognizing and measuring financial
instruments, namely financial assets, financial liabilities and derivatives.
Certain changes in the value of these financial instruments are presented under
Comprehensive Income in the Consolidated Statements of Shareholders’ Equity. The
application of these new standards had a negligible effect on the Company’s
financial statements and financial position.
Accounting
policy choice for transaction costs (“EIC-166”)
Issued in
June 2007, EIC-166 addresses whether the entity must make one accounting policy
choice that applies to all financial assets and financial liabilities classified
other than held for trading. This Abstract mentions that the same accounting
policy choice should be made for all similar financial instruments classified as
other than held for trading but that a different accounting policy choice might
be made for financial instruments that are not similar. This accounting
treatment should be applied retrospectively to transaction costs accounted for
in accordance with Section 3855 in financial statements issued for interim and
annual periods ending on or after September 30, 2007. The adoption of
this Abstract had no impact on the Company’s financial statements.
Convertible
and other debt instruments with embedded derivatives (“EIC-164”)
EIC-164
addresses the situation where a company issues a debt instrument that is
convertible at any time at the holder’s option into a fixed number of common
shares. Upon conversion, the issuer is either required or has the option to
satisfy all or part of the obligation in cash. The instrument may also permit
the issuer to redeem the instrument prior to maturity, and/or permit the holder
to force the issuer to redeem the instrument prior to maturity. This Abstract
provides guidance on various issues related to such debt
instruments.
The
accounting treatment in this Abstract should be applied retrospectively to
financial instruments accounted for in accordance with Section 3855 in financial
statements issued for interim and annual periods ending on or after June 30,
2007. The adoption of this Abstract had no impact on the financial
statements.
Accounting
by an investor upon a loss of significant influence (“EIC-165”)
Issued in
April 2007, EIC-165 addresses the situation of how an investor that loses
significant influence in an investee should account for the amount the investor
has in its accumulated other comprehensive income (OCI) for its proportionate
share of the investee’s equity adjustment for OCI. The amount
recorded by the investor in accumulated OCI for the investor’s proportionate
share of an investee’s equity adjustments for OCI should be deducted from or
added to the carrying value of the investment at the time significant influence
is lost. To the extent that the adjustment results in a carrying value of the
investment that is less than zero, an investor should reduce the carrying value
of the investment to zero and record the remaining balance in net
income.
The
accounting treatment in this Abstract should be applied retrospectively, with
restatement of prior periods, to all financial statements for interim and annual
reporting periods ending June 30, 2007. The adoption of this Abstract
had no impact on the Company’s financial statements.
b) For
changes affecting 2008
CICA
Section 1535 - Capital Disclosures
In
December 2006, the CICA issued Handbook Section 1535 – Capital
Disclosures. The new accounting standard requires disclosure of
information about an entity’s objectives, policies, and processes for managing
capital, as well as quantitative data about capital and whether the entity has
complied with any capital requirements. This Handbook Section is
effective for interim and annual periods beginning on or after October 1,
2007. The Company has adopted this new Section in its first
quarter.
CICA
Section 3862 – Financial Instruments – Disclosures
CICA
Section 3863 – Financial Instruments – Presentation
In
December 2006, the CICA issued Handbook Section 3862 and 3863 that provide
additional guidance regarding disclosure of the risks associated with both
recognized and unrecognized financial instruments and how those risks are
managed. These Handbook Sections are also effective for interim and
annual periods beginning on or after October 1, 2007. The Company has adopted
these new Sections in its first quarter.
EIC-169,
Determining Whether a Contract is Routinely Denominated in a Single
Currency
Issued
January 8, 2008, EIC-169 provides guidance on how to define or apply the term
“routinely denominated in commercial transactions around the world” as discussed
in Section 3855 when assessing contracts for embedded foreign currency
derivatives. It also determines the factors that can be used to
determine whether a contract for the purchase or sale of a non-financial item
such as a commodity is routinely denominated in a particular currency in
commercial transactions around the world. The accounting treatment of
this Abstract should be applied retrospectively to embedded foreign currency
derivatives in host contracts that are not financial instruments accounted for
in accordance with Section 3855 in financial statements issued for interim and
annual periods ending on or after March 15, 2008. The adoption of this Abstract
did not have any impact on the Company’s financial statements.
c) Future
accounting changes
Goodwill
and Intangible Assets - Section 3064
In
January 2008, the CICA issued Section 3064, Goodwill and Intangible Assets,
which replaces Section 3062, Goodwill and Other Intangible Assets. The
objectives of Section 3064 are to reinforce the principle-based approach to the
recognition of assets only in accordance with the definition of an asset and the
criteria for asset recognition; and clarify the application of the concept of
matching revenues and expenses such that the current practice of recognizing
asset items that do not meet the definition and recognition criteria is
eliminated. This standard also provides guidance for the recognition
of internally developed intangible assets (including research and development
activities), ensuring consistent treatment of all intangible assets, whether
separately acquired or internally developed. This Section applies to
interim and annual periods beginning on or after October 1, 2008, with early
adoption encouraged. The adoption of this new standard will not have
any impact on the Company’s financial statements.
Transition
to International Financial Reporting Standards (“IFRS”)
In
February 2008, the Canadian Accounting Standards Board confirmed that publicly
accountable enterprises will be required to transition from Canadian GAAP to
IFRS for interim and annual financial reporting purposes for fiscal years
beginning on or after January 1, 2011 with comparative information. In May 2008,
the Canadian Securities Administrators issued Staff Notice 52-320, which
provides guidance on the disclosure of changes expected in accounting policies
related to the change over IFRS. In accordance with the notice, the Company is
required to provide an update of the Company’s IFRS conversion plan in each
financial reporting period prior to conversion on January 1, 2011.
The
Company started working on the conversion plan in Q4 2008 with the help of an
external advisor. The project consists of three phases to be completed in order
to change over to IFRS: the diagnostic, development and
implementation.
The first
phase includes the identification of significant differences between existing
Canadian GAAP and IFRS that are relevant to the Company and a review of the
alternatives available upon adoption. In Q4 2008, the Company
performed a diagnostic review and established that the most significant
differences for the Company between Canadian GAAP and IFRS relate to revenue
recognition, property and equipment, leases, provisions, reporting currency,
presentation and additional disclosure requirements under IFRS. Additional
differences might be identified in the future as changes to IFRS standards are
released.
The
second phase includes identification, evaluation and selection of accounting
policies necessary for the Company to change over to IFRS as well as potential
first-time adoption exemptions. During this phase, the Company will assess the
impact of the transition on the data system and internal control over financial
reporting, the further training required for the financial team and the impact
on business activities such as foreign currency, capital requirements, banking
agreements or compensation arrangements. The Company began this phase in Q1
2009.
The
implementation phase will integrate all the solutions into the Company’s
financial system and processes that are necessary for the Company to convert to
IFRS.
Results
of Operations
Revenues
2008
as compared to 2007
Revenues
for 2008 were $7,011,631 compared to $8,116,408 in 2007, a decrease of
14%.
In 2008
search and graphic advertising revenues decreased by $1,748,326 or 24% to
$5,606,383 from $7,354,709 last year. The variance is explained by a decrease in
search advertising revenues due to a change in client mix and reduced
traffic. In 2008, the revenues decrease was offset by the reversal of
old prepayments totalling $80,000.
Software
licensing went from $415,263 in 2007 to $951,022 in 2008, an increase of
$535,759. The increase is explained by the sales of a new product “CDS Corporate
Edition” in 2008. Also, the launch of the new CDS Pro version in late Q3 2008
started having an impact on Q4 2008 results.
In 2008,
customized development and maintenance support amounted to $454,226 compared to
$346,436 in 2007 an increase of $107,790.
The
difference is explained by the maintenance fees included in the sales of “CDS
Corporate Edition” launched in 2008.
2007
as compared to 2006
In 2007,
the Company generated revenues of $8,116,408 compared to $9,596,402 for the
previous year, a decrease of 15%.
Search
and graphic advertising revenues totalled $7,354,709 in 2007 compared to
$8,024,972 for the same period in 2006, a decrease of $670,263 or 8%. The
decrease is due to the decline in pop-up campaigns and a decrease in demand for
all other graphic ad units.
Software
licensing stood at $415,263 in 2007 compared to $957,488 in 2006, a decrease of
$542,225 or 57%. The decrease is explained by the sale of one major
CDS license in 2006 compared to two smaller CDS licenses in 2007.
Customized
development and maintenance support revenues generated $346,436 in 2007 compared
to $613,942 for the same period the previous year, a decrease of $267,506 or
44%. The decrease is explained by maintenance support contracts that were not
renewed in 2007.
Expenses
Cost
of revenues
Cost of
revenues is comprised of partners’ payouts and bandwidth costs to deliver our
services.
2008
as compared to 2007
For the
fiscal year ended December 31, 2008, cost of revenues represented $2,530,908 or
45% of search and graphic advertising revenues, compared to $2,636,410 or 36% of
search and graphic revenues for the same period last year, due to the loss of a
high margin account in 2007.
In 2008,
search and graphic payouts totalled $2,169,916 compared to $2,262,356 for the
same period last year and represented respectively 39% and 31% over search and
graphic revenues. The increase in percentage in 2008 is explained by higher
payouts to retain partners which deliver better quality traffic.
The
bandwidth costs were $360,992 for the twelve-month period ended December 31,
2008, compared to $374,054 for the same period in 2007.
2007
as compared to 2006
In 2007,
cost of revenues represented $2,636,410 or 36% over search and graphic
advertising revenues, compared to $2,704,101 or 34% over search and graphic
advertising revenues for the same period in 2006.
Search
and graphic payouts totalled $2,262,356 in 2007 compared to $2,309,435 for the
same period in 2006 and represented respectively 31% and 29% over search
revenues. The increase in percentage in 2007 is explained by
gradually increasing payouts to partners which deliver better quality
traffic.
In 2007,
bandwidth costs decreased by $20,612 or 5% to $374,054 from $394,666 in
2006.
Marketing,
sales and services
Marketing,
sales and services consist primarily of salaries, commissions and related
personnel expenses for our sales force, advertising and promotional expenses, as
well as the provision for doubtful accounts.
2008
as compared to 2007
For the
year ended December 31, 2008, marketing, sales and services expenses stood at
$938,611 from $1,897,822 in 2007, a decrease of $959,211 or 51%. The variance
for the year is explained by the decrease in salaries and related employment
costs of $540,000, decrease in stock options compensation of $206,000 in
relation with the termination of employees and employee departures, decrease in
training and recruiting costs and purchase of algorithmic contents of
respectively $121,000 and $77,000.
2007
as compared to 2006
For the
fiscal year ended December 31, 2007, marketing, sales and services increased by
$47,646 or 3% from $1,850,176 in 2006 to $1,897,822. The variance for the
twelve-month period reflected an increase in salaries due to reorganization of
the department, professional services due to new sales consultants for CDS and
stock-based compensation of respectively $127,000, $93,000 and $67,000. The
increases were offset by a decrease in purchase of algorithmic contents and
publicity and promotion of respectively $137,000 and $117,000 due to reduced
revenue.
General
and administration
General
and administrative expenses include salaries, stock-based compensation and
associated costs of employment of executive management and finance personnel.
These costs also include facility charges, investor relations, as well as legal,
tax and accounting, consulting and professional service fees associated with
operating our business and corporate compliance requirements.
2008
as compared to 2007
In 2008,
general and administrative expenses amounted to $2,907,964 compared to
$4,691,572 in 2007, a decrease of $1,783,608. Salaries and stock-based
compensation expenses decreased by respectively $338,000 and $428,000. In 2008,
salaries included termination costs of $149,000 related to the resignation of
the former CFO offset by a decrease in salaries of $53,000 due to employee
departures. In 2007, salaries included termination costs of $434,000 related to
the departure of the former President and CEO. The decrease in stock-based
compensation expenses is mainly explained by the reversal of expenses in 2008 of
$154,000 due to the departure of two officers compared to an additional expense
of $261,000 in 2007 related to the departure of the former CEO. In 2008,
professional fees decreased by $650,000 explained mainly by the reduction of
legal fees, the investor relation expenses decreased by $147,000 due
to decrease expenses related to the annual reporting and the insurance expenses
decreased by $142,000 due to lower premium for D&O insurance.
2007
as compared to 2006
For the
year ended December 31, 2007, general and administrative expenses increased by
$695,245 to $4,691,572 from $3,996,327 in 2006. The increase is mainly explained
by the termination costs of approximately $695,000, which included a non-cash
item for accelerated vesting options of $253,236, related to the departure of
the former President and CEO of the Company in January 2007.
Product
development and technical support
Product
development and technical support costs include the salaries and associated
costs of employment of our team’s software developers and maintenance of our
metasearch engine and other IT systems. These charges also include the costs of
technical support and license maintenance. Research and development (R&D)
tax credits are also recorded against product development and technical support
expenses.
2008
as compared to 2007
In 2008,
product development and technical support expenses amounted to $1,938,724
compared to $2,416,410 last year, a decrease of $477,686 and mainly explained by
a decrease in salaries and related employment costs of $313,000, lower
stock-based compensation expenses of $63,000 and lower technical fees of
$60,000.
2007
as compared to 2006
For the
fiscal year ended December 31, 2007, product development and technical support
decreased to $2,416,410 from $2,538,867 in 2006, representing a decrease of
$122,457. The decrease is explained by a reduction in salaries due to a
reorganization of our R&D team.
