FindEx.com, Inc. Form 10-QSB/A September 30, 2005
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-QSB/A
 
(Mark One)

[X]
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005.

[_]
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ________ to _________.

Commission File Number: 0-29963

FINDEX.COM, INC.
(Exact name of small business issuer as specified in its charter)

Nevada
88-0379462
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
   
11204 Davenport Street, Suite 100, Omaha, Nebraska 68154
(Address of principal executive offices)

(402) 333-1900
(Issuer’s telephone number)

NA.
(Former name, former address and former fiscal year, if changed since last report)


Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] 


APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [_] No [_]


APPLICABLE ONLY TO CORPORATE ISSUERS
 
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 48,619,855 common shares as of December 13, 2005.

Transitional Small Business Disclosure Format (Check one):  Yes [_] No [X]

 
TABLE OF CONTENTS

   
 
Page Number
 
   
F-1
 1
13
 
 
 
 
 
13
13
13
13
13
14
 
 

 

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.
 
Findex.com, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
     
(Unaudited)
    
 (Unaudited)
  
 
    
(Restated)
    
(Restated)
  
 
    
September 30, 2005
    
September 30, 2004
  
Assets
Current assets:
Cash and cash equivalents
  
$
39,838
  
$
539,399
  
Accounts receivable, trade
    
465,383
   
296,850
 
Inventory
    
211,769
   
162,800
 
Other current assets
   
308,956
   
139,495
 
Total current assets
    
1,025,946
   
1,138,544
 
Property and equipment, net
    
123,653
   
61,518
 
Software license, net
    
1,888,153
   
2,391,660
 
Capitalized software development costs, net
    
942,451
   
602,276
 
Other assets
   
432,124
   
136,655
 
Total assets
  
$
4,412,327
  
$
4,330,653
  
 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable, trade
  
$
687,662
  
$
410,179
  
Accrued royalties
   
328,345
   
236,949
 
Notes payable
      ---      240,000  
Derivatives 
      2,843,742      3,062,500  
Other current liabilities
    
578,751
   
445,776
 
Total current liabilities
    
4,438,500
   
4,395,404
 
Long-term obligations
    
167,927
   
808,083
 
Commitments and contingencies
Stockholders’ equity:
Common stock
    
48,620
   
46,153
 
Paid-in capital
   
7,521,339
   
7,260,469
 
Retained (deficit)
    
(7,764,059
)
  
(8,179,456
)
Total stockholders’ equity
    
(194,100
)   
(872,834
) 
Total liabilities and stockholders’ equity
  
$
4,412,327
  
$
4,330,653
  
 
See accompanying notes.
 
 
F-1
 
Findex.com, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
  
Three Months Ended
Nine Months Ended
 
  
September 30,
September 30,
 
    
2005
    
2004
    
2005
    
2004
  
 
    
(Restated)
    
(Restated)
 
  
(Restated)
 
  
(Restated)
 
 
Revenues, net of reserves and allowances
  
$
1,023,609
  
$
1,010,207
  
$
3,978,019
  
$
3,664,060
  
Cost of sales
    
316,449
   
431,592
   
1,276,227
   
1,171,661
 
Gross profit
    
707,160
   
578,615
   
2,701,792
   
2,492,399
 
Operating expenses:
Sales and marketing
    
295,902
   
287,909
   
1,030,870
   
798,410
 
General and administrative
    
613,191
   
478,781
   
1,819,987
   
1,650,355
 
Bad debt expense
    
6,981
   
8,566
   
29,650
   
11,066
 
Depreciation and amortization
    
145,355
   
141,607
   
436,903
   
416,246
 
Total operating expenses
    
1,061,429
   
916,863
   
3,317,410
   
2,876,077
 
Loss from operations
    
(354,269
)
  
(338,248
)
  
(615,618
)
  
(383,678
)
Other income
    
75
   
1,010,288
   
75
   
1,010,288
 
Loss on valuation adjustment of derivatives
    
(328,121
)
  
(1,385,422
)
  
(874,992
)
  
(1,385,422
)
Other expenses
    
(164,101
)
  
(162,826
)
  
(289,876
)
  
(193,344
)
Loss before income taxes
    
(846,416
)
  
(876,208
)
  
(1,780,411
)
  
(952,156
)
Provision for income taxes
    
(111,976
)
  
(31,095
)
  
187,182
   
(92,417
)
Net loss
  
$
(958,392
)
$
(907,303
)
  
(1,593,229
)
  
(1,044,573
)
Retained deficit at beginning of year
  
(6,170,830
)
  
(7,130,758
)
Preferred stock dividend
  
---
   
(4,125
)
Retained deficit at end of period
    
$
(7,764,059
)
$
(8,179,456
)
 
 
Net loss per share:
Basic
  
$
(0.02
)
$
(0.02
)
$
(0.03
)
$
(0.03
)
Diluted
  
$
(0.02
)
$
(0.02
)
$
(0.03
)
$
(0.03
)
 
Weighted average shares outstanding:
Basic
    
48,619,855
   
46,153,189
   
48,619,855
   
30,146,980
 
Diluted
    
48,619,855
   
46,153,189
   
48,619,855
   
30,146,980
 
 
See accompanying notes.
 
 
F-2
 
Findex.com, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended September 30,
    
2005
    
2004
  
     
(Restated)
    
(Restated)
  
 
Cash flows from operating activities:
Cash received from customers
  
$
4,049,153
  
$
3,607,255
  
Cash paid to suppliers and employees
    
(3,565,309
)
  
(4,368,409
)
Other operating activities, net
    
(3,910
)
  
(34,235
)
Net cash provided (used) by operating activities
    
479,934
   
(795,389
)
Cash flows from investing activities:
Software development costs
    
(766,151
)
  
(415,197
)
Other investing activities, net
    
15,300
   
(7,152
)
Net cash (used) by investing activities
    
(750,851
)
  
(422,349
)
Cash flows from financing activities:
Payments on line of credit, net
    
---
   
(20,933
)
Payments made on long-term notes payable
    
(30,604
)
  
(202,551
)
Proceeds from convertible notes payable
    
---
   
240,000
 
Stock offering costs paid
    
---
   
(51,047
)
Proceeds from issuance of common stock and warrants
    
---
   
1,750,000
 
Net cash (used) provided by financing activities
    
(30,604
)
  
1,715,469
 
Net (decrease) increase in cash and cash equivalents
    
(301,521
)
  
497,731
 
Cash and cash equivalents, beginning of year
    
341,359
   
41,668
 
Cash and cash equivalents, end of period
  
$
39,838
  
$
539,399
  
 
Reconciliation of net loss to cash flows from operating activities:
Net loss
  
$
(1,593,229
)
$
(1,044,573
 ) 
Adjustments to reconcile net loss to net cash
   
provided (used) by operating activities:
    
Software development costs amortized
    
524,989
   
397,627
 
Stock and warrants issued for services
    
---
   
73,700
 
Loss on valuation adjustment of derivatives 
      874,992      1,385,422  
Debt forgiveness
    
---
   
(1,000,662
)
Provision for bad debts
    
29,650
   
11,066
 
Depreciation & amortization
    
436,903
   
416,245
 
Loss on disposal of property and equipment
    
1,869
   
141
 
Change in assets and liabilities:
    
Decrease in accounts receivable
    
71,786
   
57,887
 
Decrease in inventories
    
22,231
   
109,800
 
Decrease (increase) in refundable taxes
    
7,164
   
(2,948
)
Decrease (increase) in prepaid expenses
    
55,509
   
(114,629
)
Increase (decrease) in accrued royalties
    
40,831
   
(381,677
)
Increase (decrease) in accounts payable
    
65,858
   
(407,683
)
Increase (decrease) in income taxes payable
    
180
   
(950
)
(Decrease) increase in deferred taxes
    
(187,362
)
  
90,931
 
Increase (decrease) in other liabilities
    
128,563
   
(385,086
)
Net cash provided (used) by operating activities
  
$
479,934
  
$
(795,389
)
 
See accompanying notes.
 
 
F-3

Findex.com, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2005
(Unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (Restated)

BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles for interim financial information and with the instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by Generally Accepted Accounting Principles for complete financial statements. The accompanying unaudited condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are considered necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements of Findex.com, Inc. included in our Form 10-KSB/A for the fiscal year ended December 31, 2004.

USE OF ESTIMATES

The preparation of consolidated financial statements in conformity with Generally Accepted Accounting Principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Significant estimates used in the consolidated financial statements include the estimates of (i) doubtful accounts, sales returns, price protection and rebates, (ii) provision for income taxes and realizability of the deferred tax assets, (iii) the life and realization of identifiable intangible assets, and (iv) provisions for obsolete inventory. The amounts we will ultimately incur or recover could differ materially from current estimates.

INVENTORY

Inventory, including out on consignment, consists primarily of software media, manuals and related packaging materials and is recorded at the lower of cost or market value, determined on a first-in, first-out, and adjusted on a per-item, basis.

ACCOUNTING FOR LONG-LIVED ASSETS

We review property and equipment and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of our carrying amount to future net cash flows the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair market value. Property and equipment to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

INTANGIBLE ASSETS

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, intangible assets with an indefinite useful life are not amortized. Intangible assets with a finite useful life are amortized on the straight-line method over the estimated useful lives. The software license is amortized over a 10 year useful life.

 
F-4
 
SOFTWARE DEVELOPMENT COSTS

In accordance with SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, software development costs are expensed as incurred until technological feasibility and marketability has been established, generally with release of a beta version for customer testing. Once the point of technological feasibility and marketability is reached, direct production costs (including labor directly associated with the development projects), indirect costs (including allocated fringe benefits, payroll taxes, facilities costs, and management supervision), and other direct costs (including costs of outside consultants, purchased software to be included in the software product being developed, travel expenses, material and supplies, and other direct costs) are capitalized until the product is available for general release to customers. We amortize capitalized costs on a product-by-product basis. Amortization for each period is the greater of the amount computed using (i) the straight-line basis over the estimated product life (generally from 12 to 18 months), or (ii) the ratio of current revenues to total projected product revenues. Total cumulative capitalized software development costs were $2,514,885, less accumulated amortization of $1,572,434 at September 30, 2005.

Capitalized software development costs are stated at the lower of amortized costs or net realizable value. Recoverability of these capitalized costs is determined at each balance sheet date by comparing the forecasted future revenues from the related products, based on management’s best estimates using appropriate assumptions and projections at the time, to the carrying amount of the capitalized software development costs. If the carrying value is determined not to be recoverable from future revenues, an impairment loss is recognized equal to the amount by which the carrying amount exceeds the future revenues. To date, no capitalized costs have been written down to net realizable value.

SFAS No. 2, Accounting for Research and Development Costs, established accounting and reporting standards for research and development. In accordance with SFAS No. 2, costs we incur to enhance our existing products after general release to the public (bug fixes) are expensed in the period they are incurred and included in research and development costs. Research and development costs incurred prior to determination of technological feasibility and marketability and after general release to the public and charged to expense were $130,407 and $44,228 for the nine months ended September 30, 2005 and 2004 respectively.

We capitalize costs related to the development of computer software developed or obtained for internal use in accordance with the American Institute of Certified Public Accountants Statement of Position (“SOP”) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. Software obtained for internal use has generally been enterprise level business and finance software that we customize to meet our specific operational needs. We have not sold, leased, or licensed software developed for internal use to our customers and have no intention of doing so in the future.

We capitalize costs related to the development and maintenance of our Website in accordance with Financial Accounting Standard Board’s (“FASB’s”) Emerging Issues Task Force (“EITF”) Issue No. 00-2, Accounting for Website Development Costs. Under EITF Issue No. 00-2, costs expensed as incurred are as follows:

 
 §
planning the Website,
 
 §
developing the applications and infrastructure until technological feasibility is established,
 
 §
developing graphics such as borders, background and text colors, fonts, frames, and buttons, and
 
 §
operating the site such as training, administration and maintenance.

Capitalized costs include those incurred to:

 
 §
obtain and register an Internet domain name,
 
 §
develop or acquire software tools necessary for the development work,
 
 §
develop or acquire software necessary for general Website operations,
 
 §
develop or acquire code for web applications,
 
 §
develop or acquire (and customize) database software and software to integrate applications such as corporate databases and accounting systems into web applications,
 
 §
develop HTML web pages or templates,
 
 §
install developed applications on the web server,
 
 §
create initial hypertext links to other Websites or other locations within the Website, and
 
 §
test the Website applications.

 
F-5
 
We amortize Website development costs on a straight-line basis over the estimated life of the site, generally 36 months. Total cumulative Website development costs, included in other assets on our condensed consolidated balance sheets, were $101,132 less accumulated amortization of $39,807 at September 30, 2005.

NET REVENUE

We derive revenues from the sale of packaged software products, product support and multiple element arrangements that may include any combination of these items. We recognize software revenue for software products and related services in accordance with SOP 97-2, Software Revenue Recognition, as modified by SOP 98-9, Modification of SOP 97-2, With Respect to Certain Transactions. We recognize revenue when persuasive evidence of an arrangement exists (generally a purchase order), we have delivered the product, the fee is fixed or determinable and collectibility is probable.

In some situations, we receive advance payments from our customers. We defer revenue associated with these advance payments until we ship the products or offer the support.

In accordance with EITF Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Product, we generally account for cash considerations (such as sales incentives - rebates and coupons) that we give to our customers as a reduction of revenue rather than as an operating expense.

