10QSB 1 v18081_10qsb.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly period ended March 31, 2005 Commission file number 000-33315 KNOBIAS, INC. (Exact name of registrant as specified in its charter) DELAWARE 13-3968990 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 875 NORTHPARK DRIVE, BUILDING 2, SUITE 500 RIDGELAND, MISSISSIPPI 39157 ---------------------- ----- (Address of principal executive offices) (zip code) (601) 978-3399 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the last 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 _____ The number of shares of Common Stock, $0.001 par value, outstanding on May 12, 2005, was 50,666,505 shares, held by approximately 536 shareholders. Transitional Small Business Disclosure Format (check one): Yes _____ No ___X___ KNOBIAS, INC. QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTERLY PERIOD ENDING MARCH 31, 2005 Table of Contents Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets: March 31, 2005 and December 31, 2004 4 Condensed Consolidated Statements of Losses: Three Months Ended March 31, 2005 and 2004 5 Condensed Consolidated Statement of Stockholders' Equity Three Months Ended March 31, 2005 6 - 9 Condensed Consolidated Statements of Cash Flows: Three Months Ended March 31, 2005 and 2004 11 - 12 Notes to Unaudited Condensed Consolidated Financial Information: March 31, 2005 13 - 22 Item 2. Management's Discussion and Analysis 23 - 27 Item 3. Controls and Procedures 27 PART II. OTHER INFORMATION 27 Item 1. Legal Proceedings 27 Item 2. Changes in Securities 27 Item 3. Defaults Upon Senior Securities 28 Item 4. Submission of Matters to a Vote of Security Holders 28 Item 5. Other Information 28 Item 6. Exhibits and Reports on Form 8-K 28 - 32 Signatures 33 2 KNOBIAS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2005 December 31, 2004 -------------- ----------------- ASSETS (Unaudited) Current assets: Cash $ 60,316 $ 242,692 Accounts receivable 157,033 97,849 Prepaid expenses 41,467 27,559 ------------ ------------ Total current assets 258,816 368,100 Property, equipment, and database development: (Note C) 1,230,480 1,227,271 Less: accumulated amortization and depreciation 996,587 976,151 ------------ ------------ Property, equipment, and database development, net 233,893 251,120 Other assets 7,971 7,971 ------------ ------------ Total assets $ 500,680 $ 627,191 ============ ============ LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 354,665 $ 202,788 Current portion of long-term debt (Note D) 3,128 242,917 Accrued liabilities 172,324 93,139 ------------ ------------ Total current liabilities 530,017 538,844 Long-term liabilities: Note payable long-term (Note D) 885,616 257,731 ------------ ------------ Commitment and Contingencies -- -- (Deficiency in) stockholders' equity: Preferred stock Series A, par value; $0.01; authorized 5,000,000 shares; 958,333 shares issued and outstanding at March 31, 2005 and December 31, 2004 (Note F) 1,150,000 1,150,000 Common stock, par value; $0.01, authorized 95,000,000 shares; 50,666,667 and 50,766,667 shares issued and outstanding at March 31, 2005 and December 31, 2004 (Note F) 506,667 507,667 Additional paid-in capital (Note F) 9,793,936 9,793,936 Accumulated deficit (12,365,656) (11,620,987) ------------ ------------ Total (deficiency in) stockholders' equity (915,053) (169,384) ------------ ------------ Total liabilities and (deficiency in) stockholders' equity: $ 500,680 $ 627,191 ============ ============
See accompanying notes to unaudited condensed consolidated financial statements 3 KNOBIAS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) For the Three Months Ended March 31, 2005 2004 ------------ ------------ Revenues: Subscription revenue $ 503,187 $ 456,764 Information provisioning 47,699 45,000 ------------ ------------ Total revenue 550,886 501,764 Operating Expenses: Product related costs 656,512 497,078 Selling, general and administrative 476,607 238,676 Depreciation and amortization 20,436 22,432 ------------ ------------ Total operating expenses 1,153,555 758,186 (Loss) from operations (602,669) (256,422) Other income (expense): Interest income 828 18 Merger related costs (Note B) -- -- Miscellaneous income -- 5,828 Interest (expense) (142,828) (52,780) ------------ ------------ Total other income (expense) (142,000) (46,934) Loss before provision for income taxes (744,669) (303,356) Provision for income taxes -- -- ------------ ------------ Net loss $ (744,669) $ (303,356) ============ ============ Loss per share (basic and fully diluted) $ (0.01) $ (0.01) ============ ============ Basic and diluted weighted average number of shares outstanding, 50,666,667 43,103,669 ============ ============ See accompanying notes to unaudited condensed consolidated financial statements 4 KNOBIAS, INC. CONDENSED CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDERS EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2005 (UNAUDITED)