Amortization
of property and equipment
2008
as compared to 2007
In 2008,
amortization of property and equipment stood at $211,056 compared to $302,509 in
2007 explained by the decrease of the asset’s net book value at the beginning of
2008.
2007
as compared to 2006
Amortization
of property and equipment totalled $302,509 for the year ended December 31,
2007, compared to $178,192 in 2006. The increase is explained by acquisitions of
equipment during the year of approximately $150,000 and the change in the
amortization rates, from 30% in 2006 to 50% in 2007 and from 20% to 33% for
computer equipment and for furniture respectively.
Amortization
of intangible assets
2008
as compared to 2007
Amortization
of intangible assets stood at $1,019,159 in 2008 compared to $1,991,286 in 2007.
The decrease is explained by the write-downs of intangible assets of $1,985,470
recorded in Q4 2007.
2007
as compared to 2006
For the
fiscal year ended December 31, 2007, amortization of intangible assets decreased
to $1,991,286 from $2,067,009 in 2006. The decrease is explained by the
write-down of intangible assets recorded in Q3 2006 of $413,238.
Write-downs
and settlement costs
2008
as compared to 2007
For the
twelve-month period ended December 31, 2008, write-down and settlement costs
totalled $4,432,264 compared to $10,146,311 in 2007.
The
variance is mainly explained by the write-downs of goodwill and intangible
assets related to the acquisition of Copernic Technologies Inc. of $4,327,000 in
2008 compared to $9,200,000 in 2007. Also, in 2007 the Company
recorded a write-down of goodwill of $846,310 in relation to the acquisition of
FocusIN.
In 2008,
faced with improved competitive offerings the underlying core technology in
Copernic desktop search needed to be significantly enhanced and therefore, the
Company concluded, based on the assessment of the fair value of the Company’s
assets related to the software unit that the assets had suffered a loss in value
and the fair values of goodwill and intangible assets were less than the
carrying value for these assets.
2007
as compared to 2006
In 2007,
write-downs and settlement costs amounted to $10,146,311 compared to $1,683,238
for the same period last year.
In Q4
2007, the Company recorded write-downs of goodwill and intangible assets related
to Copernic Technologies Inc.’s acquisition of respectively $7,214,531 and
$1,985,470. The Company’s software unit was facing delays in execution and
changes of market conditions of its commercial deployment
solutions. Based on the assessment of the fair value of the Company’s
assets related to the software unit, the Company concluded that these assets had
suffered a loss in value and the fair values of goodwill and intangible assets
were significantly less than the carrying value for these assets.
In Q4
2007, the Company reported decreased revenues due to industry pressures on
advertising rates, slow down in sponsored clicks and a general decrease for all
graphic ads. Based on the Company assessment of the fair value of its
assets related to search / media unit, the Company concluded that the goodwill
had suffered a loss in value and the fair value of the related goodwill was
significantly less then its carrying value. Therefore, a write-down
of goodwill of $846,310 for search / media unit was recorded in 2007 to bring it
to nil.
Also in
Q4 2007, based on its assessment of the fair value of the Company’s investment
in LTRIM, the Company concluded that its investment had suffered a loss in value
other than a temporary decline due to LTRIM’s significant corporate
restructuring and therefore recorded a write-down of $150,000 to bring it to
nil.
These
expenses were offset by the reversal of $50,000 of class action settlement
costs.
In 2006,
the Company recorded class action settlement and closure costs of $700,000,
write-downs of property and equipment and intangible assets related to graphic
advertising for a total of $413,238 and a write-down of LTRIM’s investment of
$570,000.
Restructuring
charges
2008
as compared to 2007
In order
to reduce its costs, the Company has decided to close its Montreal office in Q1
2009 and concentrate all its activity in Quebec City.
The total
cost of the restructuring which includes termination costs, head hunters’ fees,
lease termination costs and moving expenses is estimated at approximately
$150,000. In 2008, the Company recorded $101,012 as restructuring
costs.
Interest
and other income
2008
as compared to 2007
Interest
income and other income decreased to $162,880 in 2008 from $401,183 in 2007. The
decrease reflected lower liquidities and lower interest rates in
2008.
2007
as compared to 2006
Interest
and other income stood at $401,183 in 2007 compared to $415,950 in
2006.
Loss
(gain) on foreign exchange
Gain on
foreign exchange totalled $24,440 for the year ended December 31, 2008 compared
to a loss of $115,071 in 2007 and $82,203 in 2006.
The gain
in foreign exchange is mainly due to the depreciation of the Canadian dollar in
2008.
Recovery
of income taxes
For the
fiscal year 2008, the recovery for current and future income taxes amounted to
$390,043 compared to $1,248,974 in 2007 and $729,053 in 2006.
In 2008,
the recovery of income taxes is explained by current income taxes paid of $522
and the reversal of $390,565 of future income taxes due to current amortization
and write-downs of Copernic Technologies Inc.’s intangible assets.
In 2007,
the recovery of income taxes is explained by current income tax paid of $1,479
and the reversal of $1,250,453 of future income tax liability due to the current
amortization and write-downs of Copernic Technologies Inc.’s intangible
assets.
In 2006,
the recovery of future income taxes is explained by a recovery of previous
year’s income tax for $4,876 and the reversal of $724,177 of future income tax
liability related to the amortization of Copernic Technologies Inc.’s intangible
assets.
Loss
from continuing operations and loss per share from continuing
operations
The
Company reported a loss from continuing operations of $6,490,704 ($0.44 per
share) in 2008, compared to a loss of $14,430,826 ($0.99 per
share) in 2007 and a loss of $4,358,708 ($0.31 per share) in 2006.
Results
of discontinued operations and loss per share from discontinued
operations
Results
from discontinued operations for Digital Arrow are nil in 2008 and 2007 compared
to contribution to earnings of $89,328 ($0.01 per share) in 2006.
In 2006,
the contribution of Digital Arrow was due to a reversal of a reserve for salary
expenses after a settlement with two former employees and a reversal of the
provision for remaining restructuring costs.
Loss
for the year
The loss
for the year totalled $6,490,704 ($0.44 per share) in 2008 compared to a loss of
$14,430,826 ($0.99 per share) in 2007 and a loss of $4,269,380 ($0.30 per share)
in 2006. For 2008, 2007 and 2006, there is no difference between net loss under
US GAAP as compared to Canadian GAAP.
Liquidity
and capital resources
As at
December 31, 2008, the Company had liquidities of $5,072,932 which were composed
of $2,067,705 in cash and cash equivalents and $3,005,227 in temporary
investments compared to $6,872,412 in 2007 which consisted of $2,099,560 in cash
and cash equivalents, restricted cash of $807,468 and $3,965,384 in temporary
investments. For the year ended December 31, 2008, working capital was
$5,051,474 compared to $6,413,044 for the previous year.
Operating
activities
In 2008,
the cash used for operating activities of $1,720,571 is explained by the loss
from continuing operations net of non-cash items of $1,281,463 and net change in
non-cash working capital items of $439,108.
In 2007,
the cash used for operating activities of $1,527,890 is mainly due to the loss
from continuing operations net of non-cash items of $2,518,048 offset by net
change in non-cash working capital items of $990,158. The cash used for
discontinued operations in 2007 totalled $6,253.
In 2006,
the cash used is explained by the loss from continuing operations net of
non-cash items of $1,343,253 offset by net change in non-cash working capital
items of $515,619. The cash used for discontinued operations in 2006 stood at
$83,948.
Investing
activities
In 2008,
investing activities provided cash of $939,224 explained by the decrease of
temporary investments of $960,157 offset by the purchases of property and
equipment and intangible assets of $20,933.
In 2007,
investing activities provided cash of $1,408,367 mainly explained by the
decrease of temporary investments of $1,626,458 offset by the purchases of
property and equipment and intangible assets of $218,091.
In 2006,
investing activities used cash of $1,326,652 mainly explained by the purchase of
temporary investments of $1,578,530 offset by a reimbursement related to
Copernic Technologies Inc.’s business acquisition of $379,382 and purchases of
intangible assets and property and equipment of $127,504.
Financing
activities
In 2008,
financing activities used cash of $57,976 for the repayment of obligations under
capital leases.
In 2007,
financing activities provided cash totalling $676,258 from issuance of capital
stock upon exercise of options offset by repayment of obligations under capital
leases of $23,071.
In 2006,
no cash was provided by, nor used in the financing activities of the
Company.
Liquidity
and capital resources
The
Company considers that its liquidities will be sufficient to meet normal
operating requirements until the end of 2009. It has no plans for a significant
capital expenditures program nor does it view its Notice of Intention to
purchase up to 700,000 common shares as material in the light of its current
cash position. Furthermore, the company intends to fund its growth through
internal cash generation and has no plans to enter into debt or equity financing
at this time. In the long term, the Company may take advantage of favourable
market conditions to gain additional liquidity to fund growth, which could
include additional equity offerings or debt financing.
Concentration
of credit risk with customers
As at
December 31, 2008, four customers represented 52% of our accounts receivable
compared to 54% from four customers for the previous year resulting in a
significant concentration of credit risk. Management monitors the evolution of
these customers closely in order to rapidly identify any potential problems.
These customers, which represented more than 10% of the Company’s net accounts
receivable, have paid accounts receivable as per their commercial agreements.
The Company also monitors the other accounts receivable
and there
is no indication of credit risk deterioration. Nevertheless we cannot assure
that we can retain the business of these customers or that their business will
not decline generally in the future.
Q4
2008 Results
Revenues
Revenues
for the three-month period ended December 31, 2008 (“Q4”) totalled $1,909,648
compared to $1,654,352 for the same period in 2007, an increase of $255,296 or
15%. The increase is mainly explained by software licensing.
Search
and graphic advertising revenues went from $1,446,167 in Q4 2007 to $1,435,148
in Q4 2008, a decrease of $11,019. In Q4 2008, the revenues decrease was offset
partially by the reversal of old prepayments of $80,000.
Software
licensing stood at $325,025 in Q4 2008 compared to $85,751 in Q4 2007, an
increase of $239,274. The increase is mainly due to the launch of new products
“CDS Corporate Edition” and “CDS Pro”.
Customized
development and maintenance support revenues generated $149,475 in Q4 2008
compared to $122,434 for the same period last year, an increase of
$22,041.
Expenses
Cost
of revenues
In Q4
2008, cost of revenues represented $601,519 or 42% over search and graphic
advertising revenues, compared to $543,763 or 38% over search and graphic
advertising revenues for the same period in 2007.
In Q4
2008, search and graphic advertising payouts totalled $552,605 compared to
$433,514 for the same period last year, representing 39% and 30% of search and
graphic revenues respectively. In 2007, payouts were reduced by the
reversal of old inactive payables of $79,342. Excluding the adjustment, the
percentage of payouts over revenue would have been 35%. In 2008, the percentage
of payouts was increased to retain partners with good quality
traffic.
The
bandwidth costs were $48,914 in Q4 2008 compared to $110,249 for the same period
in 2007. In Q4 2007, two new data centers were opened in Canada and
were run in parallel with the ones located in the US. The data centers located
in the US were shut down in Q2 2008.
Marketing,
sales and services
In Q4
2008, marketing, sales and services expenses decreased to $160,802 from $480,531
in Q4 2007, a decrease of $319,729. The variance is mainly explained by the
decrease in salaries and fringe benefits and stock-based compensation of
respectively $173,000 and $47,000, a decrease in purchase of algorithmic
contents and professional services by respectively $25,000 and $21,000. Other
expenses also decreased by $54,000 in Q4 2008.
General
and administration
General
and administrative expenses in Q4 2008 totalled $525,309 as compared to
$1,020,709 for the same period last year, a decrease of $495,400 or 49%. The
variance is explained by a decrease in professional fees of $258,000 a decrease
in salaries, stock-based compensation, investor relation and other expenses of
respectively $79,000, $60,000, $34,000 and $64,000.
Product
development and technical support
Product
development and technical support expenses amounted to $332,145 in Q4 2008,
compared to $651,830 for the same period last year, a decrease of $319,685 or
49%. The decrease is explained by the decrease in salaries and other employment
costs of $220,000 and a decrease in stock-based compensation of $75,000 due
lower headcount.
Amortization
of property and equipment
Amortization
of property and equipment totalled $55,353 in Q4 2008, compared to $119,220 for
the same period last year. The decrease is explained by lower net book value at
the beginning of the year.
Amortization
of intangible assets
Amortization
of intangible assets decreased to $254,746 in Q4 2008, compared to $511,384 for
the same period last year. The decrease is explained by the
write-downs of intangible assets at the end of Q4 2007.
Write-downs,
settlement and other costs
In Q4
2008, write-downs and settlement costs amounted to $ 4,410,733 compared to
$10,146,311 in Q4 2007.
The
variance is mainly explained by the write-downs of goodwill and intangible
assets related to the acquisition of Copernic Technologies Inc. of $4,327,000 in
2008 compared to $9,200,000. Also, in 2007 the Company recorded a
write-down of goodwill of $846,310 in relation to the acquisition of
FocusIN.
In 2008,
still facing delays in execution and changes of market conditions of its
commercial deployment solutions, the Company concluded, based on the assessment
of the fair value of the Company’s assets related to the software unit that the
assets had suffered a loss in value and the fair values of goodwill and
intangible assets were less than the carrying value for these
assets.