Product Revenue

We typically recognize revenue from the sale of our packaged software products when we ship the product. We sell some of our products on consignment to a limited number of resellers. We recognize revenue for these consignment transactions only when the end-user sale has occurred. Revenue for software distributed electronically via the Internet is recognized when the customer has been provided with the access codes that allow the customer to take immediate possession of the software on its hardware and evidence of the arrangement exists (web order).

Some of our software arrangements involve multiple copies or licenses of the same program. These arrangements generally specify the number of simultaneous users the customer may have (multi-user license), or may allow the customer to use as many copies on as many computers as it chooses (a site license). Multi-user arrangements, generally sold in networked environments, contain fees that vary based on the number of users that may utilize the software simultaneously. We recognize revenue when evidence of an order exists and upon delivery of the authorization code to the consumer that will allow them the limited simultaneous access. Site licenses, generally sold in non-networked environments, contain a fixed fee that is not dependent on the number of simultaneous users. Revenue is recognized when evidence of an order exists and the first copy is delivered to the consumer.

Many of our software products contain additional content that is “locked” to prevent access until a permanent access code, or “key,” is purchased. We recognize revenue when evidence of an order exists and the customer has been provided with the access code that allows the customer immediate access to the additional content. All of the programs containing additional locked content are fully functional and the keys are necessary only to access the additional content. The customer’s obligation to pay for the software is not contingent on delivery of the “key” to access the additional content.

We reduce product revenue for estimated returns and price protections that are based on historical experience and other factors such as the volume and price mix of products in the retail channel, trends in retailer inventory and economic trends that might impact customer demand for our products. We also reduce product revenue for the estimated redemption of end-user rebates on certain current product sales. Our rebate reserves are estimated based on the terms and conditions of the specific promotional rebate program, actual sales during the promotion, the amount of redemptions received and historical redemption trends by product and by type of promotional program. We did not offer any rebate programs to our customers during the nine months ended September 30, 2005 and 2004 and maintain a reserve for rebate claims remaining unpaid from 2000.

Service Revenue

We offer several technical support plans and recognize support revenue over the life of the plans, generally one year.

 
F-6
 
Multiple Element Arrangements

We also enter into certain revenue arrangements for which we are obligated to deliver multiple products or products and services (multiple elements). For these arrangements, which include software products, we allocate and defer revenue for the undelivered elements based on their vendor-specific objective evidence (“VSOE”) of fair value. VSOE is generally the price charged when that element is sold separately.

In situations where VSOE exists for all elements (delivered and undelivered), we allocate the total revenue to be earned under the arrangement among the various elements, based on their relative fair value. For transactions where VSOE exists only for the undelivered elements, we defer the full fair value of the undelivered elements and recognize the difference between the total arrangement fee and the amount deferred for the undelivered items as revenue (residual method). If VSOE does not exist for undelivered items that are services, we recognize the entire arrangement fee ratably over the remaining service period. If VSOE does not exist for undelivered elements that are specified products, we defer revenue until the earlier of the delivery of all elements or the point at which we determine VSOE for these undelivered elements.
 
We recognize revenue related to the delivered products or services only if (i) the above revenue recognition criteria are met, (ii) any undelivered products or services are not essential to the functionality of the delivered products and services, (iii) payment for the delivered products or services is not contingent upon delivery of the remaining products or services, and (iv) we have an enforceable claim to receive the amount due in the event that we do not deliver the undelivered products or services.
 
Shipping and Handling Costs

We record the amounts we charge our customers for the shipping and handling of our software products as product revenue and we record the related costs as cost of sales on our condensed consolidated statements of operations.

Customer Service and Technical Support

Customer service and technical support costs include the costs associated with performing order processing, answering customer inquiries by telephone and through Websites, e-mail and other electronic means, and providing technical support assistance to our customers. In connection with the sale of certain products, we provide a limited amount of free technical support assistance to customers. We do not defer the recognition of any revenue associated with sales of these products, since the cost of providing this free technical support is insignificant. The technical support is provided within one year after the associated revenue is recognized and free product enhancements (bug fixes) are minimal and infrequent. We accrue the estimated cost of providing this free support upon product shipment and include it in cost of sales.

INCOME TAXES

We utilize SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 requires the use of the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

EARNINGS PER SHARE

We follow SFAS No. 128, Earnings Per Share, to calculate and report basic and diluted earnings per share (“EPS”). Basic EPS is computed by dividing income available to common shareholders by the weighted average number of shares of common stock outstanding for the period. Diluted EPS is computed by giving effect to all dilutive potential shares of common stock that were outstanding during the period. For us, dilutive potential shares of common stock consist of the incremental shares of common stock issuable upon the exercise of stock options and warrants for all periods, convertible notes payable and the incremental shares of common stock issuable upon the conversion of convertible preferred stock.

 
F-7
 
When discontinued operations, extraordinary items, and/or the cumulative effect of an accounting change are present, income before any of such items on a per share basis represents the “control number” in determining whether potential shares of common stock are dilutive or anti-dilutive. Thus, the same number of potential shares of common stock used in computing diluted EPS for income from continuing operations is used in calculating all other reported diluted EPS amounts. In the case of a net loss, it is assumed that no incremental shares would be issued because they would be anti-dilutive. In addition, certain options and warrants are considered anti-dilutive because the exercise prices were above the average market price during the period. Anti-dilutive shares are not included in the computation of diluted EPS, in accordance with SFAS No. 128.
 
DERIVATIVES
 
We account for warrants issued with shares of common stock in a private placement according to EITF Issue 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. In accordance with accounting mandate, the derivative liability associated with the warrants has been and shall continue until our registration statement on Form SB-2 originally filed on November 22, 2004 is declared effective to be adjusted to fair value (calculated using the Black Scholes method) at each balance sheet date and is accordingly reassessed at each such time to determine whether the warrants should be classified (or reclassified, as appropriate) as a liability or as equity. The corresponding fair value adjustment is included in the consolidated statements of operations as other expenses as the value of the warrants increases from an increase in our stock price at the balance sheet date and as other income as the value of the warrants decreases from a decrease in our stock price.
 
RECLASSIFICATIONS

Certain accounts in the 2004 financial statements have been reclassified for comparative purposes to conform with the presentation in the 2005 financial statements.

NOTE 2 - INVENTORIES, Restated
 
At September 30, 2005 and 2004, inventories consisted of the following:

     
2005
    
2004
  
Raw materials
  
$
147,769
  
$
73,100
  
Finished goods
    
64,000
    
89,700
  
Inventories
  
$
211,769
  
$
162,800
  

During the nine months ended September 30, 2004, we wrote-off obsolete inventory with a carried cost totaling $32,396. This has been included in cost of sales for 2004.
 
NOTE 3 - LOSS ON VALUATION OF DERIVATIVES, (Restated)
 
In November 2004, we issued two warrants to purchase an aggregate of 21,875,000 shares of our common stock in connection with a certain Stock Purchase Agreement completed with a New York based private investment partnership, on July 19, 2004. These warrants are accounted for as a liability according to the guidance of EITF 00-19 and the fair value of each warrant was assessed at $1,421,871 ($2,843,742 total) using the Black-Scholes valuation method at September 30, 2005 with the following assumptions:
 
 
 
    
Warrant A
      
Warrant B
  
Expected term - years
    
3.80
      
3.80
  
Stock price on September 30, 2005
  
$
0.13
    
$
0.13
  
Exercise price
  
$
0.18
    
$
0.60
  
Expected dividend yield
    
0
%
    
0
%
Expected stock price volatility
    
490
%
    
490
%
Risk-free interest rate
    
3.80
%
    
3.80
%

The fair value of each warrant was estimated on the date of commitment with the following assumptions:

 
    
Warrant A
      
Warrant B
  
Expected term - years
    
5
      
5
  
Stock price on date of commitment (July 19, 2004)
  
$
0.20
    
$
0.20
  
Exercise price
  
$
0.18
    
$
0.60
  
Expected dividend yield
    
0
%
    
0
%
Expected stock price volatility
    
490
%
    
490
%
Risk-free interest rate
    
3.80
%
    
3.80
%

We recognized a loss of $2,697,922 on the commitment of the warrants determined as follows:

Fair value of warrants on commitment date (July 19, 2004)
  
$
4,375,000
  
Less: Net proceeds received
  
Gross proceeds received for stock and warrants
  
$
1,750,000
          
Par value of common stock issued
    
(21,875
)
        
Stock offering costs
    
(51,047
)
  
$
1,677,078
  
 Loss on fair value adjustment of derivatives
          
$
2,697,922
  

The warrants were valued at $1,531,250 each ($3,062,500 total) using the Black-Scholes valuation method at September 30, 2004 with the following assumptions:

 
    
Warrant A
      
Warrant B
  
Expected term - years
    
4.80
      
4.80
  
Stock price on September 30, 2004
  
$
0.14
    
$
0.14
  
Exercise price
  
$
0.18
    
$
0.60
  
Expected dividend yield
    
0
%
    
0
%
Expected stock price volatility
    
490
%
    
490
%
Risk-free interest rate
    
3.80
%
    
3.80
%

The warrants are revalued at each balance sheet date by using the parameters above, reducing the expected term to reflect the passing of time, and using the stock price at the balance sheet date. Net fair value adjustments of $328,121, $1,385,422, $874,992, and $1,385,422 have been included in other expenses on the consolidated statements of operations for the three and nine months ended September 30, 2005 and 2004, respectively.
 
 
NOTE 4 - INCOME TAXES, (Restated)
 
The provision (benefit) for taxes on net income for the three and nine months ended September 30, 2005 and 2004 consisted of the following:

   
Three months ended September 30
  
Nine months ended September 30
  
     
2005
    
2004
    
2005
    
2004
  
 
Current:
Federal
  
$
---
  
$
---
  
$
---
  
$
---
  
State
    
---
    
784
    
180
    
1,484
  
 
    
 ---
    
784
    
180
    
1,484
  
Deferred:
Federal
    
116,472
 
  
25,001
    
(165,714
)
  
75,003
  
State
    
(4,496
)
  
5,310
    
(21,648
)
  
15,930
  
     
111,976
 
  
30,311
    
(187,362
)
  
90,933
  
Total tax provision (benefit)
   $
111,976
 
$
31,095
   $
(187,182
)
$
92,417
  
 
NOTE 5 - EARNINGS PER COMMON SHARE, (Restated)
 
Earnings per common share are computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding during the year. Common stock equivalents are the net additional number of shares that would be issuable upon the exercise of the outstanding common stock options and warrants, assuming that we reinvested the proceeds to purchase additional shares at market value.
 
The following table shows the amounts used in computing earnings per common share and the effect on income and the average number of shares of dilutive potential common stock:
 
 
    
(Restated) 
    
(Restated)
 
For the Three Months Ended September 30
    
2005
    
2004
  
 
Net loss
   $
(958,392
)
 $ 
(907,303
)
Preferred stock dividends
    
---
    
(4,125
)
Net loss available to common shareholders
   $ 
(958,392
)
 $ 
(911,428
)
               
Basic weighted average shares outstanding
    
48,619,855
    
46,153,189
  
Dilutive effect of:
Stock options
    
---
    
---
  
Convertible notes payable
    
---
    
---
  
Warrants
    
---
    
---
  
Diluted weighted average shares outstanding
    
48,619,855
    
46,153,189
  

 
    
(Restated)
    
(Restated)
 
For the Nine Months Ended September 30
    
2005
    
2004
  
 
Net loss
   $ 
(1,593,229
)
 $
(1,044,573
)
Preferred stock dividends
    
---
    
(4,125
)
Net loss available to common shareholders
   $ 
(1,593,229
)
 $
(1,048,698
)
               
Basic weighted average shares outstanding
    
48,619,855
    
30,146,980
  
Dilutive effect of:
Stock options
    
---
    
---
  
Convertible notes payable
    
---
    
---
  
Warrants
    
---
    
---
  
Diluted weighted average shares outstanding
    
48,619,855
    
30,146,980
  
 
A total of 24,035,000 and 2,440,000 dilutive potential securities for the three and nine months ended September 30, 2005 and 2004, respectively, have been excluded from the computation of diluted earnings per common share, as their inclusion would be anti-dilutive.
  
 
F-10
 
NOTE 6 - COMMITMENTS AND CONTINGENCIES

We are subject to legal proceedings and claims that arise in the ordinary course of our business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect our financial statements taken as a whole.
 
Our employment agreements with our management team each contain a provision for an annual bonus equal to 1% of our net income (3% total). We accrue this bonus on a quarterly basis. Our management team consists of our Chief Executive Officer (with a base annual salary of $150,000), our Chief Financial Officer (with a base annual salary of $110,000), and our Chief Technology Officer (with a base annual salary of $150,000). In addition to the bonus provisions and annual base salary, each employment agreement provides for payment of all accrued base salaries ($8,488 included in Other current liabilities at September 30, 2005), bonuses ($-0- included in Other current liabilities at September 30, 2005), and any vested deferred compensation ($32,044 included in Other current liabilities at September 30, 2005) for termination by reason of disability. The agreements also provide for severance compensation equal to the then base salary until the later of (i) the expiration of the term of the agreement as set forth therein or (ii) one year, when the termination is other than for cause (including termination by reason of disability). There is no severance compensation in the event of voluntary termination or termination for cause.
 