Preferred Preferred Common Additional "A" "A" Shares Common Shares Paid In Accumulated Shares Amount Shares Amount Capital Deficit Total --------- ----------- ---------- --------- ----------- ------------ ---------- Balance at January 1, 2005 958,333 $ 1,150,000 50,766,667 $ 507,667 $ 9,793,936 $(11,620,987) $ (169,384) Shares returned- issued for expenses (Note F) -- -- (100,000) (1,000) -- -- (1,000) Net loss -- -- -- -- -- (744,669) (744,669) --------- ----------- ---------- --------- ----------- ------------ ---------- Balance at March 31, 2005 958,333 $ 1,150,000 50,666,667 $ 506,667 $ 9,793,936 $(12,365,656) $ (915,053) ========= =========== ========== ========= =========== ============ ==========
See accompanying notes to unaudited condensed consolidated financial statements 5 KNOBIAS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, -------------------------- 2005 2004 ----------- ----------- Cash flows from operating activities Net loss $ (744,669) $ (303,356) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 20,436 22,432 Amortization of debt issuance costs 109,969 -- Prior period costs deducted in current period (1,000) -- Changes in operating assets and liabilities (Increase) in accounts receivable (59,184) (82,243) Decrease (increase) in prepaid expenses 14,717 12,537 Decrease (increase) in other assets -- 9,022 Increase in accounts payable and accrued expenses 244,229 55,259 Increase in deferred revenue 8,208 (2,092) ----------- ----------- Net cash used in operating activities (407,294) (288,441) ----------- ----------- Cash flows provided by (used in) investing activities Capital expenditures -- (10,979) ----------- ----------- Net cash provided by (used in) investing activities -- (10,979) ----------- ----------- Cash flows from financing activities Issuance of common stock -- 488,000 Issuance of preferred stock -- -- Repayment of debt (82) (25,080) Proceeds from notes payable 225,000 -- ----------- ----------- Net cash provided by financing activities 224,918 462,920 Net increase (decrease) in cash (182,376) 163,500 Cash, beginning of period 242,692 165,357 ----------- ----------- Cash, end of period $ 60,316 $ 328,857 =========== =========== Supplemental disclosure of cash flow information Cash transactions: Cash paid for interest $ -- $ 12,642 Income taxes -- -- Non-cash transactions: Stockholder loans converted to stock 174,993 -- Subordinated debt converted to stock 1,050,000 -- Equipment purchases under vendor finance agreements 3,209 -- Accrued and prepaid interest re-financed into new debt 50,000 --
See accompanying notes to unaudited condensed consolidated financial statements 6 KNOBIAS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 (UNAUDITED) NOTE A - SUMMARY OF ACCOUNTING POLICIES The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Accordingly, the results from operations for the three month period ended March 31, 2005, are not necessarily indicative of the results that may be expected for the year ended December 31, 2005. The unaudited consolidated financial statements should be read in conjunction with the consolidated December 31, 2004, financial statements and footnotes thereto included in the Company's SEC Form 10-KSB. Nature of Business and Principles of Consolidation Knobias, Inc. ("the Company" or "Knobias") was formed in November 2004, under the laws of the State of Delaware pursuant to the Delaware General Corporation Law ("DGCL"). On November 15, 2004, Consolidated Travel Systems, Inc. ("COVSA") acquired all the outstanding stock of Knobias Holdings, Inc. For accounting purposes, the acquisition was treated as a recapitalization of Knobias Holdings, Inc. with Knobias Holdings, Inc. considered the acquirer (reverse acquisition). Upon completion of the transaction, the entity was renamed Knobias, Inc. reflecting the exchange of equity interests with COVSA. The Company's primary subsidiary Knobias.com, LLC (formerly Penny PI, LLC) was formed on September 4, 1998, under the laws of the State of Mississippi pursuant to the Mississippi Limited Liability Company Act. Penny PI, LLC was organized to design and implement an Internet website for the provision of subscriber based information and investigative services relating to over-the-counter bulletin board companies, commonly referred to as "penny stocks." Knobias consolidates, maintains and markets data from the world's largest electronic database