Restructuring
charges
In Q4
2008, $69,621 was recorded as restructuring charges in relation with the
Company’s decision to close its Montreal office in Q1 2009.
Interest
and other income
Interest
income and other income decreased to $40,762 in Q4 2008 from $74,078 in Q4 2007.
The decrease is explained by lower liquidities during Q4 2008 compared to the
same period last year.
Loss
(gain) on foreign exchange
Gain on
foreign exchange totalled $18,218 for Q4 2008, compared to a loss of $41,164 for
the same period last year mainly due to the depreciation of the Canadian dollar
in Q4 2008.
Income
taxes
The
recovery of future income taxes relates to the amortization of intangible assets
which does not have the same asset base for accounting and tax
purposes. Recovery of future income taxes totalled $181,163 in Q4
2008, compared to $796,401 for the same period last year. In 2007,
the recovery for income taxes included a more significant reversal of future
income taxes liability in relation with the write-downs of intangible assets in
Q4 2007 compared to Q4 2008.
Loss
and loss per share
Loss for
the three-month period ended December 31, 2008, totalled $4,260,437 ($0.29 per
share), compared to a loss of $10,990,081 ($0.75) per share for the same period
last year.
Off-balance
sheet arrangements
As at
December 31, 2008 and 2007, the Company has no off-balance sheet
arrangements.
Contractual
obligations, contingent liabilities and commitments
The
following table summarizes our contractual obligations as at December 31, 2008,
and the effect such obligations are expected to have on our liquidity and cash
flows in future periods:
|
Operating
leases
|
Years:
|
$
|
2009
|
249,000
|
2010
|
46,000
|
2011
|
27,000
|
2012
|
18,000
|
2013
|
-
|
The
Company maintains director and officer insurance, which may cover certain
liabilities arising from its obligation to indemnify its directors, and officers
and former directors, officers and employees of acquired companies, in certain
circumstances. It is not possible to determine the maximum potential amount
under these indemnification agreements due to the limited history of prior
indemnification claims and the unique facts and circumstances involved in each
particular agreement. Such indemnification agreements may not be subject to
maximum loss clauses. Historically, the Company has not incurred material costs
as a result of obligations under these agreements and it has not accrued any
liabilities related to such indemnification obligations in its financial
statements.
As at
December 31, 2008, the Company has change of control agreements with certain
executive officers and a few employees. If there is a change of
control of the Company and their employments are not required, the Company will
have to pay lump sums up to a maximum of $614,181 for these specific
people.
Subsequent
Events
On
January 28, 2009, the Board of Director’s unanimously approved an adjustment to
Mr. David Goldman’s consultancy agreement, to which David Goldman concurred,
that the change of control clause is amended to an entitlement to the lesser of
$300,000 or 3% of the transaction triggering a change of control. The Board
further specified that the resulting payment would be made in the same currency
as the transaction itself. The previous agreement stipulated that in the case of
change of control, David Goldman was entitled to receive a lump sum payment
equal to the greater of the past 24 months consulting payments or
CDN$300,000.
On
February 2, 2009, the Company sold 5,200,000 shares of TECE Inc. for CDN
$208,000. The Company’s investment in TECE Inc. was completely
written off in 2001.
On
February 3, 2009, a lawsuit was filed against the Company by one former officer.
The plaintiff alleges an unlawful dismissal by the Company and seeks damages
amounting to CDN $256,775. The Company denies the allegations against it,
believes that the claim is without merit, and intends to defend
itself.
On March
4, 2009 the Company announced that Claire
Castonguay, Vice President, Finance and Controller will terminate her employment
with the Company at the end of the quarter consistent with the closure of the
Montreal office at that time. Jean-Rock Fournier, Vice President Finance since
the beginning of the quarter and also located in Quebec City will assume the
duties of Chief Financial Officer, effective March 31st. Mr.
Fournier is a Chartered Accountant since 2000, practiced public
accounting with KPMG, and has been Vice President Finance with Axion
Technologies and PGI, both companies in the Information Technology
sector.
Risks
and uncertainties
Copernic
Inc.’s Management considers that these following factors, among others, should
be considered in evaluating its future results of operations.
Our
revenues depend to some degree on our relationship with one customer, the loss
of which would adversely affect our business and results of
operations.
For the
year ended December 31, 2008, approximately 13% of our revenues were derived
from an agreement with our largest customer. Revenues from this customer
represented 14% of our revenues in 2007 and 11% of our revenues in 2006.
Although we monitor our accounts receivable for credit risk deterioration and
this customer has been paying its payables to Copernic Inc. in accordance with
the terms of its agreement with the Company, there can be no assurance that it
will continue to do so or that it will continue to do so at the volume of
business it has done historically. Our loss of this customer’s business would
adversely affect our business and results of operations.
Our
operating results may fluctuate, which makes our results difficult to predict
and could cause our results to fall short of expectations.
Our
operating results may fluctuate as a result of a number of factors, many of
which are outside of our control. For these reasons, comparing our operating
results on a period-to-period basis may not be meaningful, and you should not
rely on our past results as an indication of our future performance. Our
operating results may fluctuate as a result of many factors related to our
business, including the competitive conditions in the industry, loss of
significant customers, delays in the development of new services and usage of
the Internet, as described in more detail below, and general factors such as
size and timing of orders and general economic conditions. Our
quarterly and annual expenses as a percentage of our revenues may be
significantly different from our historical or projected rates. Our operating
results in future quarters may fall below expectations. Any of these events
could cause our stock price to fall. Each of the risk factors listed in this
“Risk Factors” section, and the following factors, may affect our operating
results:
|
·
|
Our
ability to continue to attract users to our Web sites. |
|
·
|
Our
ability to monetize (or generate revenue from) traffic on our Web sites
and our network of advertisers’ Web
sites.
|
|
·
|
Our
ability to attract advertisers.
|
|
·
|
The
amount and timing of operating costs and capital expenditures related to
the maintenance and expansion of our businesses, operations and
infrastructure.
|
|
·
|
Our
focus on long term goals over short term
results.
|
|
·
|
The
results of any investments in risky
projects.
|
|
·
|
Payments
that may be made in connection with the resolution of litigation
matters.
|
|
·
|
General
economic conditions and those economic conditions specific to the Internet
and Internet advertising.
|
|
·
|
Our
ability to keep our Web sites operational at a reasonable cost and without
service interruptions.
|
|
·
|
Geopolitical
events such as war, threat of war or terrorist
actions.
|
|
·
|
Our
ability to generate CDS revenues through licensing and revenue
share.
|
Because
our business is changing and evolving, our historical operating results may not
be useful to you in predicting our future operating results. In addition,
advertising spending has historically been cyclical in nature, reflecting
overall economic conditions as well as budgeting and buying patterns. Also, user
traffic tends to be seasonal.
We
rely on our Web site partners for a significant portion of our net revenues, and
otherwise benefit from our association with them. The loss of these Web site
partners could prevent us from receiving the benefits we receive from our
association with them, which could adversely affect our business.
We
provide advertising, Web search and other services to members of our partner Web
sites. We consider this network to be critical in the future growth of our
revenues. However, some of the participants in this network may compete with us
in one or more areas. Therefore, they may decide in the future to terminate
their agreements with us. If our Web site partners decide to use a competitor’s
or their own Web search or advertising services, our revenues would
decline.
We
face significant competition from Microsoft, Yahoo, Google and
Ask.com.
We face
formidable competition in every aspect of our business, and particularly from
other companies that seek to connect people with information on the Web and
provide them with relevant advertising. Currently, we consider our primary
competitors to be Microsoft, Yahoo, Google and Ask.com. Microsoft, Yahoo, Google
and Ask.com have a variety of Internet products, services and content that
directly compete with our products, services, content and advertising
solutions. We expect that Microsoft will increasingly use its
financial and engineering resources to compete with us.
Microsoft,
Yahoo, Google and Ask.com have more employees and cash resources than we do.
These companies also have longer histories operating search engines and more
established relationships with customers. They can use their experience and
resources against us in a variety of competitive ways, including by making
acquisitions, investing more aggressively in research and development and
competing more aggressively for advertisers and Web sites. Microsoft and Yahoo
also may have a greater ability to attract and retain users than we do because
they operate Internet portals with a broad range of products and services. If
Microsoft, Yahoo, Google or Ask.com are successful in providing similar or
better Web search results compared to ours or leverage their platforms to make
their Web search services easier to access than ours, we could experience a
significant decline in user traffic. Any such decline in user traffic could
negatively affect our net revenues.
We
face competition from other Internet companies, including Web search providers,
Internet advertising companies and destination Web sites that may also bundle
their services with Internet access.
In
addition to Microsoft, Yahoo, Google and Ask.com, we face competition from other
Web search providers, including companies that are not yet known to us. We
compete with Internet advertising companies, particularly in the areas of
pay-for-performance and keyword-targeted Internet advertising. Also, we may
compete with companies that sell products and services online because these
companies, like us, are trying to attract users to their Web sites to search for
information about products and services. Barriers to entry in our
business are generally low and products, once developed, can be distributed
quickly and to a wide range of customers at a reasonably low cost.
We also
compete with destination Web sites that seek to increase their search-related
traffic. These destination Web sites may include those operated by Internet
access providers, such as cable and DSL service providers. Because our users
need to access our services through Internet access providers, they have direct
relationships with these providers. If an access provider or a computer or
computing device manufacturer offers online services that compete with ours, the
user may find it more convenient to use the services of the access provider or
manufacturer. In addition, the access provider or manufacturer may make it hard
to access our services by not listing them in the access provider’s or
manufacturer’s own menu of offerings. Also, because the access provider gathers
information from the user in connection with the establishment of a billing
relationship, the access provider may be more effective than we are in tailoring
services and advertisements to the specific tastes of the user.
There has been a trend toward industry consolidation among our competitors,
and so smaller competitors today may become larger competitors in the future. If
our competitors are more successful than we are at generating traffic and
advertising, our revenues may decline.
We
face competition from traditional media companies, and we may not be included in
the advertising budgets of large advertisers, which could harm our operating
results.
In
addition to Internet companies, we face competition from companies that offer
traditional media advertising opportunities. Most large advertisers have set
advertising budgets, a very 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 operating
results would be harmed.
Our
revenues declined in 2008 and we are experiencing downward pressure on our
operating margin, which we expect will intensify in the future.
We
believe our operating margin may decline as a result of increasing competition
and increased expenditures for all aspects of our business as a percentage of
our revenues, including product development and sales and marketing expenses.
Also, our operating margin has declined as a result of increases in the
proportion of our revenues generated from our partner Web sites. The margin on
revenues we generate from our partner Web sites is generally significantly less
than the margin on revenues we generate from advertising on our Web sites.
Additionally, the margin we earn on revenues generated from our partner Web
sites could decrease in the future if our partners require a greater portion of
the advertising fees.
If
we do not continue to innovate and provide products and services that are useful
to users, we may not remain competitive, and our revenues and operating results
could suffer.
Our
success depends on providing products and services that people use for a high
quality Internet experience. Our competitors are constantly developing
innovations in Web search, online advertising and providing information to
people. As a result, we must continue to invest significant resources in
research and development in order to enhance our Web search technology and our
existing products and services and introduce new high-quality products and
services that people will use. If we are unable to predict user preferences or
industry changes, or if we are unable to modify our products and services on a
timely basis, we may lose users, advertisers and Web site partners. Our
operating results would also suffer if our innovations were not responsive to
the needs of our users, advertisers and Web site partners are not appropriately
timed with market opportunity, effectively brought to market or well received in
the market place. As search technology continues to develop, our
competitors may be able to offer search results that are, or that are perceived
to be, substantially similar or better than those generated by our search
services. This may force us to compete on bases in addition to quality of search
results and to expend significant resources in order to remain
competitive.
Our
business depends on a strong brand, and if we are not able to maintain and
enhance our brands, our ability to expand our base of users and advertisers will
be impaired and our business and operating results will be harmed.
We
believe that the brand identity that we have developed has significantly
contributed to the success of our business. We also believe that maintaining and
enhancing the Company’s brands is critical to expanding our base of users and
advertisers. Maintaining and enhancing our brands may require us to make
substantial investments and these investments may not be successful. If we fail
to promote and maintain the Mamma® and Copernic® brands, or if we incur
excessive expenses in this effort, our business, operating results and financial
condition will be materially and adversely affected. We anticipate that, as our
market becomes increasingly competitive, maintaining and enhancing our brands
may become increasingly difficult and expensive. Maintaining and enhancing our
brands will depend largely on our ability to continue to provide high quality
products and services, which we may not do successfully.
We
generated a significant portion of our revenues in 2008 from our advertisers.
Our advertisers can generally terminate their contracts with us at any time.
Advertisers will not continue to do business with us if their investment in
advertising with us does not generate sales leads, and ultimately customers, or
if we do not deliver their advertisements in an appropriate and effective
manner.
New
technologies could block our ads, which would harm our business.
Technologies
are being developed that can block the display of our ads. Most of our revenues
are derived from fees paid to us by advertisers in connection with the display
of ads on Web pages. As a result, ad-blocking technology could, in the future,
adversely affect our operating results.
We
generate all of our revenue from advertising and software licensing, and the
reduction of spending by or loss of customers could seriously harm our
business.