In 2003 and 2004, we reduced our reserve for rebates payable based, in part, on our ability to meet the financial obligation of claims carried forward from our last rebate program in 2001. As such, we may have a legal obligation to pay rebates in excess of the liability recorded.
 
As part of a July 2004 financing transaction, we entered into a certain Registration Rights Agreement with a New York based private investment partnership, Barron Partners, LP, pursuant to which we committed to registering all of the shares issued as part of such transaction, including those issuable under each of two warrants. On November 22, 2004, we filed a registration statement on Form SB-2 covering the shares issued to Barron Partners, as well as the shares underlying the warrants issued to Barron Partners. Under the terms of the Registration Rights Agreement, as amended, we had until April 22, 2005 to cause such registration statement to be declared effective by the SEC. In accordance with the terms of the Registration Rights Agreement, any delays in meeting this obligation subjected us to liability to Barron Partners in an amount equal to $1,726 per day for the duration of any such delay. Through September 30, 2005, we have accrued a total of $278,000 in registration rights penalties, inclusive of an adjustment made pursuant to a tentative verbal agreement reached with Barron Partners in April 2005, for failing to cause the registration statement to be declared effective by the SEC by April 22, 2005. If we are unable to cause such registration statement to be declared effective by December 31, 2005, we will incur total penalties of approximately $437,000 (April 23, 2005 through December 31, 2005), which will directly decrease our net income and possibly cause a net loss for the year then ending.
 
NOTE 7 - RISKS AND UNCERTAINTIES

Our future operating results may be affected by a number of factors. We depend upon a number of major inventory and intellectual property suppliers. If a critical supplier had operational problems or ceased making material available to us, operations could be adversely affected.
 
NOTE 8 - SUBSEQUENT EVENTS
 
As of September 30, 2005, the registration statement filed on November 22, 2004 on Form SB-2 has not yet been declared effective, and we have accrued $278,000 (161 days at $1,726 per day) in penalties under the terms of the Registration Rights Agreement, inclusive of an adjustment made pursuant to a tentative verbal agreement reached with Barron Partners in April 2005, wherein, in relation to the associated accruing penalties, we agreed to pay Barron Partners an amount in cash equal to $100,000 to toll the accrual of further penalties until June 21, 2005. Although this amount has been paid in full, in two equal installments of $50,000 on each of April 22, 2005 and July 8, 2005, penalties in the amount of $1,726 per day continue to accrue from June 21, 2005 until the registration statement is declared effective, at which time a negotiated reduction of such total amount is expected to be reached, the extent of which is as yet unknown, and terms of payment of which are expected to be agreed to so as to allow us to reasonably meet our ongoing operating needs. We have experienced continued delays in effectiveness of the registration statement due principally to ongoing efforts made necessary by our determination to restate certain of our historical financial information. Although there can be no assurance, management is hopeful that we will cause the registration statement to be declared effective in the near future. The amount paid by us to date to satisfy this obligation has, and any continued delays in our ability to cause the registration statement to be declared effective coupled with additional amounts which we are and may be required to pay, will have a material adverse effect on our business, our financial condition, including liquidity and profitability, and our results of operations, including a corresponding reduction in our net income and the likelihood of a net loss for the year.
 
 
F-11
 
NOTE 9 - RESTATEMENT AND RECLASSIFICATION

We have restated our financial statements for the three and nine months ended September 30, 2004 to reflect issues identified during a regulatory review of our financial statements associated with a registration statement filing on Form SB-2 that is pending effectiveness as of the date of this 10-QSB filing.. Management and the board of directors concluded these restatements were necessary to reflect the changes described below. There was no net effect on cash used by operating activities, investing activities or cash provided by financing activities for the period then ending as a result of these issues.
 
 
§
During the quarter ended June 30, 2002, we reached a tentative settlement agreement in our arbitration with TLC. The tentative settlement agreement forgave the final, unpaid installment due on the 1999 Software License Agreement (“SLA”) and extended the SLA term from 10 years to 50 years. We originally recorded the final, unpaid installment ($1,051,785) of the SLA as an offset against the recorded historical cost of the SLA and recalculated the amortization based on this reduced amount and the extension of the useful life to 50 years. Although paragraph 6 of Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations, which guides the recognition and measurement of intangible assets, provides that the measurement of assets in which the consideration given is cash are measured by the amount of cash paid, our management has since concluded that too much time had passed between the date of the 1999 license (June 1999) and the date of the tentative settlement agreement (May 2002) for such an offset to be appropriate. Therefore, we recognized the extinguishment of the liability owed to TLC as income ($1,051,785) in the consolidated statement of operations for the year ended December 31, 2002. We have restated the retained deficit as of December 31, 2003 and there was no net effect on the consolidated statements of operations and consolidated statements of cash flows for the three and nine months ended September 30, 2004 as a result of this correction.  
     
 
§
 During the quarter ended December 31, 2003, we reached a final settlement agreement in our dispute with Zondervan and TLC. This final settlement extended the life of the SLA, and the trademarks included therein, indefinitely. We originally reassessed the useful life of the SLA to be indefinite, based on the guidelines provided by paragraphs 11 and 53 of SFAS No. 142, Goodwill and Other Intangible Assets. Our management has since concluded a 10 year life is appropriate based on our going concern opinion for 2002 and 2003. Therefore, we restored the estimated economic useful life to the original 10 years and have recalculated annual amortization accordingly. This adjustment increased the retained deficit at September 30, 2003 (for the prior years’ amortization and related income tax effects). We have restated the condensed consolidated statements of operations ($251,753) and consolidated statements of cash flows for the three and nine months ended September 30, 2004.
     
 
 §
During the three months ended June 30, 2004, we erroneously included rebates, and adjustments to rebates, in sales and marketing expenses. The more appropriate presentation should have been, and is now, as an adjustment to revenue, in accordance with EITF 01-09, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products).. During the three months ended June 30, 2004, we originally recorded an adjustment to the rebates reserve in the amount of $266,301 and an adjustment to rebates payable in the amount of $12,599. Upon reassessment of the adequacy of our reserve at December 31, 2003, we have allocated $124,262 of the total adjustment to fiscal year 2003 and $142,039 to fiscal year 2004 with $66,575 allocated to the three months ended March 31, 2004 and $75,464 allocated to the three months ended June 30, 2004. These adjustments resulted from a change in our internal control over financial reporting. Previously, when making our assessment of the adequacy of our reserve for rebates, we did not take into consideration the amount and number of outstanding checks, issued checks that were returned as undeliverable, or our ability to meet our recorded financial obligation. We have changed our internal control procedures to include review of each of these factors in our assessment of the adequacy of our reserve for rebates.  
     
 
 
 
 §
During the three months ended March 31, 2004, and as a direct result of the settlement with Zondervan and TLC, we wrote-off obsolete inventory with a carried cost totaling $32,396. We originally recorded this as a non-recurring item in the “Other income (expense)” section of the consolidated statement of operations. Our revised condensed consolidated statement of operations for the three and nine months ended September 30, 2004 reflects this inventory adjustment in Cost of sales. There was no net effect on net income (loss) from this reclassification for the three and nine months ended September 30, 2004. 
     
 
 §
Rebates payable to a third-party processor were overstated ($98,946) on our consolidated financial statements for the year ended December 31, 2000. We discovered the error during the preparation of our condensed consolidated financial statements for the three months ended March 31, 2004. We originally recorded the error correction as an adjustment to the beginning retained earnings of the year ended December 31, 2003 on the 2004 quarterly and annual filings. Our revised consolidated statement of operations for the year ended December 31, 2000 reflects an adjustment to revenue and reported the correction on Form 10-KSB/A for the year then ended. This revision had no net effect on the net loss for the three and nine months ended September 30, 2004 or retained deficit at September 30, 2004 or December 31, 2003. 
     
 
 §
 We erroneously treated the warrants issued to a New York based private investment partnership in connection with a private placement as equity.  The correct presentation is as a liability adjusted for changes in fair value, at each balance sheet date, through the consolidated statements of operations, as provided by EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock.  We reclassified the initial fair value of the warrants ($4,375,000 at July 19, 2004) as a current liability ($2,843,742 at September 30, 2005) and have included the net change in fair value through September 30, 2005 ($874,992) and 2004 ($1,385,422) in Other Expenses on the consolidated statements of operations. 
     
 
 §
We have also reclassified various other expense items in the condensed consolidated statements of operations for the three and nine months ended September 30, 2004 to conform to the presentation in the statements of operations for the year ended December 31, 2004. There was no net effect on net income (loss) from these reclassifications for the three and nine months ended September 30, 2004. 
 
 
 
 
 
 
 
 
 
 
 
 
 
F-13
 
A summary of the effects of these changes is as follows:
 
Findex.com, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2005
(Unaudited)
 
 
 
As Originally Reported
    
As Restated
    
Change
    
Assets
Current assets:
Cash and cash equivalents
        
$
39,838
  
$
39,838
  
$
---
    
Accounts receivable, trade
          
465,383
   
465,383
   
---
   
Inventory
          
211,769
   
211,769
   
---
   
Other current assets
         
308,956
   
308,956
   
---
   
Total current assets
          
1,025,946
   
1,025,946
   
---
   
Property and equipment, net
  
123,653
   
123,653
   
---
   
Software license, net
  
1,888,153
   
1,888,153
   
---
   
Software development, net
  
942,451
   
942,451
   
---
   
Other assets
 
432,124
   
432,124
   
---
   
Total assets
        
$
4,412,327
  
$
4,412,327
  
$
---
    
   
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable, trade
        
$
687,662
  
$
687,662
   $
---
   
Accrued royalties
         
328,345
   
328,345
   
---
   
Derivatives
          
---
   
2,843,742
   
2,843,742
 
(a)
Other current liabilities
          
578,751
   
578,751
   
---
   
Total current liabilities
          
1,594,758
   
4,438,500
   
2,843,742
   
Long-term obligations
  
167,927
   
167,927
   
---
   
Commitments and contingencies
  
Stockholders’ equity:
  
Common stock
          
48,620
   
48,620
   
---
   
Paid-in capital
         
9,198,417
   
7,521,339
   
(1,677,078
)
(b)
Retained (deficit)
          
(6,597,395
)
  
(7,764,059
)
  
(1,166,664
)
  
Total stockholders’ equity
          
2,649,642
   
(194,100
)
  
(2,843,742
)
  
Total liabilities and stockholders’ equity
        
$
4,412,327
  
$
4,412,327
  
$
---
    
 
(a) Fair value of common stock warrants reclassified as derivatives under EITF 00-19.
(b) Reclassification of net proceeds from common stock warrants.

 
Findex.com, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2004
(Unaudited)
 
 
  
As Originally Reported
    
As Restated
    
Change
    
Assets
Current assets:
Cash and cash equivalents
        
$
589,753
  
$
539,399
  
$
(50,354
)
(a)
Accounts receivable, trade
          
296,850
   
296,850
   
---
   
Inventory
          
162,800
   
162,800
   
---
   
Other current assets
         
139,495
   
139,495
   
---
   
Total current assets
          
1,188,898
   
1,138,544
   
(50,354
)
  
Property and equipment, net
  
61,518
   
61,518
   
---
   
Software license, net
  
2,513,158
   
2,391,660
   
(121,498
)
(b)
Software development, net
  
602,276
   
602,276
   
---
   
Other assets
 
86,301
   
136,655
   
50,354
 
(a)
Total assets
        
$
4,452,151
  
$
4,330,653
  
$
(121,498
)
  
   
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable, trade
        
$
410,179
  
$
410,179
  
$
---
   
Accrued royalties
         
236,949
   
236,949
   
---
   
Notes payable
          
240,000
   
240,000
 
 
---
    
Derivatives
          
---
   
3,062,500
   
3,062,500
 
(c)
Other current liabilities
          
445,776
   
445,776
   
---
   
Total current liabilities
          
1,332,904
   
4,395,404
   
3,062,500
   
Non-current deferred taxes
  
1,271,643
   
808,083
   
(463,560
)
(d)
Commitments and contingencies
  
Stockholders’ equity:
  
Common stock
          
46,153
   
46,153
   
---
   
Paid-in capital
         
8,989,778
   
7,260,469
   
(1,729,309
)
(e)
Retained (deficit)
          
(7,188,327
)
  
(8,179,456
)
  
(991,129
)
  
Total stockholders’ equity
          
1,847,604
   
(872,834
)
  
(2,720,438
)
  
Total liabilities and stockholders’ equity
        
$
4,452,151
  
$
4,330,653
  
$
(121,498
)
  
   
(a) Reclassification of restricted cash with merchant banker as non-current asset.
(b) Net change from reclassification of forgiveness of final installment and additional amortization from returning the estimated economic useful life from indefinite to 10 years.
(c) Fair value of common stock warrants reclassified as derivatives under EITF 00-19.
(d) Decrease from recalculation of deferred taxes resulting from changes to software license agreement.
(e) Reclassification of net proceeds from common stock warrants.