of historical and real-time information covering thousands of Outside Market companies. Outside Market companies include those companies that trade publicly "over-the-counter" in such markets as the Over-the-Counter Bulletin Board(TM), the Pink Sheets(TM), and the NASDAQ SmallCap Market (TM), as well as entrepreneurial private companies. The Company's database development and marketing efforts are focused toward servicing institutional customers rather than retail investors. The Company has developed a new website under the Knobias.com name, and discontinued supporting the original Penny PI website. Management of the Company believes that Knobias is the first and largest unbiased resource for Outside Market intelligence. The accompanying consolidated financial statements include the accounts of Knobias, Inc. and its wholly-owned subsidiary, Knobias.Com, LLC. All Intercompany balances and transactions have been eliminated in consolidation. Knobias Holdings, Inc. and Kollage, LLC are inactive subsidiaries of the Company. Prior to the merger and the 100% consolidation of Kollage, LLC, its income and expenses were included in the financial statements of Knobias Holdings, Inc. 7 KNOBIAS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 (UNAUDITED) NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONT') On June 30, 2004, Consolidated Travel Systems, Inc. (the "Company") entered into an Agreement and Plan of Reorganization (the "Merger Agreement") with Knobias Holdings, Inc., a privately held Delaware corporation ("Knobias"),and KHI Acquisition, Inc., a wholly owned subsidiary of the Company (the "Merger Sub"). Pursuant to the Merger, KHI Acquisition, Inc. has been dissolved. Revenue Recognition For revenue from services, the Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the selling price is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered/services rendered and the collectibility of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company defers any revenue for which the product has not been delivered or for which services have not been rendered or are subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or services have been rendered or no refund will be required. In December 2003, the SEC issued Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition. SAB No. 104 updated and revised the existing revenue recognition policies to make its interpretive guidance consistent with current accounting guidance, principally EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." Also, SAB 104 incorporates portions of the Revenue Recognition in Financial Statements-Frequently Asked Questions and Answers document that the SEC staff considered relevant and rescinds the remainder. The Company's revenue recognition policies are consistent with this guidance; therefore, this guidance will not have an immediate impact on the Company's financial statements. Subscription services revenues are recognized over the period that services are provided. Other revenues, which consist principally of the provision of information through its website, are recognized as the services are performed or when the goods are delivered. Deferred revenue consists primarily of monthly, semi-annual, and annual prepaid subscription fees billed or collected in advance. Concentrations of Credit Risk Financial instruments and related items which potentially subject the Company to concentrations of credit risk consist primarily of cash and trade receivables. The Company places its cash and temporary cash investments with credit quality institutions. At times, such investments may be in excess of the FDIC insurance limit. The Company's customers are concentrated in the investment sector and it periodically reviews its trade receivables in determining its allowance for doubtful accounts. The allowance for doubtful accounts at March 31, 2005, and December 31, 2004, is $53,000 and $43,000, respectively. 8 KNOBIAS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 (UNAUDITED) NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONT') Stock Based Compensation Stock option grants are accounted for in accordance with Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, no compensation expense is recognized for stock options granted if the option price is not less than the fair market value of the underlying stock at the grant date. For the period ended March 31, 2005, and for the year ended December 31, 2004, no stock based compensation expense was included in the determination of net loss as all options granted during the years had an exercise price equal to the estimated market value of the stock on the date of grant. Stock-based awards