If we are
unable to remain competitive and provide value to our advertisers, they may stop
placing ads with us, which could negatively affect our net revenues and
business. Copernic has on-going efforts to maintain a high quality network of
publishers in order to offer advertisers high quality users that will provide
for a satisfactory ROI. Therefore, from time to time we cease sending
advertisements to what we determine are low quality publishers. This can reduce
our revenues in the short term in order to create advertiser retention in the
long term.
We
make investments in new products and services that may not be
profitable.
We have
made and will continue to make investments in research, development and
marketing for new products, services and technologies. Our success in
this area depends on many factors including our innovativeness, development
support, marketing and distribution. We may not achieve significant
revenue from a new product for a number of years, if at all. For the
years 2007 and 2008, we did not generate significant revenues from licensing
Copernic® software and we cannot assure you that we will generate significant
revenue from the licensing of Copernic® software going forward. In addition, our
competitors are constantly improving their competing software, and if we fail to
innovate and remain competitive our revenues from software licensing will
decline.
Volatility
of stock price and trading volume could adversely affect the market price and
liquidity of the market for our Common Shares.
· Our
Common Shares are subject to significant price and volume fluctuations, some of
which result from various factors including (a) changes in our business,
operations, and future prospects, (b) general market and economic conditions,
and (c) other factors affecting the perceived value of our Common Shares.
Significant price and volume fluctuations have particularly impacted the market
prices of equity securities of many technology companies including without
limitation those providing communications software or Internet-related products
and services. Some of these fluctuations appear to be unrelated or
disproportionate to the operating performance of such companies. The market
price and trading volume of our Common Shares have been, and may likely continue
to be, volatile, experiencing wide fluctuations. In addition, the stock market
in general, and market prices for Internet-related companies in particular, have
experienced volatility that often has been unrelated to the operating
performance of such companies. These broad market and industry
fluctuations have adversely affected the price of our stock, regardless of our
operating performance.
On June
16, 2008 a notice from NASDAQ Listing Qualifications was received by the
Company. The notice stated that for the last 30 consecutive business days,
the bid price of the Company’s common stock had closed below the minimum $1.00
per share requirement for continued inclusion under Marketplace Rule 4310(c)(4)
(the “Rule”). Therefore, in accordance with Marketplace Rule
4310(c)(8)(D), the Company will be provided 180 calendar days, or until December
15, 2008 to regain compliance. If, at any time before December 15, 2008,
the bid price of the Company’s common stock closes at $1.00 per share or more
for a minimum of 10 consecutive business days, NASDAQ Staff will provide written
notification that it complies with the Rule. If compliance with this Rule cannot
be demonstrated by December 15, 2008, NASDAQ Staff will determine whether the
Company meets The NASDAQ Capital Market initial listing criteria as set forth in
Marketplace Rule 4310(c), except for the bid price requirement. If it
meets the initial listing criteria, NASDAQ Staff will notify the Company that it
has been granted an additional 180 calendar day compliance period. If the
Company is not eligible for an additional compliance period, NASDAQ Staff will
provide written notification that the Company’s securities will be
delisted. At that time, the Company may appeal NASDAQ Staff’s
determination to delist its securities to a Listing Qualifications Panel (the
“Panel”). These circumstances may adversely impact trading in our Common Shares
and may also adversely affect our ability to access capital.
On
October 22, 2008, the Company received a NASDAQ Notice, indicating that the
Company has received an extension to comply with the minimum bid price
requirement for continued listing.
The
notice stated: “Given these extraordinary market conditions, NASDAQ has
determined to suspend enforcement of the bid price and market value of publicly
held shares requirements through Friday, January 16, 2009. In that regard, on
October 16, 2008, NASDAQ filed an immediately effective rule change with the
Securities and Exchange Commission to implement the suspension. As a result, all
companies presently in a bid price or market value of publicly held shares
compliance period will remain at that same stage of the process and will not be
subject to being delisted for these concerns. These rules will be reinstated on
Monday, January 19, 2009 and the first relevant trade date will be Tuesday,
January 20, 2009.
Since
your company had 59 calendar days remaining in its compliance period as of
October 16th, it will, upon reinstatement of the rules, still have this number
of days, or until March 19, 2009, to regain compliance. The company can regain
compliance, either during the suspension or during the compliance period
resuming after the suspension, by achieving a $1 closing bid price for a minimum
of 10 consecutive trading days”.
On
December 19, 2008, NASDAQ issued an issuer alert #2008-005A stating “Given the
continued extraordinary market conditions, NASDAQ is extending the suspension of
the bid price and market value of publicly held shares requirements. Enforcement
of these rules is scheduled to resume on Monday, April 20, 2009. Any company in
the compliance process for a bid price or market value of publicly held shares
concern will continue to be “frozen” at the same stage of the process until the
end of the suspension. However, a company could be delisted for other reasons
during the suspension. NASDAQ staff will contact each company affected by this
extension and notify
those
that regain compliance with these requirements during the suspension. NASDAQ
will continue to monitor closely these circumstances.” The Company had 59
calendar days remaining in its compliance period, therefore, with the new
extension, it has until June 18, 2009 to effect compliance.
As at
December 31, 2008, the Company’s closing stock price was at $0.13.
Infringement
and liability claims could damage our business.
Companies
in the Internet, technology and media industries own large numbers of patents,
copyrights, trademarks and trade secrets and frequently enter into litigation
based on allegations of infringement or other violations of intellectual
property rights. As we face increasing competition and become increasingly high
profile, the possibility of intellectual property rights claims against us
grows. Our technologies may not be able to withstand any third-party claims or
rights against their use. Any intellectual property claims, with or without
merit, could be time-consuming, expensive to litigate or settle and could divert
resources and attention. In addition, many of our agreements with our
advertisers require us to indemnify certain third-party intellectual property
infringement claims, which would increase our costs as a result of defending
such claims and may require that we pay damages if there were an adverse ruling
in any such claims. An adverse determination also could prevent us from offering
our services to others and may require that we procure substitute services for
these members.
With
respect to any intellectual property rights claim, to resolve these claims, we
may enter into royalty and licensing agreements on less favorable terms, pay
damages or stop using technology or content found to be in violation of a third
party’s rights. We may have to seek a license for the technology or content,
which may not be available on reasonable terms and may significantly increase
our operating expenses. The technology or content also may not be available for
license to us at all. As a result, we may also be required to develop
alternative non-infringing technology, which could require significant effort
and expense, or stop using the content. If we cannot license or develop
technology or content for the infringing aspects of our business, we may be
forced to limit our product and service offerings and may be unable to compete
effectively. Any of these results could harm our brand and operating
results.
In
addition, we may be liable to third-parties for content in the advertising we
deliver if the artwork, text or other content involved violates copyright,
trademark, or other intellectual property rights of third-parties or if the
content is defamatory. Any claims or counterclaims could be time-consuming,
could result in costly litigation and could divert management’s
attention.
Additionally,
we may be subject to legal actions alleging patent infringement, unfair
competition or similar claims. Others may apply for or be awarded patents or
have other intellectual property rights covering aspects of our technology or
business. For example, we understand that Overture Services, Inc. (acquired by
Yahoo) purports to be the owner of U.S. Patent No. 6,269,361, which was issued
on July 31, 2001 and is entitled “System and method for influencing a position
on a search result list generated by a computer network search engine.” Overture
has aggressively pursued its alleged patent rights by filing lawsuits against
other pay-per-click search engine companies such as MIVA (formerly known as
FindWhat.com) and Google. MIVA and Google have asserted counter-claims against
Overture including, but not limited to, invalidity, unenforceability and
non-infringement. While it is our understanding that the lawsuits
against MIVA and Google have been settled, there is no guarantee Overture (owned
by Ask.com) will not pursue its alleged patent rights against other companies.
In addition, X1 has won a patent to provide search results as you type a
function utilised by other companies including Copernic Inc.
An
inability to protect our intellectual property rights could damage our
business.
We rely
upon a combination of trade secret, copyright, trademark, patents and other laws
to protect our intellectual property assets. We have entered into
confidentiality agreements with our management and key employees with respect to
such assets and limit access to, and distribution of, these and other
proprietary information. However, the steps we take to protect our intellectual
property assets may not be adequate to deter or prevent misappropriation. We may
be unable to detect unauthorized uses of and take appropriate steps to enforce
and protect our intellectual property rights. Additionally, the
absence of harmonized patent laws between the United States and Canada makes it
more difficult to ensure consistent respect for patent
rights. Although senior management believes that our services and
products do not infringe on the intellectual property rights of others, we
nevertheless are subject to the risk that such a claim may be asserted in the
future. Any such claims could damage our business.
Historical
net results include net losses for the years ended December 31, 1999 to December
31, 2003 and for the years ended December 31, 2005 to December 31, 2008. Working
capital may be inadequate.
For the
years ended December 31, 1999 through the year ended December 31, 2003 and for
the years ended December 31, 2005 to December 31, 2008, we have reported net
losses and net losses per share. We have been financing operations mainly from
funds obtained in several private placements, and from exercised warrants and
options. Management considers that liquidities as at December 31, 2008 will be
sufficient to meet normal operating requirements throughout 2009. In the long
term, we may require additional liquidity to fund growth, which could include
additional equity offerings or debt finance. No assurance can be given that we
will be successful in getting required financing in the future.
Goodwill
may be written-down in the future.
Goodwill
is evaluated for impairment annually, or when events or changed circumstances
indicate impairment may have occurred. Management monitors goodwill for
impairment by considering estimates including discount rate, future growth
rates, amounts and timing of estimated future cash flows, general economic,
industry conditions and competition. Future adverse changes in these factors
could result in losses or inability to recover the carrying value of the
goodwill. Consequently, our goodwill, which amounts to approximately $3.0M as at
December 31, 2008, may be written-down in the future which could adversely
affect our financial position.
Long-lived
assets may be written-down in the future.
The
Company assesses the carrying value of its long-lived assets, which include
property and equipment and intangible assets, for future recoverability when
events or changed circumstances indicate that the carrying value may not be
recoverable. Management monitors long-lived assets for impairment by considering
estimates including discount rate, future growth rates, general economic,
industry conditions and competition. Future adverse changes in these factors
could result in losses or inability to recover the carrying value of the
long-lived assets. Consequently, our long-lived assets, which amount to
approximately $1.2M as at December 31, 2008, may be written-down in the
future.
Reduced
Internet use may adversely affect our results.
Our
business is based on Internet driven products and services including direct
online Internet marketing. The emerging nature of the commercial uses of the
Internet makes predictions concerning a significant portion of our future
revenues difficult. As the industry is subject to rapid changes, we believe that
period-to-period comparisons of its results of operations will not necessarily
be meaningful and should not be relied upon as indicative of our future
performance. It is also possible that in some fiscal quarters, our operating
results will be below the expectations of securities analysts and investors. In
such circumstances, the price of our Common Shares may decline. The success of a
significant portion of our operations depends greatly on increased use of the
Internet by businesses and individuals as well as increased use of the Internet
for sales, advertising and marketing. It is not clear how effective Internet
related advertising is or will be, or how successful Internet-based sales will
be. Our results will suffer if commercial use of the Internet, including the
areas of sales, advertising and marketing, fails to grow in the
future.
Our
business depends on the continued growth and maintenance of the Internet
infrastructure.
The
success and availability of our internet based products and services depend on
the continued growth, maintenance and use of the Internet. Spam,
viruses, worms, spyware, denial of service attacks, phishing and other acts of
malice may affect not only the Internet’s speed and reliability but also its
desirability for use by customers. If the Internet is unable to meet
these threats placed upon it, our business, advertiser relationships, and
revenues could be adversely affected.
Our
long-term success may be materially adversely affected if the market for
e-commerce does not grow or grows slower than expected.
Because
many of our customers’ advertisements encourage online purchasing and/or
Internet use, our long-term success may depend in part on the growth and market
acceptance of e-commerce. Our business will be adversely affected if the market
for e-commerce does not continue to grow or grows slower than expected. A number
of factors outside of our control could hinder the future growth of
e-commerce,
including the following:
|
·
|
the
network infrastructure necessary for substantial growth in Internet usage
may not develop adequately or our performance and reliability may
decline;
|
|
·
|
insufficient
availability of telecommunication services or changes in telecommunication
services could result in inconsistent quality of service or slower
response times on the Internet;
|
|
·
|
negative
publicity and consumer concern surrounding the security of e-commerce
could impede our growth; and
|
|
·
|
financial
instability of e-commerce
customers.
|
Security
breaches and privacy concerns may negatively impact our business.
Consumer
concerns about the security of transmissions of confidential information over
public telecommunications facilities is a significant barrier to increased
electronic commerce and communications on the Internet that are necessary for
growth of the Company’s business. Many factors may cause compromises or breaches
of the security systems we use or other Internet sites use to protect
proprietary information, including advances in computer and software
functionality or new discoveries in the fields of cryptography and processor
design. A compromise of security on the Internet would have a negative effect on
the use of the Internet for commerce and communications and negatively impact
our business. Security breaches of their activities or the activities of their
customers and sponsors involving the storage and transmission of proprietary
information, such as credit card numbers, may expose our operating business to a
risk of loss or litigation and possible liability. We cannot assure you that the
measures in place are adequate to prevent security breaches.
If we
fail to detect click fraud or other malicious applications or activity of
others, we could lose the confidence of our advertisers as well as face
potential litigation, government regulation or legislation, thereby causing our
business to suffer.