Findex.com, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 2005
(Unaudited)
 
 
  
As Originally Reported
    
As Restated
    
Change
    
   
Revenues, net of reserves and allowances
$
3,978,019
  
$
3,978,019
  
$
---
    
Cost of sales
  
1,276,227
   
1,276,227
   
---
   
Gross profit
          
2,701,792
   
2,701,792
   
---
   
Operating expenses:
  
Sales and marketing
          
1,030,870
   
1,030,870
   
---
   
General and administrative
          
1,819,987
   
1,819,987
   
---
   
Bad deb provision
          
29,650
   
29,650
   
---
   
Depreciation and amortization
          
436,903
   
436,903
   
---
   
Total operating expenses
          
3,317,410
   
3,317,410
   
---
   
Loss from operations
  
(615,618
)
  
(615,618
)
  
---
   
Other income
  
75
   
75
   
---
   
Loss on valuation adjustment of derivatives
  
---
   
(874,992
)
  
(874,992
)
(a)
Other expenses, net
  
(289,876
)
  
(289,876
)
  
---
   
Loss before income taxes
          
(905,419
)
  
(1,780,411
)
  
(874,992
)
  
Provision for income taxes
  
187,182
   
187,182
   
---
   
Net loss
        
$
(718,237
)
$
(1,593,229
)
$
(874,992
)
  
 
  
Net loss per share:
  
Basic
        
$
(0.02
)
$
(0.03
)
$
(0.01
)
(b)
Diluted
        
$
(0.02
)
$
(0.03
)
$
(0.01
)
(b)
 
 
Weighted average shares outstanding:
  
Basic
          
48,619,855
   
48,619,855
   
---
   
Diluted
          
48,619,855
   
48,619,855
   
---
   
 
  
(a) Fair value adjustment on common stock warrants treated as derivatives under EITF 00-19.
(b) Decrease from effects of fair value adjustment of derivatives.

 
Findex.com, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2005
(Unaudited)
 
 
  
As Originally Reported
    
As Restated
    
Change
    
   
Revenues, net of reserves and allowances
$
1,023,609
  
$
1,023,609
  
$
---
    
Cost of sales
  
316,449
   
316,449
   
---
   
Gross profit
          
707,160
   
707,160
   
---
   
Operating expenses:
  
Sales and marketing
          
295,902
   
295,902
   
---
   
General and administrative
          
613,191
   
613,191
   
---
   
Bad debt provision
          
6,981
   
6,981
   
---
   
Depreciation and amortization
          
145,355
   
145,355
   
---
   
Total operating expenses
          
1,061,429
   
1,061,429
   
---
   
Loss from operations
  
(354,269
)
  
(354,269
)
  
---
   
Other income
  
75
   
75
   
---
   
Loss on valuation adjustment of derivatives
  
---
   
(328,121
)
  
(328,121
)
(a)
Other expenses, net
  
(164,101
)
  
(164,101
)
  
---
   
Loss before income taxes
          
(518,295
)
  
(846,416
)
  
(328,121
)
  
Provision for income taxes
  
(111,976
)
  
(111,976
)
  
---
   
Net loss
        
$
(630,271
)
$
(958,392
)
$
(328,121
)
  
   
Net loss per share:
  
Basic
        
$
(0.01
)
$
(0.02
)
$
(0.01
)
(b)
Diluted
        
$
(0.01
)
$
(0.02
)
$
(0.01
)
(b)
 
  
Weighted average shares outstanding:
  
Basic
          
48,619,855
   
48,619,855
   
---
   
Diluted
          
48,619,855
   
48,619,855
   
---
   
 
  
(a) Fair value adjustment on common stock warrants treated as derivatives under EITF 00-19.
(b) Decrease from effects of fair value adjustment of derivatives.

 
Findex.com, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 2004
(Unaudited)
 
 
  
As Originally Reported
    
As Restated
    
Change
    
   
Revenues, net of reserves and allowances
$
3,526,492
  
$
3,664,060
  
$
137,568
  
(a)
Cost of sales
  
999,770
   
1,171,661
   
171,891
 
(b)
Gross profit
          
2,526,722
   
2,492,399
   
(34,323
)
  
Operating expenses:
  
Sales and marketing
          
791,249
   
798,410
   
7,161
 
(c)
General and administrative
          
1,801,483
   
1,650,355
   
(151,128
)
(d)
Nonrecurring items
          
186,965
   
---
   
(186,965
)
(e)
Rebate reserve adjustment
          
(266,301
)
  
---
   
266,301
 
(f)
Bad debt provision
          
11,066
   
11,066
   
---
   
Depreciation and amortization
          
38,615
   
416,246
   
377,631
 
(g)
Total operating expenses
          
2,563,077
   
2,876,077
   
313,000
   
Loss from operations
  
(36,355
)
  
(383,678
)
  
(347,323
)
  
Other income
  
9,135
   
1,010,288
   
1,001,153
 
(h)
Loss on valuation adjustment of derivatives
  
---
   
(1,385,422
)
  
(1,385,422
)
(k)
Other expenses, net
  
(38,285
)
  
(193,344
)
  
(155,059
)
(l)
Loss before income taxes
          
(65,505
)
  
(952,156
)
  
(886,651
)
 
Provision for income taxes
  
15,700
   
(92,417
)
  
(108,117
)
(i)
Loss before extraordinary item
          
(49,805
)
  
(1,044,573
)
  
(994,768
)
  
Extraordinary item
  
763,162
   
---
   
(763,162
)
(h)
Net income (loss)
        
$
713,357
  
$
(1,044,573
)
$
(1,757,930
)
  
 
  
Net earnings (loss) per share:
  
Basic
        
$
0.03
  
$
(0.03
)
$
(0.06
)
  
Diluted
        
$
0.02
  
$
(0.03
)
$
(0.05
)
  
 
  
Weighted average shares outstanding:
  
Basic
          
30,146,980
   
30,146,980
   
---
   
Diluted
          
32,880,085
   
30,146,980
   
(2,733,105
)
(j)
 
  
(a) Increase from reclassification of rebate reserve adjustment from Sales and marketing expenses and reclassify cost of estimated returns to Cost of sales.
(b) Increase from reclassification of non-capitalized technical support wages from General and  administrative expenses, reclassification of fulfillment costs from Sales and marketing expenses, reclassification of Inventory write down expense from operating expenses, and reclassification of cost of estimated returns from net revenues.
(c) Increase from reclassification of rebate reserve adjustment to Revenues and reclassification of fulfillment costs to Cost of sales.
(d) Decrease from reclassification of non-capitalized technical support wages to Cost of sales and costs of withdrawn public offering to Other expenses, net.
(e) Decrease from reclassification of inventory write-down to Cost of sales.
(f) Increase from reclassification as an adjustment to revenue.
(g) Increase from effects of additional amortization of the software license agreement.
(h) Reclassification of debt forgiveness as other income from net extraordinary item.
(i) Income tax effects of additional software license amortization.
(j) Decrease due to correction of error in calculation of potentially dilutive common stock warrants.
(k) Fair value adjustment on common stock warrants treated as derivatives under EITF 00-19.
(l) Reclassification of costs of withdrawn public offering from General and administrative.

 
Findex.com, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2004
(Unaudited)
 
 
  
As Originally Reported
    
As Restated
    
Change
    
   
Revenues, net of reserves and allowances
$
1,027,277
  
$
1,010,207
  
$
(17,070
)
(a)
Cost of sales
  
368,979
   
431,592
   
62,613
 
(b)
Gross profit
          
658,298
   
578,615
   
(79,683
)
  
Operating expenses:
  
Sales and marketing
          
294,200
   
287,909
   
(6,291
)
(c)
General and administrative
          
552,177
   
478,781
   
(73,396
)
(d)
Nonrecurring items
          
154,569
   
---
   
(154,569
)
(e)
Bad debt provision
          
8,566
   
8,566
   
---
 
 
Depreciation and amortization
          
15,729
   
141,607
   
125,878
 
(f)
Total operating expenses
          
1,025,241
   
916,863
   
(108,378
)
  
Loss from operations
  
(366,943
)
  
(338,248
)
  
28,695
   
Other income
  
8,019
   
1,010,288
   
1,002,269
 
(g)
Loss on valuation adjustment of derivatives
  
---
   
(1,385,422
)
  
(1,385,422
)
(h)
Other expenses, net
  
(6,651
)
  
(162,826
)
  
(156,175
)
(e)
Loss before income taxes
          
(365,575
)
  
(876,208
)
  
(510,633
)
  
Provision for income taxes
  
18,005
   
(31,095
)
  
(49,100
)
(i)
Loss before extraordinary item
          
(347,570
)
  
(907,303
)
  
(559,733
)
 
Extraordinary item
  
763,162
   
---
   
(763,162
)
(g)
Net income (loss)
        
$
415,592
  
$
(907,303
)
$
(1,322,895
)
  
 
  
Net earnings (loss) per share:
  
Basic
        
$
0.01
  
$
(0.02
)
$
(0.03
)
  
Diluted
        
$
0.01
  
$
(0.02
)
$
(0.03
)
  
 
  
Weighted average shares outstanding:
  
Basic
          
46,153,189
   
46,153,189
   
---
   
Diluted
          
48,886,294
   
46,153,189
   
(2,733,105
)
(j)
 
  
(a) Increase from reclassification of rebate reserve adjustment from Sales and marketing expenses and reclassify cost of estimated returns to Cost of sales.
(b) Increase from reclassification of non-capitalized technical support wages from General and administrative expenses, reclassification of fulfillment costs from Sales and marketing expenses, reclassification of Inventory write down expense from operating expenses, and reclassification of cost of estimated returns from net revenues.
(c) Decrease from reclassification of fulfillment costs to Cost of sales.
(d) Decrease from reclassification of non-capitalized technical support wages to Cost of sales.
(e) Reclassification of expenses incurred in a withdrawn public offering to Other expenses, net.
(f) Increase from effects of additional amortization of the software license agreement.
(g) Reclassification of debt forgiveness as other income from net extraordinary item.
(h) Fair value adjustment on common stock warrants treated as derivatives under EITF 00-19.
(i) Income tax effects of additional software license amortization.
(j) Decrease due to correction of error in calculation of potentially dilutive common stock warrants.

 
Findex.com, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2005
(Unaudited)
 
 
  
As Originally Reported
    
As Restated
    
Change
    
Cash flows from operating activities:
  
Cash received from customers
        
$
4,049,153
  
$
4,049,153
  
$
---
    
Cash paid to suppliers and employees
          
(3,565,309
)
  
(3,565,309
)
  
---
   
Other operating activities, net
          
(3,910
)
  
(3,910
)
  
---
   
Net cash provided by operating activities
          
479,934
   
479,934
   
---
   
Cash flows from investing activities:
        
Software development costs
          
(766,151
)
  
(766,151
)
  
---
   
Other investing activities, net
          
15,300
   
15,300
   
---
   
Net cash (used) by investing activities
          
(750,851
)
  
(750,851
)
  
---
   
Cash flows from financing activities:
        
Payments made on long-term notes payable
          
(30,604
)
  
(30,604
)
  
---
    
Net cash (used) by financing activities
          
(30,604
)
  
(30,604
)
  
---
   
Net (decrease) in cash and cash equivalents
  
(301,521
)
  
(301,521
)
  
---
   
Cash and cash equivalents, beginning of year
  
341,359
   
341,359
   
---
   
Cash and cash equivalents, end of period
        
$
39,838
  
$
39,838
  
$
---
    
 
        
Reconciliation of net loss to cash flows from operating activities:
        
Net loss
        
$
(718,237
)
$
(1,593,229
)
$
($874,992
)
(a)
Adjustments to reconcile net loss to net cash
           
provided (used) by operating activities:
            
Software development costs amortized
          
524,989
   
524,989
   
---
   
Loss on valuation adjustment of derivatives
          
---
   
874,992
   
874,992
 
(a)
Provision for bad debts
          
29,650
   
29,650
   
---
   
Depreciation and amortization
          
436,903
   
436,903
   
---
   
Loss on disposal of property and equipment
          
1,869
   
1,869
   
---
   
Change in assets and liabilities:
            
Decrease in accounts receivable
          
71,786
   
71,786
   
---
   
Decrease in inventories
          
22,231
   
22,231
   
---
   
Decrease in refundable income taxes
          
7,164
   
7,164
   
---
   
Decrease in prepaid expenses
          
55,509
   
55,509
   
---
   
Increase in accrued royalties
          
40,831
   
40,831
   
---
   
Increase in accounts payable
          
65,858
   
65,858
   
---
   
Increase in income taxes payable
          
180
   
180
   
---
   
(Decrease) in deferred taxes
          
(187,362
)
  
(187,362
)
  
---
   
Increase in other liabilities
          
128,563
   
128,563
   
---
   
Net cash provided by operating activities
        
$
479,934
  
$
479,934
  
$
---
    
 
        
(a) Loss increase from fair value adjustment of derivatives.