to non-employees are accounted for under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, and Emerging Issues Task Force ("EITF") Issue No. 96-18, Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods and Services. Had compensation expense been determined on the basis of fair value pursuant to SFAS No. 123, using the minimum value method as a basis of determining fair values, net loss and net loss per share would have been increased as follows: For the Three Months For the Ended Year Ended March 31, December 31, 2005 2004 ---- ---- Net loss, as reported $(744,669) $ (2,811,127) Add: Total stock based employee compensation expense as reported under intrinsic value method (APB. No. 25) -- -- Less stock based compensation expense determined under fair value method for all stock options (SFAS No. 123) -- (3,975) ---------- ------------- Pro forma net loss $(744,669) $ (2,815,102) ========== ============= Basic loss per share As reported $ (0.01) $ (0.06) ======== ======== Pro forma $ (0.01) $ (0.06) ======== ======== See discussion of pricing of and additional information on these options included in Note F. 9 KNOBIAS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 (UNAUDITED) NOTE A - SUMMARY OF ACCOUNTING POLICIES (CONT') Advertising Costs Advertising costs are expensed as incurred. Total advertising expenses were $7,000 and $3,000 for each of the three months ended March 31, 2005 and 2004, respectively. Reclassifications Certain reclassifications have been made in prior period's financial statements to conform to classifications used in the current period. These reclassifications had no effect on reported losses. NOTE B - BUSINESS COMBINATION AND CORPORATE RESTRUCTURE Knobias, Inc. ("the Company" or "Knobias") was formed in November 2004, under the laws of the State of Delaware pursuant to the Delaware General Corporation Law ("DGCL"). On November 15, 2004, Consolidated Travel Systems, Inc. ("COVSA") acquired all the outstanding stock of Knobias Holdings, Inc. For accounting purposes, the acquisition was treated as a recapitalization of Knobias Holdings, Inc. with Knobias Holdings, Inc. considered the acquirer (reverse acquisition). Upon completion of the transaction, the entity was renamed Knobias, Inc. reflecting the exchange of equity interests with COVSA. Effective with the agreement, all previously outstanding stock owned by COVSA's stockholders were exchanged for a total of 2,500,000 shares of the Knobias Holdings, Inc. common stock, along with a cash payment of $400,000, less any filing fees. The total consideration paid was $670,733 and the significant components of the transaction are as follows: Common stock retained (at par value) $ 25,000 Assets acquired -- Liabilities assumed -- Cash paid ($400,000 less filing fees) 399,367 --------- Consideration given to original COVSA shareholders 424,367 Common stock issued for services provided (at par value) 20,341 Commissions and fees paid 226,025 --------- Total consideration/organization costs $ 670,733 ========= In accordance with accounting principles generally accepted in the United States, these amounts have been expensed and are reflected in the accompanying statement of operations as a non-operating expense. 10 KNOBIAS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 (UNAUDITED) NOTE C - PROPERTY, EQUIPMENT, AND DATABASE DEVELOPMENT Major classes of property and equipment are as follows: March 31, December 31, 2005 2004 --------- --------- Furniture, equipment and leasehold improvements $ 174,384 $ 174,384 Computer hardware and software 447,552 444,343 Website and database development 608,544 608,544 --------- --------- Total property, equipment, and database development 1,230,480 1,227,271 Less: accumulated amortization (608,544) (608,544) Less: accumulated depreciation (388,043) (367,607) --------- --------- Total accumulated depreciation (996,587) (976,151) Property, equipment and database development, net $ 233,893 $ 251,120 ========= ========== Depreciation and amortization expense was $20,436 and $22,432 for the three months ended March 31, 2005 and 2004, respectively. NOTE D - NOTES PAYABLE AND SUBORDINATED DEBT March 31, 2005 December 31, 2004 -------------- ----------------- Securities Purchase Agreement for $550,000 bearing interest at 12% with interest payable monthly, maturing September 1, 2006. The Agreement provides that an additional 4% per annum, payable monthly, is due on the balance until it is paid in full. In the event that the Company raises more than $2,000,000 from the sale of its securities, it is obligated to repay the notes plus accrued interest immediately. DCOFI Master, Ltd. holds a second priority lien on