We are
exposed to the risk of fraudulent clicks on our ads and other clicks that
advertisers may perceive as undesirable. Click fraud occurs when a person clicks
on an ad displayed on a Web site for a reason other than to view the underlying
content. These types of fraudulent activities could hurt our brands. If
fraudulent clicks are not detected, the affected advertisers may experience a
reduced return on their investment in our advertising programs because the
fraudulent clicks will not lead to potential revenue for the
advertisers. Advertiser dissatisfaction with click fraud and other
traffic quality related claims has lead to litigation and possible governmental
regulation of advertising. Any increase in costs due to any such litigation,
government regulation, or refund could negatively impact our
profitability.
Index
spammers could harm the integrity of our Web search results, which could damage
our reputation and cause our users to be dissatisfied with our products and
services.
There is
an ongoing and increasing effort by “index spammers” to develop ways to
manipulate our Web search results. Although they cannot manipulate our results
directly, “index spammers” can manipulate our suppliers, which can result in our
search engine pages producing poor results. We take this problem very seriously
because providing relevant information to users is critical to our success. If
our efforts to combat these and other types of manipulation are unsuccessful,
our reputation for delivering relevant information could be diminished. This
could result in a decline in user traffic, which would damage our
business.
Our
business is subject to a variety of U.S. and foreign laws that could subject us
to claims or other remedies based on the nature and content of the information
searched or displayed by our products and services, and could limit our ability
to provide information regarding regulated industries and products.
The laws
relating to the liability of providers of online services for activities of
their users are currently unsettled both within the U.S. and abroad. Claims have
been threatened and filed under both U.S. and foreign law for defamation, libel,
invasion of privacy and other data protection claims, tort, unlawful activity,
copyright or trademark infringement, or other theories based on the nature and
content of the materials searched and the ads posted or the content generated by
our users. Increased attention focused on these issues and legislative proposals
could harm our reputation or otherwise affect the growth of our
business.
The
application to us of existing laws regulating or requiring licenses for certain
businesses of our advertisers, including, for example, distribution of
pharmaceuticals, adult content, financial services, alcohol or firearms and
online gambling, can be unclear. Existing or new legislation could expose us to
substantial liability, restrict our ability to deliver services to our users,
limit our ability to grow and cause us to incur significant expenses in order to
comply with such laws and regulations.
Several
other federal laws could have an impact on our business. Compliance with these
laws and regulations is complex and may impose significant additional costs on
us. For example, the Digital Millennium Copyright Act has provisions that limit,
but do not eliminate, our liability for listing or linking to third-party Web
sites that include materials that infringe copyrights or other rights, so long
as we comply with the statutory requirements of this act. The Children’s Online
Protection Act and the Children’s Online Privacy Protection Act restrict the
distribution of materials considered harmful to children and impose additional
restrictions on the ability of online services to collect information from
minors. In addition, the Protection of Children from Sexual Predators Act of
1998 requires online service providers to report evidence of violations of
federal child pornography laws under certain circumstances. Any failure on our
part to comply with these regulations may subject us to additional
liabilities.
If
the technology that we currently use to target the delivery of online
advertisements and to prevent fraud on our networks is restricted or becomes
subject to regulation, our expenses could increase and we could lose customers
or advertising inventory.
Web sites
typically place small files of non-personalized (or “anonymous”) information,
commonly known as cookies, on an Internet user’s hard drive, generally without
the user’s knowledge or consent. Cookies generally collect information about
users on a non-personalized basis to enable Web sites to provide users with a
more customized experience. Cookie information is passed to the Web site through
an Internet user’s browser software. We currently use cookies to track an
Internet user’s movement through the advertiser’s Web site and to monitor and
prevent potentially fraudulent activity on our network. Most currently available
Internet browsers allow Internet users to modify their browser settings to
prevent cookies from being stored on their hard drive, and some users currently
do so. Internet users can also delete cookies from their hard drives at any
time. Some Internet commentators and privacy advocates have suggested limiting
or eliminating the use of cookies, and legislation (including, but not limited
to, Spyware legislation such as U.S. House of Representatives Bill HR 29 the
“Spy Act”) has been introduced in some jurisdictions to regulate the use of
cookie technology. The effectiveness of our technology could be limited by any
reduction or limitation in the use of cookies. If the use or effectiveness of
cookies were limited, we would have to switch to other technologies to gather
demographic and behavioural information. While such technologies currently
exist, they are substantially less effective than cookies. We would also have to
develop or acquire other technology to prevent fraud. Replacement of cookies
could require significant reengineering time and resources, might not be
completed in time to avoid losing customers or advertising inventory, and might
not be commercially feasible. Our use of cookie technology or any other
technologies
designed
to collect Internet usage information may subject us to litigation or
investigations in the future. Any litigation or government action against us
could be costly and time-consuming, could require us to change our business
practices and could divert management’s attention.
Increased
regulation of the Internet may adversely affect our business.
If the
Internet becomes more strongly regulated, a significant portion of our operating
business may be adversely affected. For example, there is increased pressure to
adopt and where adopted, strengthen laws and regulations relating to Internet
unsolicited advertisements, privacy, pricing, taxation and content. The
enactment of any additional laws or regulations in Canada, Europe, Asia or the
United States, or any state or province of the United States or Canada may
impede the growth of the Internet and our Internet-related business, and could
place additional financial burdens on us and our Internet-related
business.
Changes
in key personnel, labour availability and employee relations could disrupt our
business.
Our
success is dependent upon the experience and abilities of our senior management
and our ability to attract, train, retain and motivate other high-quality
personnel, in particular for our technical and sales teams. There is significant
competition in our industries for qualified personnel. Labour market conditions
generally and additional companies entering industries which require similar
labour pools could significantly affect the availability and cost of qualified
personnel required to meet our business objectives and plans. There can be no
assurance that we will be able to retain our existing personnel or that we will
be able to recruit new personnel to support our business objectives and plans.
Currently, none of our employees are unionized. There can be no assurance,
however, that a collective bargaining unit will not be organized and certified
in the future. If certified in the future, a work stoppage by a collective
bargaining unit could be disruptive and have a material adverse effect on us
until normal operations resume.
Possible
future exercise of warrants and options could dilute existing and future
shareholders.
As at
March 25, 2009, we had 646,392 warrants at a weighted average exercise price of
$15.60 expiring from April to July 2009 and 693,993 stock options at a weighted
average exercise price of $1.54 outstanding. As at March 25, 2009, the exercise
prices of all outstanding warrants and options, were higher than the market
price of our Common Shares. When the market value of the Common Shares is above
the respective exercise prices of all options and warrants, their exercise could
result in the issuance of up to an additional 1,320,385 Common Shares. To the
extent such shares are issued, the percentage of our Common Shares held by our
existing stockholders will be reduced. Under certain circumstances the
conversion or exercise of any or all of the warrants or stock options might
result in dilution of the net tangible book value of the shares held by existing
Company stockholders. For the life of the warrants and stock options, the
holders are given, at prices that may be less than fair market value, the
opportunity to profit from a rise in the market price of the shares of Common
Shares, if any. The holders of the warrants and stock options may be expected to
exercise them at a time when the Company may be able to obtain needed capital on
more favourable terms. In addition, we reserve the right to issue additional
shares of Common Shares or securities convertible into or exercisable for shares
of Common Shares, at prices, or subject to conversion and exercise terms,
resulting in reduction of the percentage of outstanding Common Shares held by
existing stockholders and, under certain circumstances, a reduction in the net
tangible book value of existing stockholders’ Common Shares.
Strategic
acquisitions and market expansion present special risks.
A future
decision to expand our business through acquisitions of other businesses and
technologies presents special risks. Acquisitions entail a number of particular
problems, including (i) difficulty integrating acquired technologies,
operations, and personnel with the existing businesses, (ii) diversion of
management’s attention in connection with both negotiating the acquisitions and
integrating the assets as well as the strain on managerial and operational
resources as management tries to oversee larger operations, (iii) exposure to
unforeseen liabilities relating to acquired assets, and (iv) potential issuance
of debt instruments or securities in connection with an acquisition possessing
rights that are superior to the rights of holders of our currently outstanding
securities, any one of which would reduce the benefits expected from such
acquisition and/or might negatively affect our results of operations. We may not
be able to successfully address these problems. We also face competition
from other acquirers, which may prevent us from realizing certain desirable
strategic opportunities.
We
do not plan to pay dividends on the Common Shares.
The
Company has never declared or paid dividends on its shares of Common Shares. The
Company currently intends to retain any earnings to support its working capital
requirements and growth strategy and does not anticipate paying dividends in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of the Company’s Board of Directors after taking into account various
factors, including the Company’s financial condition, operating results, current
and anticipated cash needs and plans for expansion.
Rapidly
evolving marketplace and competition may adversely impact our
business.
The
markets for our products and services are characterized by (i) rapidly changing
technology, (ii) evolving industry standards, (iii) frequent new product and
service introductions, (iv) shifting distribution channels, and (v) changing
customer demands. The success of the
Company
will depend on its ability to adapt to its rapidly evolving marketplaces. There
can be no assurance that the introduction of new products and services by others
will not render our products and services less competitive or obsolete. We
expect to continue spending funds in an effort to enhance already
technologically complex products and services and develop or acquire new
products and services. Failure to develop and introduce new or enhanced products
and services on a timely basis might have an adverse impact on our results of
operations, financial condition and cash flows. Unexpected costs and delays are
often associated with the process of designing, developing and marketing
enhanced versions of existing products and services and new products and
services. The market for our products and services is highly competitive,
particularly the market for Internet products and services which lacks
significant barriers to entry, enabling new businesses to enter this market
relatively easily. Competition in our markets may intensify in the future.
Numerous well-established companies and smaller entrepreneurial companies are
focusing significant resources on developing and marketing products and services
that will compete with the Company’s products and services. Many of our current
and potential competitors have greater financial, technical, operational and
marketing resources. We may not be able to compete successfully against these
competitors. Competitive pressures may also force prices for products and
services down and such price reductions may reduce our revenues.
To
the extent that some of our revenues and expenses are paid in foreign
currencies, and currency exchange rates become unfavourable, we may lose some of
the economic value in U.S. dollar terms.
Although
we currently transact a majority of our business in U.S. dollars, as we expand
our operations, more of our customers may pay us in foreign currencies.
Conducting business in currencies other than U.S. dollars subjects us to
fluctuations in currency exchange rates. This could have a negative impact on
our reported operating results. We do not currently engage in hedging
strategies, such as forward contracts, options and foreign exchange swaps
related to transaction exposures to mitigate this risk. If we determine to
initiate such hedging activities in the future, there is no assurance these
activities will effectively mitigate or eliminate our exposure to foreign
exchange fluctuations. Additionally, such hedging programs would expose us to
risks that could adversely affect our operating results, because we have limited
experience in implementing or operating hedging programs. Hedging programs are
inherently risky and we could lose money as a result of poor
trades. In 2008, revenues were decreased by approximately $101,000
and total expenses were increased by $50,000 resulting in a net loss $151,000
due to the fluctuation of foreign currencies.
Higher
inflation could adversely affect our results of operations and financial
condition.
We do not
believe that the relatively moderate rates of inflation experienced in the
United States and Canada in recent years have had a significant effect on our
revenues or profitability. Although higher rates of inflation have been
experienced in a number of foreign countries in which we might transact
business, we do not believe that such rates have had a material effect on our
results of operations, financial condition and cash flows. Nevertheless, in the
future, high inflation could have a material, adverse effect on the Company’s
results of operations, financial condition and cash flows.
Our future growth significantly
depends to a high degree on our ability to successfully commercialize the
Copernic Desktop Search® product, and any failure or delays
in that commercialization would adversely affect our business and results of
operations.
On
December 22, 2005, we completed our acquisition of Copernic, which we believe
positioned the Company as a leader in search technologies and applications and
as a multi-channel online marketing services provider. Although we
have high expectations for the Copernic Desktop Search® (CDS) award-winning
product, to date our program to commercialize that product through licensing to
large ISP’s and Internet Portals has not generated significant revenue and we
cannot guarantee we will obtain such significant licensing revenue in the
future. However in 2008, we have generated subscription sales of $636,893
through new products and sales channel expansion which appears to have reversed
the previous trend.
Controls
and Procedures
Disclosure
Controls and Procedures
We are
responsible for establishing and maintaining a system of disclosure controls and
procedures, as defined in Rule 13a-15 (e) under the Securities Exchange Act of
1934, (the “Exchange Act”) designed to ensure that information we are required
to disclose in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the issuer’s management, including its principal executive officer or
officers and principal financial officer or officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.
We
carried out an evaluation, under the supervision of and with the participation
of our management, including our Chief Executive Officer and Vice President
Finance, as to the effectiveness of our disclosure controls and procedures as of
December 31, 2008.
Based
upon that evaluation, our Chief Executive Officer and Vice President Finance
concluded that our disclosure controls and procedures were effective as of
December 31, 2008.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is
defined in Rule 13a-15(f) of the Exchange Act as a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that (1) pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company’s assets that could have a
material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect all misstatements. Projections of any assessment of
effectiveness to future periods are subject to the risks that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. Our
management evaluated the effectiveness of our internal control over financial
reporting as of December 31, 2008. In making this evaluation, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in “Internal Control — Integrated
Framework.”
Based on
our evaluation under the framework in Internal Control-Integrated Framework,
management concluded that our internal control over financial reporting was
effective as of December 31, 2008.