 
Findex.com, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2004
(Unaudited)
 
 
  
As Originally Reported
    
As Restated
    
Change
    
Cash flows from operating activities:
  
Cash received from customers
        
$
3,607,255
  
$
3,607,255
  
$
---
    
Cash paid to suppliers and employees
          
(4,368,409
)
  
(4,368,409
)
  
---
   
Other operating activities, net
          
(34,235
)
  
(34,235
)
  
---
   
Net cash (used) by operating activities
          
(795,389
)
  
(795,389
)
  
---
   
Cash flows from investing activities:
        
Software development costs
          
(415,197
)
  
(415,197
)
  
---
   
Other investing activities, net
          
(57,152
)
  
(7,152
)
  
50,000
 
(a)
Net cash (used) by investing activities
          
(472,349
)
  
(422,349
)
  
50,000
   
Cash flows from financing activities:
        
Proceeds from (payments on) line of credit, net
          
(20,933
)
  
(20,933
)
  
---
   
Payments made on long-term notes payable
          
(202,551
)
  
(202,551
)
  
---
   
Proceeds from convertible notes payable
          
240,000
   
240,000
   
---
   
Stock offering costs paid
          
(51,047
)
  
(51,047
)
  
---
   
Proceeds from issuance of common stock and warrants
          
1,750,000
   
1,750,000
   
---
   
Net cash provided by financing activities
          
1,715,469
   
1,715,469
   
---
   
Net increase in cash and cash equivalents
  
447,731
   
497,731
   
50,000
   
Cash and cash equivalents, beginning of year
  
142,022
   
41,668
   
(100,354
)
(a)
Cash and cash equivalents, end of period
        
$
589,753
  
$
539,399
  
$
(50,354
)
  
 
        
Reconciliation of net income (loss) to cash flows from operating activities:
        
Net income (loss)
        
$
713,357
  
$
(1,044,573
)
$
(1,757,930
)
  
Adjustments to reconcile net income (loss)to net cash
           
provided (used) by operating activities:
            
Software development costs amortized
          
397,627
   
397,627
   
---
   
Provision for bad debts
          
11,066
   
11,066
   
---
   
Common stock and warrants issued for services
          
73,700
   
73,700
   
---
   
Loss on valuation adjustment of derivatives
          
---
   
1,385,422
   
1,385,422
 
(d)
Rebate reserve adjustment
          
(266,301
)
  
---
   
266,301
 
(c)
Depreciation and amortization
          
38,615
   
416,245
   
377,630
 
(b)
Extraordinary item
          
(1,000,662
)
  
---
   
1,000,662
 
(e)
Debt foregiveness
          
---
   
(1,000,662
)
  
(1,000,662
)
(e)
Loss on disposal of property and equipment
          
141
   
141
   
---
   
Change in assets and liabilities:
            
Decrease in accounts receivable
          
57,887
   
57,887
   
---
   
Decrease in inventories
          
109,800
   
109,800
   
---
   
(Increase) in refundable income taxes payable
          
(2,948
)
  
(2,948
)
  
---
   
(Increase) in prepaid expenses
          
(114,629
)
  
(114,629
)
  
---
   
(Decrease) in accrued royalties
          
(381,677
)
  
(381,677
)
  
---
   
(Decrease) in accounts payable
          
(407,683
)
  
(407,683
)
  
---
   
(Decrease) in income taxes payable
          
(950
)
  
(950
)
  
---
    
Increase in deferred taxes
          
220,316
   
90,931
   
(129,385
)
(f)
(Decrease) in other liabilities
          
(243,048
)
  
(385,086
)
  
(142,038
)
(c)
Net cash used by operating activities
        
$
(795,389
)
$
(795,389
)
$
---
    
 
        
(a) Reclassification of restricted cash held by merchant banker as other asset.
(b) Increase from additional software license amortization.
(c) Reclassification of Rebate reserve adjustment as decrease in other liabilities.
(d) Fair value adjustment on common stock warrants treated as derivatives under EITF 00-19.
(e) Reclassify extraordinary item as debt forgiveness.
(f) Net income tax effects of additional software amortization.
 
 
F-21
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

Cautionary Statement Regarding Forward-Looking Statements
 
This Form 10-QSB, press releases and certain information provided periodically in writing or orally by our officers or our agents contain statements which constitute forward-looking statements. The words “may”, “would”, “could”, “will”, “expect”, “estimate”, “anticipate”, “believe”, “intend”, “plan”, “goal” and similar expressions and variations thereof are intended to specifically identify forward-looking statements. These statements appear in a number of places in this Form 10-QSB and include all statements that are not statements of historical fact regarding the intent, belief or current expectations of us, our directors or our officers, with respect to, among other things (i) our liquidity and capital resources, (ii) our financing opportunities and plans, (iii) our ability to attract customers to generate revenues, (iv) market and other trends affecting our future financial condition or results of operations, (v) our growth strategy and operating strategy, and (vi) the declaration and/or payment of dividends.

Investors and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. The factors that might cause such differences include, among others, those set forth in Part I, Item 2 of this quarterly report on Form 10-QSB, entitled Management’s Discussion and Analysis or Plan of Operation, including without limitation the risk factors contained in the company’s annual report on Form 10-KSB/A for the period ending December 31, 2004. Except as required by law, we undertake no obligation to update any of the forward-looking statements in this Form 10-QSB after the date of this report.
 
This information should be read in conjunction with the financial statements and the notes thereto included in Item 1 of Part I of this Quarterly Report and the audited financial statements and notes thereto and Management’s Discussion and Analysis or Plan of Operation contained in the company’s Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 2004.

MANAGEMENT OVERVIEW
 
During the third quarter of 2005, we released an upgrade to our flagship product, QuickVerse®, which was three months earlier compared to our upgrade release of QuickVerse® in 2004. Furthermore, this is the first upgrade release of QuickVerse® in over five years that will be in the retail stores before the Holiday season begins. QuickVerse® 2006 is currently available in five editions, QuickVerse® 2006 Essentials, QuickVerse® 2006 Standard, QuickVerse® 2006 Expanded, QuickVerse® 2006 Deluxe and QuickVerse® 2006 Platinum. We believe that the unique features of the new QuickVerse®2006 editions will provide us with an opportunity to broaden our customer base as our products appeal not only to those just beginning their journey into Bible study but also to the scholars who are searching for an in-depth knowledge of the Bible. The QuickVerse® 2006 editions range in retail price from $49.95 to $799.95. In addition, during the second quarter of 2005 and for the first time in our operating history, we introduced QuickVerse® to the Macintosh® Operating System platform. QuickVerse®Macintosh is available in two new editions, QuickVerse® Macintosh Black which has a suggested retail price of $99.95 and QuickVerse®Macintosh White which has a suggested retail price of $49.95. We believe we are now the only publisher of Bible reference software for each of the Windows®, Macintosh®, PocketPC® and Palm® OS platforms. We also released an updated version of Bible Illustrator® 3.0 titled Sermon Builder® 4.0 during the second quarter of 2005. Sermon Builder® 4.0 was the first update to this particular program in over six years and has a suggested retail price of $69.95. Sermon Builder® 4.0 is ideal for pastors and teachers who want to create punctuated sermons, comprehensive lessons, and in-depth Bible studies. Furthermore, during the first quarter of 2005, and for the second consecutive year, we released an upgrade to our top-selling financial and data management software, Membership Plus®, and introduced two new QuickVerse® editions, QuickVerse® 2005 Essentials and QuickVerse® 2005 Platinum. As a result of these releases, our third quarter 2005 revenues were higher than those during the third quarter of 2004. Although there can be no assurance, we believe that we can sustain our revenue growth through the fourth quarter based upon our development schedule which includes an update to our QuickVerse® PDA software.
 
 
-1-
 
Results Of Operations for Quarters Ending September 30, 2005 and September 30, 2004

Statement of Operations for Nine Months Ended September 30
    
2005
      
2004
      
Change
 
  
%
  
Net revenues
  
$
3,978,019
    
$
3,664,060
    
$
313,959
    
9
%
Cost of sales
  
$
1,276,227
    
$
1,171,661
    
$
104,566
    
9
%
Gross profit
  
$
2,701,792
    
$
2,492,399
    
$
209,393
    
8
%
Total operating expenses
  
$
(3,317,410
)
  
$
(2,876,077
)
  
$
(441,333
)
  
15
%
Other income
  
$
75
    
$
1,010,288
    
$
(1,010,213
)
  
-100
%
Loss on valuation adjustment of derivatives
  
$
(874,992
)
  
$
(1,385,422
)
  
$
510,430
    
-37
%
Other expenses
  
$
(289,876
)
  
$
(193,344
)
  
$
(96,532
)
  
50
%
Loss before income taxes
  
$
(1,780,411
)
  
$
(952,156
)
  
$
(828,255
)
  
87
%
Provision for income taxes
  
$
187,182
    
$
(92,417
)
  
$
279,599
    
-303
%
Net loss
  
$
(1,593,229
)
  
$
(1,044,573
)
  
$
(548,656
)
  
53
%
 
Our software products are highly seasonal. More than 50% of our annual sales are expected to occur in the five months of September through January; the five months of April through August are generally our weakest, generating only about 29% of our annual sales.
 
For the nine months ended September 30, 2004, we wrote down the reserve for rebates payable from a change in accounting estimate of approximately $142,000 and wrote down actual rebates payable of approximately $61,000 due to an overstatement. Both of these write down items are recognized as an adjustment to revenue. We also wrote down a distinct category of obsolete inventory of approximately $32,000 which is included in cost of sales, and incurred an expense of approximately $155,000 related to a settlement with an institutional private equity investor which is included in other expenses. Furthermore, for the nine months ended September 30, 2004, we recognized approximately a $1,000,000 gain from extinguishment of debt which is classified as other income. The extinguishment of debt is a direct result of our settling with various vendors and content providers for lump-sum payments at a reduced amount of balances owed. We recognized a loss of approximately $1,385,000 for the nine months ended September 30, 2004 and a loss of approximately $875,000 for the nine months ended September 30, 2005 related to the fair value adjustment of derivatives in other expenses. Warrants issued with shares of common stock in a private placement are considered derivative liabilities. The derivative liability associated with the warrants has been adjusted to fair value at each balance sheet date and is accordingly reassessed at each such time to determine whether the warrants should be classified (or reclassified, as appropriate) as a liability or as equity. See “Derivatives” below. For the nine months ended September 30, 2005, we incurred penalties of approximately $278,000 in connection with a certain Registration Rights Agreement entered into with Barron Partners, LP and our registration statement on Form SB-2 originally filed on November 22, 2004, and which, as of the date of this filing, has yet to be declared effective. These penalties are included in other expenses. Furthermore, due to the continued delays in effectiveness of such registration statement, due principally to ongoing efforts made necessary by our determination to restate certain of our historical financial information, we have experienced an increase in legal expenses of approximately $136,000 for the nine months ended September 30, 2005 compared to the nine months ended September 30, 2004. Due mainly to the items stated above, our net loss increased approximately $51,000 from a net loss of approximately $907,000 for the three months ended September 30, 2004 to a net loss of approximately $958,000 for the three months ended September 30, 2005 and increased approximately $548,000 from a net loss of approximately $1,045,000 for the nine months ended September 30, 2004 to a net loss of approximately $1,593,000 for the nine months ended September 30, 2005.
 
Revenues
 
We derive revenues from the sale of packaged software products, product support and multiple element arrangements that may include any combination of these items. Revenue is recognized when persuasive evidence of an arrangement exists (generally a purchase order), we have delivered the product, the fee is fixed or determinable and collectibility is probable. For our packaged software products, we typically recognize revenue from the sale when we ship the product. We sell some of our products on consignment to a limited number of resellers. We recognize revenue for these consignment transactions only when the end-user sale has occurred. Service revenue resulting from technical support plans is recognized over the life of the plan which is generally one year. Revenue associated with advance payments from our customers is deferred until we ship the product or offer the support service. Revenue for software distributed electronically via the Internet is recognized when the customer has been provided with the access codes that allow the customer to take immediate possession of the software on its hardware and evidence of the arrangement exists. For revenue arrangements involving multiple elements and include software products, we allocate and defer revenue for the undelivered elements based on their vendor-specific objective evidence of fair value, which is generally the price charged when that element is sold separately.
 
We reduce product revenue for estimated returns and price protections that are based on historical experience and other factors such as the volume and price mix of products in the retail channel, trends in retailer inventory and economic trends that might impact customer demand for our products. Estimated returns are also based upon a percentage of total retail and direct sales. Direct sales accounted for approximately 65% of our 2004 fiscal year revenue. We account for cash considerations (such as sales incentives - rebates and coupons) that we give our customers as a reduction of revenue rather than as an operating expense. Product revenue is also reduced for the estimated redemption of end-user rebates on certain current product sales. We did not have any rebate programs during the three and nine months ended September 30, 2004 and 2005, respectively.

Trends that our returns typically follow include (i) the seasonality of sales, and (ii) the fact that, generally, relatively higher return rates occur during periods of new title or title version releases. Historically, actual returns have been within management’s prior estimates, however, we cannot be certain that any future write-offs exceeding reserves will not occur or that amounts written off will not have a material adverse effect on our business, our financial condition, including liquidity and profitability, and our results of operations. Management continually monitors and adjusts these allowances to take into account actual developments and sales results in the marketplace. In the past, particularly during title and title version transitions, we have had to increase price concessions to our retail customers.

Product returns from distributors and Christian bookstores are allowed primarily in exchange for new products or for credit towards purchases as part of a stock-balancing program. These returns are subject to certain limitations that may exist in the contract. Under certain circumstances, such as termination or when a product is defective, distributors and bookstores could receive a cash refund if returns exceed amounts owed. Returns from sales made directly to the consumer are accepted within 45 days of purchase and are issued a cash refund. Product returns or price protection concessions that exceed our reserves could materially adversely affect our business and operating results and could increase the magnitude of quarterly fluctuations in our operating and financial results. We did implement a price protection program within the third quarter of 2005 on our QuickVerse® 2005 titles within the Christian Booksellers Association retail channel due to our updated release of QuickVerse® 2006. QuickVerse® 2006 was released in late September 2005, and we believe we reserved appropriately for the price protections.