It should
be noted that while management believes that current disclosure and internal
controls and procedures provide a reasonable level of assurance, it cannot be
expected that existing disclosure controls and procedures or internal financial
controls will prevent all human error and circumvention or overriding of the
controls and procedures. A control system, no matter how well
conceived or operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met.
Capital
Stock Information
The
following table discloses the Company’s outstanding share data:
|
Number
of issued and
outstanding
common
shares
as at March 25,
2009
|
Book
value as at
December
31, 2008
under
Canadian
GAAP
|
Book
value as at
December
31, 2008
under
US GAAP
|
|
14,637,531
|
$96,556,485
|
$113,326,055
|
As at
March 25, 2009, the Company also had 646,392 warrants and 693,993 stock options
outstanding.
Forward-Looking
Statements
Information
contained in this Management’s Discussion and Analysis of Financial Condition
and Results of Operations includes forward-looking statements, which can be
identified by the use of forward-looking terminology such as “believes,”
“expects,” “may,” “desires,” “will,” “should,” “projects,” “estimates,”
“contemplates,” “anticipates,” “intends,” or any negative such as “does not
believe” or other variations thereof or comparable terminology. No
assurance can be given that potential future results or circumstances described
in the forward-looking statements will be achieved or occur. Such
information may also include cautionary statements identifying important factors
with respect to such forward-looking statements, including certain risks and
uncertainties that could cause actual results to vary materially from the
projections and other expectations described in such forward-looking
statements. Prospective investors, customers, vendors and all other
persons are cautioned that forward-looking statements are not assurances,
forecasts or guarantees of future performance due to related risks and
uncertainties, and that actual results may differ materially from those
projected. Factors which could cause results or events to differ from current
expectations include, among other things: the severity and duration
of the adjustments in our business segments; the effectiveness of our
restructuring activities, including the validity of the assumptions underlying
our restructuring efforts; fluctuations in operating results; the impact of
general economic, industry and market conditions; the ability to recruit and
retain qualified employees; fluctuations in cash flow; increased levels of
outstanding debt; expectations regarding market demand for particular products
and services and the dependence on new product/service development; the ability
to make acquisitions and/or integrate the operations and technologies of
acquired businesses in an effective manner; the impact of rapid technological
and market change; the impact of price and product competition; the
uncertainties in the market for Internet-based products and services; stock
market volatility; the trading volume of our stock; the possibility of delisting
our stock since the Company may not satisfy the requirements for continued
listing on the NASDAQ Capital Market including whether the minimum bid price for
the stock falls below $1; and the adverse resolution of
litigation. For additional information with respect to these and
certain other factors that may affect actual results, see the reports and other
information filed or furnished by the Company with the United States Securities
and Exchange Commission (“SEC”) and/or the Ontario Securities Commission (“OSC”)
respectively accessible on the Internet at www.sec.gov and www.sedar.com, or the
Company’s Web site at www.copernic-inc.com. All
information contained in these audited financial statements and Management’s
Discussion and Analysis of Financial Condition and Results of Operations is
qualified in its entirety by the foregoing and reference to the other
information the Company files with the OSC and SEC. Unless otherwise required by
applicable securities laws, the Company disclaims any intention or obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Period-to-Period
Comparisons
A
variety of factors may cause period-to-period fluctuations in the Company’s
operating results, including business acquisitions, revenues and expenses
related to the introduction of new products and services or new versions of
existing products, new or stronger competitors in the marketplace as well as
currency fluctuations. Historical operating results are not indicative of future
results and performance.
Selected
Annual Information
(In
thousand of US dollars, except per share data and in accordance with generally
accepted accounting principles in Canada)
For
the years ended December 31,
|
|
|
2008
$
|
|
|
|
2007
$
|
|
|
|
2006
$
|
|
|
|
2005
$
|
|
|
|
2004
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
7,012 |
|
|
|
8,116 |
|
|
|
9,596 |
|
|
|
9,444 |
|
|
|
14,636 |
|
Earnings
(loss) from continuing operations
|
|
|
(6,491 |
) |
|
|
(14,431 |
) |
|
|
(4,358 |
) |
|
|
(3,343 |
) |
|
|
371 |
|
Results
of discontinued operations, net of income taxes
|
|
|
- |
|
|
|
- |
|
|
|
89 |
|
|
|
(2,315 |
) |
|
|
734 |
|
Earnings
(loss) for the year
|
|
|
(6,491 |
) |
|
|
(14,431 |
) |
|
|
(4,269 |
) |
|
|
(5,658 |
) |
|
|
1,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
(0.44 |
) |
|
|
(0.99 |
) |
|
|
(0.31 |
) |
|
|
(0.27 |
) |
|
|
0.03 |
|
Net
earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
(0.44 |
) |
|
|
(0.99 |
) |
|
|
(0.30 |
) |
|
|
(0.46 |
) |
|
|
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
10,782 |
|
|
|
18,358 |
|
|
|
33,339 |
|
|
|
38,327 |
|
|
|
35,166 |
|
Quarterly
Financial Highlights
(in
thousand of US dollars, except per share data and in accordance with generally
accepted accounting principles in Canada)
(unaudited)
|
|
2008
|
|
|
2007
|
|
|
|
|
Q4
$
|
|
|
|
Q3
$
|
|
|
|
Q2
$
|
|
|
|
Q1
$
|
|
|
|
Q4
$
|
|
|
|
Q3
$
|
|
|
|
Q2
$
|
|
|
|
Q1
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
1,910 |
|
|
|
1,672 |
|
|
|
1,721 |
|
|
|
1,709 |
|
|
|
1,654 |
|
|
|
1,867 |
|
|
|
1,953 |
|
|
|
2,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
for the period
|
|
|
(4,261 |
) |
|
|
(622 |
) |
|
|
(522 |
) |
|
|
(1,086 |
) |
|
|
(10,990 |
) |
|
|
(975 |
) |
|
|
(1,085 |
) |
|
|
(1,381 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share basic and diluted
|
|
|
(0.29 |
) |
|
|
(0.04 |
) |
|
|
(0.04 |
) |
|
|
(0.07 |
) |
|
|
(0.75 |
) |
|
|
(0.07 |
) |
|
|
(0.07 |
) |
|
|
(0.10 |
) |
ITEM
6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
DIRECTORS
AND SENIOR MANAGEMENT
|
Following
is a table, which discloses the names, functions, areas of expertise within the
Company and present principal occupation(s) of the Company’s directors and
senior management.
Name
|
|
Functions
and areas
of
experience within
the
Company
|
|
Present
Principal Occupation(s)
|
|
Date
first elected
Director
or
appointed
Senior
Officer
of the
Company
|
|
|
|
|
|
|
|
Marc
Ferland1
|
|
Director
and Officer
|
|
President,
and Chief Executive Officer and acting CFO
Copernic
Inc.
|
|
September
21, 2007
|
|
|
|
|
|
|
|
Éric
Bouchard2
|
|
Officer
|
|
Vice
President - Products
Copernic
Inc.
|
|
December
22, 2005
|
|
|
|
|
|
|
|
David
Goldman
|
|
Director
|
|
Chairman,
Copernic
Inc.
Director,
SNC-Lavalin Group Inc. (an engineering and construction company listed on
the Toronto Stock Exchange)
|
|
May
24, 2001
|
|
|
|
|
|
|
|
Claude
E. Forget
|
|
Director
|
|
Consultant
|
|
October
11, 1999
|
|
|
|
|
|
|
|
Irwin
Kramer
|
|
Director
|
|
President,
iCongo, Inc.
(an
e-commerce and service company)
|
|
May
24, 2001
|
|
|
|
|
|
|
|
Dr.
David Schwartz
|
|
Director
|
|
Associate
Professor, Bar Ilan
University
School
of Business Administration
|
|
May
23, 2002
|
|
|
|
|
|
|
|
Lawrence
Yelin
|
|
Director
|
|
Attorney,
Lawrence
Yelin, Attorney
|
|
September
21, 2007
|
|
|
|
|
|
|
|
Claire
Castonguay
|
|
Officer
|
|
Vice
President - Finance and Controller
Copernic
Inc.
|
|
September
8, 2008
|
|
|
|
|
|
|
|
Dennis
Dion
|
|
Officer
|
|
Vice
President - Sales
Copernic
Inc.
|
|
November
11, 2008
|
|
|
|
|
|
|
|
Benoit
Godbout
|
|
Officer
|
|
Vice
President - Chief Technology Officer
Copernic
Inc.
|
|
June
17, 2008
|
Each
Director’s term of office expires at the earliest of the next annual meeting of
shareholders or his resignation as Director.
To the
knowledge of the Company, there is no family relationship among any of the
persons named in this Item 6, nor were any such persons selected as directors or
members of senior management pursuant to any arrangement or understanding with
major shareholders, customers, suppliers or others.
STATEMENT
OF CORPORATE GOVERNANCE PRACTICES
The
directors of the Company strongly believe that sound corporate governance is
essential to produce maximum value to shareholders. The following is a summary
of the governance practices of the Company.
The Board
of Directors has approved and adopted a document entitled “Responsibilities of
the Board of Directors and its three
1 Marc
Ferland is acting CFO until March 31, 2009.
2 Eric
Bouchard did not renew his employment contract which expired on December 31,
2008.
Committees”
which sets forth the responsibilities for the Board and these three committees.
That document is available on SEDAR at www.sedar.com. That
document includes the Board’s mandate, the Charters of the Board’s three
committees and the Company’s insider trading policy and code of
ethics. The Company’s code of ethics is available on SEDAR at www.sedar.com. In
accordance with the policies and guidelines outlined in that document, the Board
of Directors constantly strives to promote a culture of ethical conduct in an
effort to meet the highest industry standards. All decisions are
carefully considered from this point of view and the Board of Directors does not
act until all factors have been adequately considered. This approach
is expected of management and, to a relevant degree, all employees of the
Company.
1.
|
Composition
of the Board of Directors
|
More than
fifty percent of the directors of the Company are “independent” directors. An
independent director is independent of management and free of any business or
other relationship which could, or could reasonably be perceived to, materially
interfere with the director’s ability to act in the best interest of the
Company, as required by the standards of the NASDAQ Stock Exchange® and the
Ontario Securities Commission.
The Chair
of the Board of Directors is David Goldman, who is not an independent director.
Mr. Goldman also sits on the board of directors of SNC-Lavalin Group Inc. The
Board feels strongly that Mr. Goldman’s abilities, extensive experience as a
director of listed companies and role in the Company make him best suited for
this position. The Board will continue to consider whether or not the
position of Chairman should be occupied by an independent director and, if
circumstances change, will take action to adjust the composition of the Board
accordingly or appoint a lead director who is
independent. Independent directors meet, when they deem it advisable,
through in camera sessions conducted after or during each meeting of the
Board. The
independent directors, when they deem it advisable, make recommendations to the
Board on various matters. The Board will continue to encourage regular meetings
of the independent directors through in camera sessions as it feels that it is a
good way to facilitate Board operations independently of management and to
maintain and improve the quality of governance.
The
directors consider the following nominees to be independent to the Company:
Claude E. Forget, Irwin Kramer, Dr. David Schwartz, and Lawrence
Yelin. Through October 2, 2001, Claude E. Forget was Chief Executive
Officer of Intasys Billing Technologies, a subsidiary of the Company, whose
business was subsequently sold. The Board of Directors has determined
that Marc Ferland and David Goldman are not independent because they are
officers of the Company. Martin Bouchard is not independent because
he was President and Chief Executive Officer of the Company until March 3,
2008.
In June
2008, David Goldman resigned as an officer of the Company.
During
the 2008 fiscal year, the Board of Directors met 10 times and all of the
Directors attended all of the meetings. Martin Bouchard attended 6 of
the meetings since he resigned on June 17, 2008. During the 2008
fiscal year, there were no meetings of the independent directors.
The Board
of Directors’ mandate is set forth in the document entitled “Responsibilities of
the Board of Directors and its Three Committees,” which provides in pertinent
part:
It is the
explicit responsibility of the Board of Directors to assume the global
stewardship of the Company and to ensure itself of the pertinence and efficiency
of the key functions and of the following matters:
|
·
|
Identification
of the principal risks associated with the activities of the Company and
the establishment of an appropriate system to manage these
risks.
|
|
·
|
Succession
planning, including appointing, training and monitoring
officers.
|
|
·
|
The
communications policy of the Company with its
shareholders.
|
|
·
|
The
integrity of the Company’s internal control and management information
systems.
|
The Board
has drawn up a written position description for the Chairman of the Board and
CEO. The Chairman of a Board committee is mainly responsible for
overseeing how the committee is managed and that it effectively performs its
duties and to guide the committee in the performance of its charter mandate and
any other matter which the Board delegates to the committee.
The Board
ensures that each new director has the necessary abilities, expertise,
availability and knowledge to properly perform his duties and provides him with
the corporate information and documentation required to do
so. Additional education of directors and information about our
activities is available upon request.
All
directors, officers and employees who have information giving them reasonable
grounds to believe that certain accounting practices or the auditing of the
Company are illegal or irregular, or that other violations of our Code of Ethics
have or are occurring, can and are encouraged to utilize the Company’s
Whistleblower Policy.
No
material change report that pertains to any conduct of a director or officer
that constitutes a departure from the Code of Ethics was filed during financial
year 2008.