Software products are sold separately, without future performance such as upgrades enhancements or additional software products, and are sold with post contract customer support services such as customer service and technical support assistance. In connection with the sale of certain products, we provide a limited amount of free technical support assistance to our customers. We do not defer the recognition of any revenue associated with sales of these products, since the cost of providing this free technical support is insignificant. The technical support is provided within one year after the associated revenue is recognized and free product enhancements (bug fixes) are minimal and infrequent. We accrue the estimated cost of providing this free support upon product shipment and include it in cost of sales.

 
Shipping and handling costs in connection with our software products are expensed as incurred and included in cost of sales.
 
Revenues for Three Months Ended September 30
    
2005
    
% to Sales
      
2004
    
% to Sales
      
Change
 
  
%
  
Gross sales
  
$
1,233,389
    
100
%
  
$
1,125,275
    
100
%
  
$
108,114
    
10
%
Add rebate adjustment
    
4,910
   
---
%
    
---
   
---
%
    
4,910
   
---
%
Less reserve for sales returns and allowances
    
(214,691
)
  
-17
%
    
(115,068
)
  
-10
%
    
(99,623
)
  
87
%
Net sales
  
$
1,023,609
    
83
%
  
$
1,010,207
    
90
%
  
$
13,401
    
1
%
 
Revenues for Nine Months Ended September 30
    
2005
    
% to Sales
      
2004
    
% to Sales
      
Change
 
  
%
  
Gross sales
  
$
4,744,759
    
100
%
  
$
3,898,250
    
100
%
  
$
846,510
    
22
%
Add rebate adjustment
    
14,730
   
---
%
    
202,548
   
5
%
    
(187,817
)
  
-93
%
Less reserve for sales returns and allowances
    
(781,471
)
  
-16
%
    
(436,737
)
  
-11
%
    
(344,733
)
  
79
%
Net sales
  
$
3,978,019
    
84
%
  
$
3,664,060
    
94
%
  
$
313,959
    
8
%
 
Gross revenues increased approximately $108,000 from approximately $1,125,000 for the three months ended September 30, 2004 to approximately $1,233,000 for the three months ended September 30, 2005 and increased approximately $847,000 from approximately $3,898,000 for the nine months ended September 30, 2004 to approximately $4,745,000 for the nine months ended September 30, 2005. Such increase is due to our releases during the nine months ended September 30, 2005 including an enhanced version of our top financial and data management product, Membership Plus®, an enhanced version of QuickVerse® 2005 Essentials and QuickVerse® 2005 Platinum edition during the first quarter of 2005. During the second quarter of 2005, we introduced QuickVerse® Macintosh in two editions, White Box edition at the retail price of $49.95 and Black Box edition at the retail price of $99.95. This was our first product release on the Macintosh® Operating System platform. We also released an enhanced version of Bible Illustrator® 3.0 titled Sermon Builder® 4.0 during the second quarter of 2005. This was the first update to this program in over six years and retails for $69.95. During the third quarter of 2005, we released an upgrade to our flagship product, QuickVerse®, three months earlier compared to our upgrade release of QuickVerse® in 2004. QuickVerse® 2006 is the first upgrade release in over five years that will be in the retail stores prior to the beginning of the Holiday season. The five QuickVerse® 2006 editions that are currently available are QuickVerse® 2006 Essentials, QuickVerse® 2006 Standard, QuickVerse® 2006 Expanded, QuickVerse® 2006 Deluxe and QuickVerse® 2006 Platinum, and they range in retail price from $49.95 to $799.95. Comparatively, during the nine months ended September 30, 2004, we had only two product releases which included Membership Plus® 8.0 with a retail price of $199.95 to $299.95 and QuickVerse® 2005 PDA with a retail price of $14.95 to $39.95. We anticipate that revenues will continue to increase throughout the year as the QuickVerse® 2006 editions reach the retail stores in time for the Holiday season and we will be releasing an update to our QuickVerse® PDA software within the fourth quarter of 2005.
 
Sales returns and allowances increased approximately $100,000 from approximately $115,000 for the three months ended September 30, 2004 to approximately $215,000 for the three months ended September 30, 2005 and increased approximately $345,000 from approximately $437,000 for the nine months ended September 30, 2004 to approximately $782,000 for the nine months ended September 30, 2005. As a percentage of gross sales, sales returns and allowances increased from approximately 10% for the three months ended September 30, 2004 to approximately 17% for the three months ended September 30, 2005 and increased from approximately 11% for the nine months ended September 30, 2004 to approximately 16% for the nine months ended September 30, 2005. The upward trend in sales returns and allowances as a percentage is attributable to our release of enhanced versions of QuickVerse® in December 2004 and late September 2005 and Membership Plus® in February of 2005. The release of these enhanced products resulted in an increased quantity of sales returns and allowances, such as price protections, of prior versions as the enhancements for both of these titles are approximately one year. In the past, product enhancements were typically extended over two to three years. We have also increased our reserve for sales returns due to a higher price point in connection with QuickVerse® Platinum being released in the first quarter of 2005. Furthermore, due to the resignation of the primary developer of Membership Plus® and some unresolved maintenance issues, we have experienced higher actual returns on the Membership Plus® 2005 product line. However, we are currently utilizing both domestic and international contracted developers to not only resolve the maintenance issues but to also continue the development for our annual update on the Membership Plus® program. We are on track to continue to release enhanced versions of our products on an annual basis; however, we do anticipate the sales return and allowances as a percentage to follow a downward trend in the future due to the increased focus of our sales efforts to the end-user and our decreased presence in the retail market. Incidents of return are lower for sales direct to the end-user than sales into the retail stores.
 
 
-4-
 
Cost of Sales
 
Cost of sales consists primarily of royalties to third party providers of intellectual property and the direct costs and manufacturing overhead required to reproduce, package, fulfill and ship the software products. Direct costs and manufacturing overhead also include the amortized software development costs and the non-capitalized technical support wages. The direct costs and manufacturing overhead decreased approximately $21,000 from approximately $274,000 for the three months ended September 30, 2004 to approximately $253,000 for the three months ended September 30, 2005 and increased approximately $77,000 from approximately $899,000 for the nine months ended September 30, 2004 to approximately $976,000 for the nine months ended September 30, 2005. As a percentage of gross revenues, the direct costs and manufacturing overhead decreased approximately 4% for the three months ended September 30, 2005 and decreased approximately 2.5% for the nine months ended September 30, 2005. The nine months ended September 30, 2004 include the write down of a distinct category of obsolete inventory of approximately $32,000. Fulfillment costs from a third-party warehouse and included in the manufacturing overhead costs noted above decreased approximately $8,000 from approximately $53,000 for the nine months ended September 30, 2004 to approximately $45,000 for the nine months ended September 30, 2005 as we moved our retail fulfillment to a new outside entity in late October 2004. The decrease in the percentage of cost of sales reflects the continual software development cycle of enhancing our two major product lines within a one year timeframe and the increased amortization of those software development costs. The amortization recognized during the nine months ended September 30, 2004 resulted from several new software releases in late 2003 and early 2004 including QuickVerse® 8.0 and Membership Plus® 8.0. Similarly, the amortization recognized during the nine months ended September 30, 2005 resulted from the December 2004 release of QuickVerse® 2005, the February 2005 release of Membership Plus® 2005, the June 2005 releases of QuickVerse® Macintosh and Sermon Builder® 4.0, the late September 2005 release of QuickVerse® 2006 and the remainder of QuickVerse® 8.0 and Membership Plus® 8.0. The direct costs and manufacturing overhead percentage are expected to continue at the 2005 levels as working capital remains more consistent and as more development projects are implemented in a shortened timeframe.
 
Royalties to third party providers of intellectual property decreased approximately $94,000 from approximately $158,000 for the three months ended September 30, 2004 to approximately $64,000 for the three months ended September 30, 2005 and increased approximately $27,000 from approximately $273,000 for the nine months ended September 30, 2004 to approximately $300,000 for the nine months ended September 30, 2005. As a percentage of gross revenues, royalties decreased from approximately 14% for the three months ended September 30, 2004 to approximately 5% for the three months ended September 30, 2005 and slightly decreased from approximately 7% for the nine months ended September 30, 2004 to approximately 6.3% for the nine months ended September 30, 2005. The decrease of royalties for the three months ended September 30, 2004 and 2005 reflects the sale of some of the older QuickVerse® versions to liquidators at a reduced price in 2004 compared to no sales to liquidators during the same three month period in 2005. However, the overall steady percentage for the nine months ended September 30, 2004 and 2005 reflects the release of the QuickVerse® 2005 editions in early December 2004, and the three additional QuickVerse® editions, specifically QuickVerse® Essentials and QuickVerse® Platinum, which were released in early March of 2005 and QuickVerse® Macintosh which was released in June 2005. We also released Sermon Builder® 4.0 in June 2005 which was an update to Bible Illustrator® 3.0. This was the first update to Bible Illustrator® 3.0 in over six years and included not only technological updates but content additions. During the year ended 2004, we renegotiated several royalty contracts which resulted in some cases in a higher royalty rate along with access to more content. The royalty rate for the fourth quarter of 2005 is expected to increase as the QuickVerse® 2006 retail products began to ship in early October 2005 compared to the QuickVerse® 2005 retail products shipping in December 2004. In addition, the royalty rate as a percentage of gross sales is expected to increase in the future as sales to new users are expected to increase and as more development projects are implemented for new and/or enhanced products. However, upgrade sales will continue to be subject to royalties only on content additions of the upgraded version.

 
Software development costs are expensed as incurred until technological feasibility and marketability has been established, at which time development costs are capitalized until the software title is available for general release to customers. Development costs include direct production costs (including labor directly associated with the development projects), indirect costs (including allocated fringe benefits, payroll taxes, facilities costs and management supervision), and other direct costs (including costs of outside consultants, purchased software to be included in the software product being developed, travel expenses, material and supplies, and other direct costs). Software development is segregated by title and technology platform. Once a product has been successfully released, subsequent revisions and upgrades are considered development and the costs of the revision and upgrade are capitalized. Capitalized costs are amortized on a product-by-product basis using the greater of (i) the straight-line amortization over the estimated life of the product (generally from 12 to 18 months), or (ii) the ratio of current revenues from the product to the total projected revenue over the life of the product. Generally, we consider technological feasibility to have been established with the release of a beta version for testing.
 
Software development costs are summarized in the table below. The software development costs, consisting primarily of direct and indirect labor and related overhead charges, capitalized during the three months ended September 30, 2004 and 2005 were approximately $237,000 and approximately $172,000, respectively and approximately $415,000 and $766,000 for the nine months ended September 30, 2004 and 2005, respectively. Accumulated amortization of these development costs included in cost of sales totaled approximately $139,000 and approximately $161,000 for the three months ended September 30, 2004 and 2005, respectively and approximately $398,000 and $525,000 for the nine months ended September 30, 2004 and 2005, respectively. The overall increase in both the capitalization and amortization is a direct result of the increase in the number of development projects we have undertaken in the last two years and the consistent one year turn around on enhanced versions of our two major product lines QuickVerse® and Membership Plus®.
 
 
  
Three Months Ended September 30,
Nine Months Ended September 30,
     
2005
    
2004
    
2005
    
2004
  
Beginning balance
  
$
931,103
  
$
504,497
  
$
701,289
  
$
584,706
  
Capitalized
    
171,990
    
237,148
    
766,151
    
415,196
  
Amortized (Cost of sales)
    
160,642
    
139,369
    
524,989
    
397,626
  
Ending Balance
  
$
942,451
  
$
602,276
  
$
942,451
  
$
602,276
  
Research and development expense (General and administrative)
  
$
63,164
  
$
532
  
$
130,407
  
$
44,228
  
 
Sales, General and Administrative

Sales, General and Administrative Costs for Nine Months Ended September 30
    
2005
    
% to Sales
      
2004
    
% to Sales
      
Change
 
  
%
  
Selected expenses:
    
Commissions
  
$
611,653
    
13
%
  
$
576,482
    
15
%
  
$
35,171
    
6
%
Advertising and direct marketing
    
419,217
   
9
%
    
221,928
   
6
%
    
197,288
   
89
%
Total sales and marketing
  
$
1,030,870
   
22
%
  
$
798,410
   
20
%
  
$
232,459
   
29
%
Research and development
  
$
130,407
   
3
%
  
$
44,228
   
1
%
  
$
86,180
   
195
%
Personnel costs
    
973,620
   
21
%
    
946,222
   
24
%
    
27,398
   
3
%
Legal
    
157,970
   
3
%
    
21,742
   
1
%
    
136,228
   
627
%
Telecommunications
    
42,605
   
1
%
    
107,720
   
3
%
    
(65,115
)
  
-60
%
Corporate services
    
73,972
   
2
%
    
53,965
   
1
%
    
20,007
   
37
%
Administration
    
13,263
   
0
%
    
101,756
   
3
%
    
(88,493
)
  
-87
%
Other general and administrative costs
    
428,150
   
9
%
    
374,723
   
10
%
    
53,427
   
14
%
Total general and administrative
  
$
1,819,987
   
38
%
  
$
1,650,355
   
42
%
  
$
169,632
   
10
%
 
 
Gross revenues increased approximately $108,000 from approximately $1,125,000 for the three months ended September 30, 2004 to approximately $1,233,000 for the three months ended September 30, 2005 and increased approximately $847,000 from approximately $3,898,000 for the nine months ended September 30, 2004 to approximately $4,745,000 for the nine months ended September 30, 2005. However, sales and marketing expenses also increased approximately $8,000 from approximately $288,000 for the three months ended September 30, 2004 to approximately $296,000 for the three months ended September 30, 2005 and increased approximately $233,000 from approximately $798,000 for the nine months ended September 30, 2004 to approximately $1,031,000 for the nine months ended September 30, 2005. Included in sales expenses, commissions to a third-party telemarketing firm increased approximately $35,000 from approximately $577,000 for the nine months ended September 30, 2004 to approximately $612,000 for the nine months ended September 30, 2005. This increase is attributed to the increased focus of our sales to the direct consumer along with the number of new and enhanced product releases during the nine months ended September 30, 2005 compared with two product releases during the nine months ended September 30, 2004. However, as a percentage of gross revenues commissions decreased from approximately 15% to approximately 13% for the nine months ended September 30, 2004 and 2005, respectively. This decrease is attributed to the in-house development of our direct telemarketing sales team as we attempt to reduce the reliance on the third-party telemarketing firm. Advertising and direct marketing costs increased approximately $197,000 from approximately $222,000 for the nine months ended September 30, 2004 to approximately $419,000 for the nine months ended September 30, 2005 and increased as a percentage of gross revenues from approximately 6% to approximately 9%, respectively. This increase is a direct result in continuing to market our products online through multiple sources, continuing to increase and focus more on our direct marketing efforts, and the increased number of publication advertisements due to the new product enhancements of QuickVerse® 2006 and Membership Plus® 2005 along with the introduction of the three new QuickVerse® editions (QuickVerse® Platinum, Macintosh and Essentials) and the updated Sermon Builder® 4.0 during the nine months ended September 30, 2005.
 
Research and development costs include direct production costs (including labor directly associated with the development projects), indirect costs (including allocated fringe benefits, payroll taxes, facilities costs and management supervision), and other direct costs (including costs of outside consultants, purchased software to be included in the software product being developed, travel expenses, material and supplies, and other direct costs). Software development costs related to third-party developers and direct labor expensed as research and development (see table above) amounted to approximately $500 for the three months ended September 30, 2004 compared to approximately $63,000 incurred for the three months ended September 30, 2005 and approximately $44,000 for the nine months ended September 30, 2004 compared to approximately $130,000 for the nine months ended September 30, 2005. The increase in 2005 reflects more research and development costs associated with maintenance issues on titles after they are released to the general public along with exploring new platforms for future products. Research and development expenses are expected to increase in future periods as we add new products and versions to our product mix along with new platforms for our current and future products.

Total personnel costs increased approximately $27,000 from approximately $946,000 for the nine months ended September 30, 2004 to approximately $973,000 for the nine months ended September 30, 2005. However, direct salaries and wages increased approximately $115,000 from approximately $1,083,000 for the nine months ended September 30, 2004 to approximately $1,198,000 for the nine months ended September 30, 2005. As a percentage of gross revenues, direct salaries and wages decreased approximately 2.5% from approximately 27.8% for the nine months ended September 30, 2004 to approximately 25.3% for the nine months ended September 30, 2005. The direct salaries and wages include approximately $36,000 and $-0- in expense for upper management year-end bonus accrual for the year ends December 31, 2004 and 2005, respectively. Furthermore, we recognized approximately $14,000 of expense related to 635,000 restricted common shares issued to employees during the nine months ended September 30, 2004. The increase in direct salaries and wages is a direct result of increasing our sales and marketing team, our development staff and our direct telemarketing sales team. The associated health care costs decreased approximately $16,000 from approximately $121,000 for the nine months ended September 30, 2004 to approximately $105,000 for the nine months ended September 30, 2005 as we restructured our health benefits plans in late October 2004. The capitalization of direct and indirect labor and related overhead charges as software development costs (see “Cost of Sales” above) increased by approximately $155,000 from approximately $206,000 for the nine months ended September 30, 2004 to approximately $361,000 for the nine months ended September 30, 2005. This increase is due to the addition of development staff and the increased amount of new development projects. It is anticipated that personnel costs will increase in future periods as operating capital is available to fund full staffing of our product development team and expansion of the direct sales staff.
 
 
Direct legal costs increased approximately $136,000 for the nine months ended September 30, 2005 as the company continues to work through the registration process for the SB-2 registration statement. It is anticipated that legal costs will continue at increased levels as we pursue our business plan for growth by acquiring companies that are synergistic with our current product line and customer base. Telecommunications costs decreased approximately $65,000 for the nine months ended September 30, 2005 as we switched our local and long distance carriers in order to take advantage of the provider’s current technology. Our increased call volume enabled us to change our service to dedicated T-1 lines which in turn reduced the long distance charges. Furthermore, we invested in internet protocol phones for our remote locations which reduced the overall local and long distance charges in our Illinois and Iowa locations. The increased call volume in the technical support and customer service departments resulted from the release of the two major product upgrades in December 2004 and February 2005 along with the three new product releases during the nine months ended September 30, 2005. Corporate service fees increased approximately $20,000 for the nine months ended September 30, 2005. These fees are related to the hiring of an outside consultant and the expense for a 2004 issuance of a warrant to purchase 600,000 shares of common stock allocated over the term of the consulting contract. Administration expenses decreased approximately $88,000 for the nine months ended September 30, 2005 due to not incurring interest and penalty fees on back payroll taxes as we did during the nine months ended September 30, 2004. Finally, bad debt expense increased approximately $19,000 for the nine months ended September 30, 2005 as we were notified by one of our liquidation customers of the possibility that they will not be able to pay on their full balance due to us.
 
Other Income and Expenses
 
During the quarter ended September 30, 2004, we recognized an approximately $1,000,000 gain from extinguishment of debt which is included in other income. The extinguishment of debt is a direct result from one-time settlement arrangements with various vendors and content providers for lump-sum payments ranging from approximately 17% to approximately 60% of balances owed at the time. Vendors who were offered the settlement had previously provided services and/or goods to us, and the content providers were owed royalties from us. We do not anticipate this to be a recurring event in the future.

Furthermore during the quarter ended September 30, 2004, we incurred approximately $155,000 in expenses related to a settlement agreement with Swartz Private Equity, an institutional private equity investor, for early termination of the agreement. As part of a settlement agreement, we issued 295,692 shares of common stock and paid a cash lump sum of $125,000. The shares were valued at $0.10 per share. This has been included in other expenses.
 
On July 19, 2004, we completed an equity financing in the amount of $1,750,000 through a private placement with Barron Partners, LP where Barron Partners purchased 21,875,000 restricted shares of common stock and received two warrants to purchase up to an additional 21,875,000 shares of common stock. As part of the financing transaction, we also entered into a certain Registration Rights Agreement with Barron Partners pursuant to which we became committed to registering all of the shares issued as part of such transaction, including those issuable under the warrants.

Upon receipt of the requisite stockholder approval to increase the number of authorized common shares so as to allow us to deliver the warrants, effectively obtained and effectuated as of November 10, 2004, we had 30 days within which to file a registration statement on Form SB-2 covering the shares issued to Barron Partners, as well as the shares underlying the warrants issued to Barron Partners. Such registration statement was filed on November 22, 2004. In accordance with the terms of the Registration Rights Agreement, as amended, we had another 150 days, until April 22, 2005, to cause such registration statement to be declared effective by the SEC, with any delays in meeting this obligation resulting in our being liable to Barron Partners in an amount equal to $630,000 per year, pro-rated for the duration of any such delay, which amounts to $1,726 per day.  

 
As of September 30, 2005, we had accrued a total of $278,000 (161 days at $1,726 per day) in penalties under the terms of the Registration Agreement, inclusive of an adjustment made pursuant to a tentative verbal agreement reached with Barron Partners in April 2005, wherein, in relation to the associated accruing penalties, we agreed to pay Barron Partners an amount in cash equal to $100,000 to toll the accrual of further penalties until June 21, 2005. Although this amount has been paid in full, in two equal installments of $50,000 on each of April 22, 2005 and July 8, 2005, penalties in the amount of $1,726 per day continue to accrue from June 21, 2005 until the registration statement is declared effective, at which time a negotiated reduction of such total amount is expected to be reached, the extent of which is as yet unknown, and terms of payment of which are expected to be agreed to so as to allow us to reasonably meet our ongoing operating needs. The penalties have been included in other expenses. We have experienced continued delays in effectiveness of the registration statement due principally to ongoing efforts made necessary by our determination to restate certain of our historical financial information. Although there can be no assurance, management is hopeful that we will cause such registration statement to be declared effective in the near future. The amount paid by us to date to satisfy this obligation has, and any continued delays in our ability to cause the registration statement to be declared effective coupled with additional amounts which we are and may be required to pay, will have a material adverse effect on our business, our financial condition, including liquidity and profitability, and our results of operations, including a corresponding reduction in our net income and the likelihood of a net loss for the year. 
 
Derivatives
 
In November 2004, we issued two warrants to purchase an aggregate of 21,875,000 shares of our common stock in connection with a certain Stock Purchase Agreement completed with Barron Partners, LP, on July 19, 2004. The first warrant entitles the holder to purchase up to 10,937,500 shares of our common stock at a price of $0.18 per share, and the second warrant entitles the holder to purchase up to 10,937,500 additional shares of our common stock at a price of $0.60 per share. Each warrant is subject to standard adjustment provisions and each provides for settlement in registered shares of our common stock and may, at the option of the holder, be settled in a cashless, net-share settlement. These warrants have been accounted for as a liability according to the guidance of EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. In accordance with accounting mandate, the derivative liability associated with these warrants has been and shall continue until our registration statement on Form SB-2 originally filed on November 22, 2004 is declared effective to be adjusted to fair value at each balance sheet date and is accordingly reassessed at each such time to determine whether the warrants should be classified (or reclassified, as appropriate) as a liability or as equity. The fair value of each warrant was initially assessed at $2,187,500 ($4,375,000 total) using the Black-Scholes valuation method. At September 30, 2004 and September 30, 2005, the fair value of the derivative liability was approximately $3,063,000 and approximately $2,844,000, respectively, and a fair value adjustment of approximately $1,385,000 and approximately $875,000, respectively, has been included in other expenses for the nine months then ended.
 
Amortization
 
Amortization expense increased approximately $12,000 for the nine months ended September 30, 2005. The software license acquired from The Learning Company in July of 1999 is amortized over a 10 year useful life. Amortization expense for 2005 reflects the continual amortization of the software license along with the amortization for the launch of our website, www.quickverse.com, during the second quarter of 2004.

Income Tax Benefits
 
Our effective tax rate differs from the statutory federal rate due to differences between income and expense recognition prescribed by the Internal Revenue Code and Generally Accepted Accounting Principles. We utilize different methods and useful lives for depreciating property and equipment. Changes in estimates (reserves) are recognized as expense for financial reporting but are not deductible for income tax purposes.

 
We have recognized a net deferred tax asset whose realization depends on generating future taxable income. At September 30, 2005, management established the valuation allowance based on the assessment that the company will produce sufficient income in the future to realize its net deferred tax asset. The resulting deferred tax liability reflects income taxes payable in future periods on the net deductible differences related to the software license agreement. We currently have net operating loss carryforwards, for income tax purposes, of approximately $7,648,000. The carryforwards are the result of income tax losses generated in 2000 ($2,480,000 expiring in 2020) and 2001 ($5,168,000 expiring in 2021). We will need to achieve a minimum annual taxable income over the remaining life of the carryforward, before deduction of operating loss carryforwards, of approximately $450,000 to fully utilize the current loss carryforwards. We believe this is achievable through careful expense management and continued introduction of new products and enhanced versions of our existing products.

Although there can be no assurance, management expects the deductible temporary differences (reserves) to reverse sometime beyond the next fiscal year.
 
Liquidity And Capital Resources

Our primary needs for liquidity and capital resources are the funding of our continued operations, which includes the ongoing internal development of new products and expansion and upgrade of existing products. We believe our future cash provided by operations will be sufficient to fund our continued operations. However, our pursuit of future strategic product line and/or corporate acquisitions and licensing will require funding from outside sources. Funding from outside sources may include but are not limited to the exercise of outstanding warrants and pursuit of other financing options such as commercial loans, common stock and/or preferred stock issuances and convertible notes. At this time, we have no legally committed funds for future capital expenditures including software development.
 
Working Capital at September 30
    
2005
    
2004
    
Change
 
  
 %
  
Current assets
  
$
1,025,946
  
$
1,138,544
  
$
(112,598
)
  
-10
%
Current liabilites
  
$
4,438,500
  
$
4,395,404
  
$
43,096
    
1
%
Retained deficit
  
$
(7,764,059
)
$
(8,179,456
)
$
415,397
    
-5
%
 
As of September 30, 2005, we had $1,025,946 in current assets, $4,438,500 in current liabilities and a retained deficit of $7,764,059. We had a loss before income taxes of $846,416 for the three months ended September 30, 2005 and a loss before income taxes of $1,780,411 for the nine months ended September 30, 2005. In comparison, we had a loss before income taxes of $876,208 for the three months ended September 30, 2004 and a loss before income taxes of $952,156 for the nine months ended September 30, 2004.
 