Our Code
of Ethics clearly states that the directors and executive officers must avoid
any transaction or event which could give rise to a conflict of
interest. If an event or transaction occurs in which a director has a
material interest, he must disclose his interest to the Board and refrain from
voting with respect to any matter related thereto.
The role
of the Nominating and Governance Committee is, among other things, to assess the
effectiveness of the Board, its committees and its directors.
2.
|
Committees
of the Board of Directors
|
The
Company maintains three standing committees: the Audit and Finance Committee,
the Nominating and Governance Committee and the Compensation
Committee.
As part
of its ongoing review of corporate governance matters, on March 29, 2006 the
Company’s Board of Directors approved Charters constituting a Compensation
Committee and a Nominating and Governance Committee to segregate the nominating
and executive compensation functions into separate Charters as required by the
standards of the NASDAQ Stock Exchange®.
Composition
of the Audit and Finance Committee
The
current members of the Audit and Finance Committee are Irwin Kramer,
Dr. David Schwartz, Claude E. Forget and Lawrence Yelin all of whom are
independent. On March 29, 2006, the Board approved a new Charter of the Audit
and Finance Committee of the Company. The Charter provides that the Audit and
Finance Committee shall assist the Board in fulfilling its responsibilities
relating to corporate accounting and reporting practices of the Company and in
the quality and integrity of financial reports of the Company. The Audit and
Finance Committee meets with the financial officers of the Company, including
the Chief Financial Officer, and the independent auditors to review financial
reporting matters, the system of internal accounting controls and the overall
audit plan and examines the quarterly and year-end financial statements before
their presentation to the Board. In addition, the Audit Committee fixes the
compensation and other terms of engagement of the Company’s independent
auditors. In 2008, the Audit and Finance Committee met 7 times and the Company’s
independent auditors were present at 6 of these meetings.
Composition
of the Nominating and Governance Committee
The
current members of the Nominating and Governance Committee are Irwin Kramer,
Dr. David Schwartz, Claude E. Forget and Lawrence Yelin.
The
Nominating and Governance Committee is responsible for, among other things,
overseeing and making recommendations to the Board on the following
matters:
|
(i)
|
the
search for and compensation of all senior executives and management of the
Company and its subsidiaries, including periodic review of
same;
|
|
(ii)
|
the
Company’s management structure and succession
plans;
|
|
(iii)
|
the
recommendation of new candidates as potential directors of the Company and
the assessment of the performance of current directors and committees;
and
|
|
(iv)
|
the
review and recommendation of procedures to be followed with respect to
corporate governance guidelines.
|
Composition
of the Compensation Committee
The
current members of the Compensation Committee are Irwin Kramer, Dr. David
Schwartz, Claude E. Forget and Lawrence Yelin.
The
Compensation Committee is responsible for, among other things, overseeing and
making recommendations to the Board on the following matters:
|
(i)
|
the
compensation of all senior executives and management of the Company and
its subsidiaries, including periodic review of
same;
|
|
(ii)
|
the
incentive plans for employees of the Company and its subsidiaries;
and
|
|
(iii)
|
the
Company’s Stock Option Plan and the granting of stock options
thereunder.
|
Report
on Executive Compensation
As part
of its ongoing dedication to creating shareholder value and promoting corporate
success, the Compensation Committee establishes executive compensation in order
to attract, retain and motivate key executives in the increasing competitive
Internet and information technology sectors and to reward significant
performance achievements.
Consistent
with the Company’s objectives, and in order to further align shareholder and
executive interests, the Compensation Committee places emphasis on base salary,
incentive compensation, discretionary bonus and long-term incentive compensation
by granting of stock options in establishing executive compensation.
Consequently, the standard executive compensation package of the Company is
composed of four major components: (i) base salary and benefits, (ii) short-term
incentive and (iii) long-term incentive compensation.
In making
compensation decisions with respect to each of these components, the
Compensation Committee considers external market data for executives. Towers
Perrin was retained by the Chair of the Compensation Committee in 2007, 2006 and
2005 to assist with preparing information and providing advice on officer and
Board of Director compensation arrangements. Materials prepared by Towers Perrin
have been presented by the Chair to the Compensation Committee for review and
decisions. Towers Perrin’s scope of services in the most recent fiscal year
included providing advice and market data related to Board of Director and
officer compensation arrangements, assisting with the design of special
compensation programs, and other general executive compensation assistance.
Towers Perrin does not provide any other services to the Company. The
Compensation Committee uses the compensation data from Towers Perrin as one of
several factors in determining the appropriate levels of base salary, short-term
and long-term incentives that fairly compensate the Company’s executive
officers.
In
setting the compensation package for executives, the Compensation Committee
balances consideration of base salary with short-term incentive compensation so
that a significant proportion of executive officers’ compensation is linked to
objectives aligned with the interests of the Company’s shareholders. The
compensation packages include:
i) Salary
and Benefits
Salary
and benefits policies of the Company are determined by bench marking similar
businesses in the Internet sector and are targeted at the mid range in the
sectors, taking into account the economic trends, the Company’s competitive
position and performance and extraordinary contributions to the
Company.
ii) Short-Term
Incentive Compensation
The
Company provides short-term cash incentive compensation to employees and
officers whose responsibilities and attainment of personal and Company
objectives exceed established expectations, based on individual contributions,
operating results, and financial performance. The amount of these payments is
approved by the Compensation Committee and is based on specific goals in these
areas. Incentive compensation targets for each individual are set during the
first quarter of each year.
In the
case of Named Executive Officers, as defined hereinafter under the heading
“Statement of Executive Compensation”, targeted incentive compensation varies in
proportion to base salary, depending primarily on the level of responsibility of
the individual. Generally, bonuses are higher when operating results
and financial performance objectives are exceeded and when the objectives are
not met, the incentive bonuses are lower or nil depending on the circumstances
and the individual’s contribution to the Company.
The Board
of Directors, upon recommendation of the Compensation Committee, also may award
bonuses as deemed necessary to compensate management for circumstances where
warranted to reward extraordinary contributions to the Company not reflected in
our results of operations if and when deemed in the Company’s best
interest.
For the
year ended December 31, 2008, for all employees, no incentive compensation was
earned related to Company objectives as minimal financial targets were not
realized; however, some officers were paid bonuses based upon achieving Q2 and
Q4 2008 financial targets.
iii) Long-Term
Incentive Compensation
The
long-term incentive component of the Company’s compensation program consists of
the stock option plan of the Company which provides for the issuance of options
to executive officers and other employees, directors or consultants to purchase
common shares of the Company. The stock option plan of the Company is described
below under the heading “Stock
Option Plan”.
The
Compensation Committee determines the executives, employees and directors
eligible for the granting of options pursuant to the stock option plan. It also
determines the size of each grant and the date on which each grant is to become
effective. The exercise price of options granted may not be less than the market
price of the Company’s common shares as traded on the NASDAQ Stock Exchange®
in
U.S.
dollars determined as of the date the options are granted. The number of options
granted annually to recipients is determined by the Compensation Committee on a
discretionary basis.
The
Compensation Committee may, in its discretion, determine when the options
granted under the stock option plan may be exercised or vested, provided that
the term of such options can not exceed ten (10) years.
Unless
otherwise stipulated by the terms of a stock option grant, which terms are
approved by the Compensation Committee, options granted pursuant to the stock
option plan will lapse thirty (30) days after the holder ceases to be employed
by the Company. In the event of death, any vested option of a holder lapses
three (3) months after his or her death. In the event that the holder’s
employment terminates due to disability, the holder may exercise the vested
options for one (1) year after the date of termination of employment. If the
holder is terminated for cause, vested options terminate
immediately.
In July
2007, the Company reviewed its stock option plan to assess its retention
potential for key employees. The review was initiated following the resignation
of a number of key employees due to a competitive labor market in the high tech
industry in the Quebec City region. PCI Perrault Consulting Inc. was retained by
the Chair of the Compensation Committee to assist with preparing information and
providing advice.
In light
of the above and consistent with the Company’s objectives to retain key
employees, the Board of Directors has, on September 18, 2007, reviewed and
accepted stock option grants to key employees that would vest on equal
increments over a three-year period.
At the
time that the Stock Option Plan was reviewed in July 2007, 1,400,000 Common
Shares were reserved for issuance under this plan. Taking into account options
that have been cancelled of forfeited, options to acquire a net total of 652,000
Common Shares have been granted on September 18, 2007 under the Stock Option
Plan. As of January 1, 2009, 622,384 Common Shares remain available for future
grants.
Conclusion
The
Company’s executive compensation policy links executive compensation to
corporate results and individual contribution, as well as stock performance and
long-term results. The Compensation Committee regularly reviews the various
executive compensation components to ensure that they maintain their
competitiveness in the industry and continue to focus on the Company’s
objectives, values and business strategies.
Depending
on specific circumstances, the Compensation Committee may also recommend
employment terms and conditions that deviate from the above described
policies.
Statement
of Executive and Board Compensation
In the
first half of 2008, the Directors received US $6,250 per quarter and US $1,000
per meeting in person and US $500 by phone. Per quarter, the Chairman of the
Board also received US $3,125, the Audit Committee Chairman received US $2,500
and of the other two Board Committees received US $1,250 each. On
June 17th, 2008,
the Board reduced its compensation by US $1,250 per quarter in favour of the
grant of 19,000 stock options for each member and 24,000 for the Chairman all at
an exercise price of US $0.62 per share.
The
following summary table, presented in accordance with applicable securities
legislation, sets forth all compensation provided by the Company and its
affiliates for the fiscal years ended December 31, 2006, 2007 and 2008
to:
(i)
|
the
Chief Executive Officer;
|
(ii)
|
the
Chief Financial Officer;
|
(iii)
|
each
of the Company’s three most highly compensated executive officers, other
than the Chief Executive Officer and the Chief Financial Officer, who were
serving as executive officers at the end of December 31, 2008 and whose
total salary and bonus exceeded CDN $150,000,
and
|
(iv)
|
such
other individuals for whom the foregoing disclosure would have been made
but for the fact that such individual was not an officer of the Company at
the end of December 31, 2008 (collectively, the “Named Executive
Officers”).
|
Summary
Compensation Table
Compensation
is payable in Canadian dollars and converted by using the yearly average U.S.
exchange rate. Exchange rate conversions were 0.8821 in 2006, 0.9352
in 2007 and 0.9443 in 2008.
|
|
Annual
Compensation
|
Name
and Principal Occupation
|
Year
|
Salary
U.S.
$
|
Bonus
U.S.
$
|
Other
Annual Compensation
U.S.
$
(Taxable
Benefits Related to
Exercised
Options and Other)
|
Marc
Ferland
President
and Chief Executive Officer and Acting CFO
|
2008
2007
2006
|
190,636
N/A
N/A
|
Nil
N/A
N/A
|
7,077
N/A
N/A
|
Éric
Bouchard1
Vice
President - Products
|
2008
2007
2006
|
177,560
169,155
149,798
|
18,882
10,161
23,992
|
3,813
3,813
2,372
|
Daniel
Bertrand2
Executive
Vice President and Chief Financial Officer
|
2008
2007
2006
|
136,310
172,897
153,326
|
9,441
12,982
116,6443
|
3,387
117,534
3,722
|
Martin
Bouchard4
President
and Chief Executive Officer
|
2008
2007
2006
|
60,999
220,526
176,158
|
Nil
22,456
13,231
|
750
3,813
2,382
|
Guy
Fauré5
President
and Chief Executive Officer
|
2008
2007
2006
|
N/A
46,403
224,705
|
N/A
Nil
179,9406
|
N/A
502,977
3,718
|
Patrick
Hopf7
Vice
President - Business Development
|
2008
2007
2006
|
21,569
154,145
125,816
|
Nil
Nil
88,4888
|
750
47,817
2,869
|
1 Eric Bouchard did
not renew his employment contract which expired on December 31,
2008.
2 Daniel Bertrand
resigned from his position as Executive Vice President and Chief financial
Officer on September 8, 2008. In connection with his
resignation, the Company paid Mr. Bertrand termination compensation and recorded
termination costs of CDN$159,100 in Q3
2008.
3 Performance bonus
of $9,209 and retention bonus of $107,435.
4 Martin Bouchard
resigned from his position as the President and Chief Executive Officer
effective as of March 3, 2008 for personal reasons.
He was replaced by Marc Ferland.
5 Guy Fauré resigned from his positions
as the President, Chief Executive Officer and a member of the Board of Directors
of the Company effective
as of January 31, 2007. In connection with his resignation, the Company paid Mr.
Fauré termination
compensation and recorded termination
costs of CDN$510,000 in Q1 2007, changed the duration of option agreements and
allowed accelerated vesting of options. These
changes represented an additional non-cash item expense of approximately US
$267,000 which was recorded in Q1 2007.
6 Performance bonus
of $22,492 and retention compensation of $157,448.
7 On February 11,
2008, the Company announced the departure of Patrick Hopf, effective February
11, 2008.
8 Performance bonus
of $6,986 and retention bonus of $81,502.
Option
Grants During the Most Recently Completed Financial Year
|
|
Long
Term Compensation
|
All
Other Compensation
|
Name
and Principal Occupation
|
Year
|
Awards
|
Payouts
|
U.S.
$
|
|
|
Securities
Under
Options
#
|
Shares
or Units Subject to
Resale
Restrictions
($)
|
LTIP
Payouts
$
|
|
Marc
Ferland
President
and Chief Executive Officer and Acting CFO
|
2008
2007
2006
|
100,000
25,000
N/A
|
Nil
Nil
N/A
|
Nil
Nil
N/A
|
16,245
15,455
N/A
|
Éric
Bouchard1
Vice
President – Products
|
2008
2007
2006
|
Nil
78,000
Nil
|
Nil
Nil
Nil
|
Nil
Nil
Nil
|
Nil
Nil
Nil
|
Daniel Bertrand2
Executive
Vice President and Chief Financial Officer
|
2008
2007
2006
|
Nil
98,000
Nil
|
Nil
Nil
Nil
|
Nil
Nil
Nil
|
149,420
Nil
Nil
|
Martin Bouchard3
President
and Chief Executive Officer
|
2008
2007
2006
|
Nil
155,000
Nil
|
Nil
Nil
Nil
|
Nil
Nil
Nil
|
Nil
Nil
Nil
|
David Goldman4
Chairman
|
2008
2007
2006
|
24,000
20,000
Nil
|
Nil
Nil
Nil
|
Nil
Nil
Nil
|
41,455
108,291
125,0043
|
Claire
Castonguay
Vice
President, Finance and Controller
|
2008
2007
2006
|
Nil
22,000
Nil
|
Nil
Nil
Nil
|
Nil
Nil
Nil
|
Nil
Nil
Nil
|
Dennis
Dion
Vice
President, Sales
|
2008
2007
2006
|
25,000
N/A
N/A
|
Nil
N/A
N/A
|
Nil
N/A
N/A
|
Nil
N/A
N/A
|
Benoit
Godbout
Vice
President, Chief Technology Officer
|
2008
2007
2006
|
30,000
N/A
N/A
|
Nil
N/A
N/A
|
Nil
N/A
N/A
|
Nil
N/A
N/A
|
Guy Fauré5
President
and Chief Executive Officer
|
2008
2007
2006
|
Nil
Nil
Nil
|
Nil
Nil
Nil
|
Nil
Nil
Nil
|
Nil
477,182
Nil
|
Patrick Hopf6
Vice
President –Business Development
|
2008
2007
2006
|
Nil
73,000
Nil
|
Nil
Nil
Nil
|
Nil
Nil
Nil
|
Nil
Nil
Nil
|
1 Eric Bouchard did
not renew his employment contract which expired on December 31,
2008.
2 Daniel Bertrand
resigned from his position as Executive Vice President and Chief financial
Officer on September 8, 2008. In connection with his
resignation, the Company paid Mr. Bertrand termination compensation and recorded
terminiation costs of CDN $159,100 in Q3 2008.
3 Martin Bouchard
resigned from his position as the President and Chief Executive Officer
effective as of March 3, 2008 for personal reasons.
He was replaced by Marc Ferland.
4 The Company and
Dave Goldman Advisors Ltd., a company controlled by Mr. Goldman, entered into a
consulting agreement pursuant to which
David Goldman provides his services to the Company. In addition, as part of the
compensation paid to David Goldman, the Company
agreed to grant him options under the Company’s stock option plan.
5 Mr. Fauré resigned from his positions
as the President, Chief Executive Officer and a member of the Board of Directors
of the Company effective
as of January 31, 2007. In connection with his resignation, the Company paid Mr.
Fauré termination
compensation and recorded termination
costs of CDN $510,000 in Q1 2007, changed the duration of option agreements and
allowed accelerated vesting of options. These
changes represented an additional non-cash item expense of approximately US
$267,000 which was recorded in Q1 2007.
6 On February 11,
2008, the Company announced the departure of Patrick Hopf, effective February
11, 2008.
Employment
Agreements and Change of Control Provisions
During
2008, the Company had employment arrangements and agreements with the following
Named Executive Officers. All sums mentioned herein are in Canadian
Dollars.
David
Goldman was Chairman and Chief Executive Officer of the Company until January
12, 2004 when he became the Executive Chairman of the Company. In
June 2008, David Goldman resigned as an officer and became Chairman
of the Company. During the year ended 2003, Mr. Goldman was not paid
any salary or benefits by the Company but rather was rewarded solely through the
granting of stock options which are awarded at the discretion of the Nominating,
Human Resource and Governance Committee. This position was not considered as a
full time position and therefore the level of this award was based solely on the
overall achievements and performance of the Company.
On May 1,
2002, the Company entered into a consulting agreement with David Goldman through
Dave Goldman Advisors Ltd. These consulting arrangements may be terminated on
sixty (60) days’ notice by either party. On August 12, 2004, the
Company amended the consulting agreement with Dave Goldman Advisors Ltd. As a
result, if there is change of control of the Company, Dave Goldman Advisors Ltd.
will receive a lump sum payment equal to the greater of the past 24 months
consulting payments or CDN $300,000 if:
(i)
|
the
consultant agreement is terminated;
|
(ii)
|
Mr.
Goldman does not accept a relocation or to perform a substantial part of
his services outside of the greater Montreal
area;
|
(iii)
|
Mr.
Goldman’s responsibilities are greatly reduced for which reason he
terminates the agreement; or
|
(iv)
|
the
total compensation offered to the consultant is
reduced.
|
On May
23, 2005, the consulting agreement was further amended to increase the hourly
rate of Dave Goldman Advisors Ltd. for services rendered from CDN $200 to CDN
$250. In June 2008, as Mr. Goldman resigned as an officer and became Chairman of
the Company, the consulting agreement was amended to fixed fees of CDN $7,500
per quarter. Total fees for 2008 were $41,455 (2007: $108,291; 2006: $141,971).
The transactions are in the normal course of operations and are measured at the
exchange amount which is the amount of the consideration established and agreed
to by the related parties.
On
January 28, 2009, the Board of Director’s unanimously approved an adjustment to
Mr. David Goldman’s consultancy agreement, to which David Goldman concurred,
that the change of control clause is amended to an entitlement to the lesser of
$300,000 or 3% of the transaction triggering a change of control. The Board
further specified that the resulting payment would be made in the same currency
as the transaction itself. The previous agreement stipulated that in the case of
change of control, David Goldman was entitled to receive a lump sum payment
equal to the greater of the past 24 months consulting payments or CDN
$300,000.
On March
3, 2008, the Company entered into a consulting agreement with Martin Bouchard
through 4332903 Canada Inc. This company is remunerated for services rendered on
an hourly rate of CDN $250. These consulting arrangements may be terminated on
sixty (60) days’ notice by either party. There were no fees for
2008.
Éric
Bouchard has been Vice President - Products since the acquisition of Copernic
Technologies Inc. by the Company. Éric Bouchard signed an employment
agreement with the Company on December 22, 2005. Éric Bouchard’s
annual salary is CDN $188,200 with an entitlement to short term annual incentive
compensation for meeting targeted financial performance, to a maximum of 60% of
his base salary for far exceeding targeted performance levels. This compensation
package was contractually negotiated at the time of the acquisition of Copernic
Technologies Inc. and was approved by the Compensation Committee as it was
consistent with the compensation and bonus arrangements with other
officers.
Éric
Bouchard’s employment agreement provides that in the event of a change of
control or sale of the Company, Éric Bouchard may terminate his employment
agreement and will be entitled to one year’s base salary. The employment
agreement also provides that the Company may at any time with or without cause
terminate the agreement. In such event, the Company must pay Éric
Bouchard the lesser of (i) the base salary of Éric Bouchard from the date of
termination until December 31, 2008, and (ii) one year’s base
salary. Eric Bouchard’s employment contract expired on December 31,
2008.
On
October 11, 2007, the Company entered into a consulting agreement with Marc
Ferland through Gen24 Marketing, a division of 6556027 Canada Inc. The agreement
provided for a US $5,000 per month retainer and 5% commissions on recognized
revenue of customers and investment proceeds for a 3-year period received from
certain specified customers brought in by Gen24 Marketing to the Company. The
consulting agreement is cancellable on thirty (30) days’ notice by either
party. Total fees for 2008 were $16,245 (2007:
$15,454).
The
monthly retainer of Gen24 Marketing was increased to $10,000 for the month of
February, 2008 and the consulting agreement was terminated as of February 29,
2008.
On March
3, 2008, Marc Ferland entered into an employment agreement with the Company
regarding his appointment as President and Chief Executive Officer for a period
ending on April 20, 2010. Pursuant to the terms and conditions of his employment
agreement, Mr. Ferland is paid an annual salary of CDN $250,000 for a period
ending on April 20, 2010. Mr. Ferland is also entitled to a bonus for meeting
certain financial performance levels, to a maximum of 50% of his base salary.
Under his employment agreement, Mr. Ferland received 100,000 stock options
under the Company’s stock option plan.
Mr.
Ferland’s agreement was amended on September 30, 2008 by adding a retention
incentive bonus equal to one and one-half times his annual salary. The bonus is
earned on a monthly basis at the rate of 1/25th per
each month (commencing as of March 3, 2008). In addition, Mr. Ferland is also
entitled to a bonus of $125,000 in the event of either a transactional event
occurring or the meeting of certain financial performance levels, whichever
occurs first. In addition, Mr. Ferland shall be entitled to a $10,000 bonus for
each quarter that certain other financial performance levels are
met.
If there
is a change in control of the Company, Mr. Ferland will receive a lump sum
payment equal to one and a half times his annual base salary if the following
occurs within one (1) year of such change in control:
(i)
|
Mr.
Ferland is terminated; or
|
(ii)
|
If
he does not accept a relocation outside of the Province of Quebec;
or
|
(iii)
|
If
he does not accept an offer of employment at reduced levels of
responsibility; or
|
(iv)
|
If
he does not accept an offer of compensation (including
performance/incentive plan targets and long-term compensations) which is
less than his current level.
|
Stock
Option Plan
In 1999,
the Company adopted a new stock option plan (the “Plan”), replacing all previous
stock option plans of the Company, to provide eligible officers, directors,
employees and consultants of the Company and its subsidiaries compensation
opportunities that will encourage share ownership and enhance the Company’s
ability to attract, retain and motivate such persons and reward significant
performance achievements. Options under the Plan may not be granted with a term
exceeding ten years. The exercise price of the options may not be less than the
market price of the Company’s common shares determined as of the date the
options were granted. Unless the Board determines otherwise, options granted
under the Plan are exercisable within 30 days after an optionee ceases to be
employed or retained by the Company (other than for reason of cause in which
event they terminate immediately, death in which event they are exercisable
within three months and disability in which event they are exercisable within
one year). The Plan, which was approved by shareholders on June 30, 1999, and
subsequently amended as approved by shareholders on June 20, 2000, May 23, 2002
and June 7, 2006 provides that the aggregate number of common shares reserved
for issuance under the Plan shall not exceed 1,400,000 common shares. The
granting of options is subject to the further conditions that: (i) the number of
outstanding common shares of the Company reserved for options to optionees or
issued to optionees within any one year period shall not exceed fifteen percent
(15%) of the outstanding common shares of the Company, and (ii) at no time may
any optionee hold more than five percent (5%) of the outstanding common shares
of the Company under option.
The
following table discloses individual grants of options to the Named Executive
Officers to purchase or acquire common shares of the Company pursuant to the
Plan for the financial year ended December 31, 2008.
Aggregate
Options Exercised During the Most Recently Completed Financial Year and
Financial Year-end Option Values
Name
|
Securities
Acquired
on Exercise
(#)
|
Aggregate
Value
Realized
(U.S.
$)
|
Unexercised
Options
at FY-End (#)
Exercisable/
Unexercisable
|
Value
of Unexercised
in-the-Money
Options at FY-End (U.S. $)
Exercisable/
Unexercisable
|
David
Goldman
|
Nil
|
Nil
|
85,667 /
37,333
|
Nil
/ Nil
|
Daniel
Bertrand
|
Nil
|
Nil
|
Nil
/ Nil
|
Nil
/ Nil
|
Patrick
Hopf
|
Nil
|
Nil
|
Nil /
Nil
|
Nil
/ Nil
|
Martin
Bouchard
|
Nil
|
Nil
|
Nil
/ Nil
|
Nil
/ Nil
|
Éric
Bouchard
|
Nil
|
Nil
|
26,001
/ Nil
|
Nil
/ Nil
|
Claude
E. Forget
|
Nil
|
Nil
|
28,334
/ 25,666
|
Nil
/ Nil
|
Dr.
David Schwartz
|
Nil
|
Nil
|
20,001
/ 25,666
|
Nil
/ Nil
|
Irwin
Kramer
|
Nil
|
Nil
|
28,334
/ 25,666
|
Nil
/ Nil
|
W.
Brian Edwards
|
Nil
|
Nil
|
Nil
/ Nil
|
Nil
/ Nil
|
Marc
Ferland
|
Nil
|
Nil
|
8,334
/ 116,666
|
Nil
/ Nil
|
Lawrence
Yelin
|
Nil
|
Nil
|
8,334
/ 35,666
|
Nil
/ Nil
|
Guy
Fauré
|
Nil
|
Nil
|
60,500
/ Nil
|
Nil
/ Nil
|
Claire
Castonguay
|
Nil
|
Nil
|
7,334 / 14,666
|
Nil
/ Nil
|
Dennis
Dion
|
Nil
|
Nil
|
Nil / 25,000
|
Nil
/ Nil
|
Benoit
Godbout
|
Nil
|
Nil
|
|