Cash Flows for Nine Months Ended September 30
    
2005
    
2004
    
Change
 
  
%
  
Cash flows provided (used) by operating activities
  
$
479,934
  
$
(795,389
)
$
1,275,323
    
-160
%
Cash flows (used) by investing activities
  
$
(750,851
)
$
(422,349
)
$
(328,502
)
  
78
%
Cash flows provided (used) by financing activities
  
$
(30,604
)
$
1,715,469
  
$
(1,746,073
)
  
-102
%

Net cash used by operating activities was approximately $795,000 for the nine months ended September 30, 2004, and net cash provided by operating activities was approximately $480,000 for the nine months ended September 30, 2005. The increase in cash provided was primarily due to an increase in the amounts received from customers resulting from increased sales along with a decrease in the amount paid out to suppliers and employees.

 
Net cash used in investing activities was approximately $422,000 for the nine months ended September 30, 2004 and approximately $751,000 for the nine months ended September 30, 2005. The increase in cash used for investing activities results from capitalizing costs associated with software development and Website development along with upgrading our internal computer equipment and software in order to increase our operating efficiency capabilities. Furthermore, during the nine months ended September 30, 2005 the restriction on the cash held in reserve by our merchant banker was lifted and made available to us.
 
Net cash provided by financing activities was approximately $1,715,000 for the nine months ended September 30, 2004, and net cash used by financing activities was approximately $31,000 for the nine months ended September 30, 2005. The net cash provided by financing activities for the nine months ended September 30, 2004 reflects final settlement on our accounts receivable line of credit, payment made on long term note payables, stock offering costs associated with the Barron Partners, LP equity financing and the proceeds received from convertible debentures and the issuance of stock for Barron Partners. Cash used by financing activities for the nine months ended September 30, 2005 reflects payments made on long-term note payables.
 
On July 19, 2004, we completed an equity financing in the amount of $1,750,000 through a private placement with Barron Partners, LP. Under the terms of the agreement, Barron purchased 21,875,000 restricted shares of common stock at a price of $0.08 per share. In addition, according to the terms of the agreement, Barron received two warrants to purchase common stock. The first warrant entitles Barron to purchase up to 10,937,500 shares of common stock at a price of $0.18 per share and the second warrant entitles Barron to purchase up to 10,937,500 additional shares of common stock at a price of $0.60 per share; each warrant is subject to standard adjustment provisions. These warrants have been accounted for as a liability according to EITF 00-19. In accordance with accounting mandate, the derivative liability associated with these warrants has been and shall continue until our registration statement on Form SB-2 originally filed on November 22, 2004 is declared effective to be adjusted to fair value at each balance sheet date and is accordingly reassessed at each such time to determine whether the warrants should be classified (or reclassified, as appropriate) as a liability or as equity The fair value of each warrant was initially assessed at $2,187,500 ($4,375,000 total) using the Black-Scholes valuation method. At September 30, 2004 and September 30, 2005, the fair value of the derivative liability was approximately $3,063,000 and approximately $2,844,000, respectively, and a fair value adjustment of approximately $1,385,000 and approximately $875,000, respectively, has been included in other expenses for the nine months then ended.
 
As part of the July 19, 2004 financing transaction with Barron Partners, LP, we also entered into a certain Registration Rights Agreement pursuant to which we became committed to registering all of the shares issued as part of such transaction, including those issuable under each of two warrants. On November 22, 2004 we filed a registration statement on Form SB-2 covering the shares issued to Barron Partners, as well as the shares underlying the warrants issued to Barron Partners. In accordance with the terms of the Registration Rights Agreement, as amended, we had another 150 days, until April 22, 2005, to cause such registration statement to be declared effective by the SEC, with any delays in meeting this obligation resulting in our being liable to Barron Partners in an amount equal to $630,000 per year, pro-rated for the duration of any such delay, which amounts to $1,726 per day.

As of September 30, 2005 we have accrued $278,000 (161 days at $1,726 per day) in penalties under the terms of the Registration Rights Agreement, inclusive of an adjustment made pursuant to a tentative verbal agreement reached with Barron Partners in April 2005, wherein, in relation to the associated accruing penalties, we agreed to pay Barron Partners an amount in cash equal to $100,000 to toll the accrual of further penalties until June 21, 2005. Although this amount has been paid in full, in two equal installments of $50,000 on each of April 22, 2005 and July 8, 2005, penalties in the amount of $1,726 per day continue to accrue from June 21, 2005 until the registration statement is declared effective, at which time a negotiated reduction of such total amount is expected to be reached, the extent of which is as yet unknown, and terms of payment of which are expected to be agreed to so as to allow us to reasonably meet our ongoing operating needs. Although there can be no assurance, management is hopeful that we will cause such registration statement to be declared effective in the near future. The amount paid by us to date to satisfy this obligation has, and any continued delays in our ability to cause the registration statement to be declared effective coupled with additional amounts which we are and may be required to pay, will have a material adverse effect on our business, our financial condition, including liquidity and profitability, and our results of operations, including a corresponding reduction in our net income and the likelihood of a net loss for the year. See Exhibits 10.10, 10.11, 10.12, and 10.13.
 
 
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Contractual Liabilities

We lease office space/warehouse facilities in Omaha, Nebraska under an operating lease with a third-party with terms extending through 2007. We are responsible for all taxes, insurance and utility expenses associated with this lease. There is no lease renewal option contained in the lease.

We lease office space in Naperville, Illinois under an operating lease with a third-party with terms extending through March 2006. We are responsible for all insurance expenses associated with this lease.
 
At September 30, 2005, the future minimum rental payments required under these leases are as follows:

2005
 
$
20,333
2006
   
69,451
2007
   
27,288
Total future minimum rental payments
 
$
117,072
 
We lease telephone equipment under a capital lease expiring in November 2009. The asset and liability under the capital lease are recorded at the present value of the minimum lease payments. The asset is depreciated over a 5 year life. Minimum future lease payments under capital leases as of September 30, 2005 for each of the next five years and in the aggregate are:

2005
 
$
3,432
2006
   
13,726
2007
   
13,726
2008
   
13,726
2009
   
12,582
Total minimum lease payments
   
57,192
Less: Amount representing interest
   
12,086
Total obligations under capital lease
   
45,106
Less: Current installments of obligations under capital lease
   
8,922
Long-term obligation under capital lease
 
$
36,184
 
The Potential Impact of Known Facts, Commitments, Events and Uncertainties on Future Operating Results or Future Liquidity Requirements

New Accounting Pronouncements

In the past, we have applied Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting as allowed by SFAS No 123, Accounting for Stock Based Compensation, for various forms of share-based awards including incentive and nonqualified stock options and stock appreciation rights attached to stock options; and therefore, no compensation cost had been recognized. However, in December 2004, the FASB issued SFAS No 123 (R), Share-Based Payment, which replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123 (R) requires compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost will be measured based on the fair value on the grant date of the equity or liability instruments issued. Compensation cost will be recognized over the period that the service is provided for that award. This new standard will be effective for the company the first quarter of fiscal 2006. We did not grant any form of share-based awards during the nine months ended September 30, 2005.
 
 
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ITEM 3. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures.
 
Our CEO and CFO have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the fiscal quarter covered by this report on Form 10-QSB. Based on this evaluation, our CEO and CFO have concluded that these disclosure controls and procedures are effective and designed to ensure that the information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the requisite time periods.
 
(b) Changes In Internal Controls Over Financial Reporting.

No changes in our disclosure controls and procedures, internal controls over financial reporting or other factors have occurred during the fiscal quarter covered by this report that would materially affect or be reasonably likely to materially affect our disclosure controls and procedures or internal controls over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

As of the date of this report, there were no pending material legal proceedings to which we were a party and we were not aware that any were contemplated. There can be no assurance, however, that we will not be made a party to litigation in the future. Moreover, there can be no assurance that our insurance coverage will prove adequate to cover all liabilities arising out of any claims that may be initiated against us in the future. Any finding of liability imposed against us coupled with a lack of corresponding insurance coverage is likely to have an adverse effect on our business, financial condition, and operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Subsequent to December 31, 2004, the company restored a stale check that was issued to Business Investor Services, Inc. as payment in full of a note payable. This resulted in the conversion of the note payable into 466,666 shares of common stock. The conversion of such securities was effected without registration under the Securities Act of 1933, as amended, based on their being exempted securities under Section 3(a)(9) thereof. There were no underwriters or placement agents involved in this issuance and no commissions were paid.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

There were no reportable events under this Item 3 during the quarterly period ended September 30, 2005.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

There were no reportable events under this Item 4 during the quarterly period ended September 30, 2005.

ITEM 5. OTHER INFORMATION.

The Annual Meeting of the Stockholders of Findex.com, Inc. will be held on May 19, 2006. Stockholders of record who wish to submit a proposal at the 2006 Annual Meeting must provide written notice to the Secretary of the company in accordance with Article IX of our Articles of Incorporation. Under our Articles of Incorporation, such notice must be received by the Secretary no earlier than March 21, 2006, and no later than April 20, 2006.

There were no material changes to the procedures by which security holders may recommend nominees to our board of directors.

 
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ITEM 6. EXHIBITS.
 
No.
Description of Exhibit
   
2.1
Share Exchange Agreement between Findex.com, Inc. and the stockholders of Reagan Holdings, Inc. dated March 7, 2000, incorporated by reference to Exhibit 2.1 on Form 8-K filed March 15, 2000.
   
3(i)(1)
Articles of Incorporation of Findex.com, Inc., incorporated by reference to Exhibit 3.1 on Form 8-K filed March 15, 2000.
   
3(i)(2)
Amendment to Articles of Incorporation of Findex.com, Inc. dated November 12, 2004 incorporated by reference to Exhibit 3.1(ii) on Form 10-QSB filed November 12, 2004.
   
3(ii)
By-Laws of Findex.com, Inc., incorporated by reference to Exhibit 3.3 on Form 8-K filed March 15, 2000.
   
10.1
Stock Incentive Plan of Findex.com, Inc. dated May 7, 1999, incorporated by reference to Exhibit 10.1 on Form 10-KSB/A filed May 13, 2004.
   
10.2
Share Exchange Agreement between Findex.com, Inc. and the stockholders of Reagan Holdings Inc., dated March 7, 2000, incorporated by reference to Exhibit 2.1 on Form 8-K filed March 15, 2000.
   
10.3
License Agreement between Findex.com, Inc. and Parsons Technology, Inc. dated June 30, 1999, incorporated by reference to Exhibit 10.3 on Form 10-KSB/A filed May 13, 2004.
   
10.4
Employment Agreement between Findex.com, Inc. and Steven Malone dated July 25, 2003, incorporated by reference to Exhibit 10.4 on Form 10-KSB/A filed May 13, 2004.
   
10.5
Employment Agreement between Findex.com, Inc. and Kirk Rowland dated July 25, 2003, incorporated by reference to Exhibit 10.5 on Form 10-KSB/A filed May 13, 2004.
   
10.6
Employment Agreement between Findex.com, Inc. and William Terrill dated June 7, 2002, incorporated by reference to Exhibit 10.6 on Form 10-KSB/A filed May 13, 2004.
   
10.7
Restricted Stock Compensation Agreement between Findex.com, Inc. and John A. Kuehne dated July 25, 2003, incorporated by reference to Exhibit 10.7 on Form 10-KSB/A filed May 13, 2004.
   
10.8
Restricted Stock Compensation Agreement between Findex.com, Inc. and Henry M. Washington dated July 25, 2003, incorporated by reference to Exhibit 10.8 on Form 10-KSB/A filed May 13, 2004.
   
10.9
Restricted Stock Compensation Agreement between Findex.com, Inc. and William Terrill dated July 25, 2003, incorporated by reference to Exhibit 10.9 on Form 10-KSB/A filed May 13, 2004.
   
10.10
Stock Purchase Agreement, including the form of warrant agreement, between Findex.com, Inc. and Barron Partners, LP dated July 19, 2004, incorporated by reference to Exhibit 10.1 on Form 8-K filed July 28, 2004.
   
10.11
Amendment No. 1 to Barron Partners, LP Stock Purchase Agreement dated September 30, 2004, incorporated by reference to Exhibit 10.3 on Form 8-K filed October 6, 2004.
   
10.12
Registration Rights Agreement between Findex.com, Inc. and Barron Partners, LP dated July 26, 2004, incorporated by reference to Exhibit 10.2 on Form 8-K filed July 28, 2004.
   
10.13
Waiver certificate between Findex.com, Inc. and Barron Partners, LP dated September 16, 2004, incorporated by reference to Exhibit 10.4 on Form 8-K filed October 6, 2004.
   
31.1
Certification of Findex.com, Inc. Chief Executive Officer, Steven Malone, required by Rule 13a-14(a) or Rule 15d-14(a), and dated December 14, 2005. FILED HEREWITH.
   
31.2
Certification of Findex.com, Inc. Chief Financial Officer, Kirk R. Rowland, required by Rule 13a-14(a) or Rule 15d-14(a), and dated December 14, 2005. FILED HEREWITH.
   
 
 
32.1
Certification of Findex.com, Inc. Chief Executive Officer, Steven Malone, required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350), and dated December 14, 2005. FILED HEREWITH.
   
32.2
Certification of Findex.com, Inc. Chief Financial Officer, Kirk R. Rowland, required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350), and dated December 14, 2005. FILED HEREWITH.
   
 
Signatures

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

   
FINDEX.COM, INC.
 
       
Date: December 14, 2005
By
/s/ Steven Malone
  
   
Steven Malone
  
   
President and Chief Executive Officer
  

       
Date: December 14, 2005
By
/s/ Kirk R. Rowland
  
   
Kirk R. Rowland, CPA
  
   
Chief Financial Officer
  
 
 
-15-