substantially all of the Company's assets. This lien is junior to the lien granted to the holders of the Secured Convertible Notes issued November 15, 2004. $ 550,000 $ 275,000 Debt issuance costs, net of accumulated amortization of $11,667 and $2,917 at March 31, 2005 and December 31, 2004 (23,333) (32,083) --------- --------- 526,667 242,917 --------- --------- Line of credit equipment financing $15,000 limit, variable interest rate (20.49% at March 31, 2005), with payments due monthly 3,128 -- 11 KNOBIAS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 (UNAUDITED) NOTE D - NOTES PAYABLE AND SUBORDINATED DEBT (CONT') Secured Convertible Notes, interest at 8% payable quarterly, due November 1, 2006. The notes are convertible at any time, at the option of the note purchaser, into the Company's common stock at the initial conversion price (subject to adjustment) of $0.60 per share; however, the conversion price will be reduced to $0.30 per share in the event that either (1) the Company's annualized pre-tax net income for the three-month period ending December 31, 2005, is less than $2,000,000 or (2) the volume weighted average trading price for the Company's common stock for the month of December 2005 is less than $1.00 per share. The investors of these notes are secured by a security interest in substantially all of the Company's assets and a guarantee by its subsidiaries. At the time of the issuance of the notes, the Company also issued to the note purchasers warrants to purchase an aggregate of 3,000,000 shares of the Company's common stock. The warrants may be exercised, in whole or in part, at any time within five years from the date of the issuance of the notes, for an exercise price of $0.01 per share. 1,000,000 1,000,000 Debt issuance costs, net of accumulated amortization of $15,625 and $6,250 at March 31, 2005 and December 31, 2004 (59,375) (68,750) Debt discount--beneficial conversion feature, net of accumulated amortization of $55,261 and $22,104 at March 31, 2005 and December 31, 2004 (209,991) (243,148) Debt discount--value attributable to warrants attached to notes, net of accumulated amortization of $97,912 and $39,125 at March 31, 2005 and December 31, 2004 (371,685) (430,371) ---------- ---------- 358,949 257,731 ---------- ---------- Total $ 888,744 $ 500,648 Less: current portion of long-term debt 3,128 (242,917) ---------- ---------- Note payable - long-term $ 885,616 $ 257,731 ---------- ========== 12 KNOBIAS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 (UNAUDITED) NOTE D - NOTES PAYABLE AND SUBORDINATED DEBT (CONT') In connection with issuance of the Securities Purchase Agreement and in accordance with EITF Issue 98-5 Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, the Company recognized an imbedded beneficial conversion feature present in the Securities Purchase Agreement. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid in capital. The Company recognized and measured an aggregate of $265,252 of the proceeds, which is the amount allocated based on the fair value of the combined debt and equity instruments included in the agreement. This discount has been recorded as additional paid in capital and as a discount against the Securities Purchase Agreement issued during the year ending December 31, 2004. The debt discount attributed to the beneficial conversion feature is amortized over the securities' twenty-four month duration as interest expense. In connection with the placement of the Securities Purchase Agreement, the Company issued warrants granting the holders the right to acquire 3,000,000 shares of the Company's common stock at $0.01 per share. In accordance with EITF Issue 00-27, Application of EITF Issue 98-5 to Certain Convertible Instruments, the Company recognized the value attributable to the warrants in the amount of $469,496 (calculated as a pro rata value of all equity and debt instruments issued in the transaction) to additional paid-in-capital and a discount against the debt issued during 2004. The Company valued the warrants in accordance withy EITF 00-27; using the Company's estimate of fair value at that time of the securities at the date of issue which was $0.60. NOTE E - ACCRUED LIABILITIES Accrued liabilities are as follows: March 31, December 31, 2005 2004 ---- ---- Accrued payroll $ 83,754 $ 42,167 Accrued interest 22,836 11,375 Miscellaneous accrued expenses 40,536 22,607 Deferred revenue 25,198 16,990 -------- -------- Total accrued liabilities $172,324 $ 93,139 -------- ======== NOTE F - STOCKHOLDER'S EQUITY The Company is authorized to issues 95,000,000 shares of its common stock and has 50,766,667 and 50,666,667 shares outstanding at March 31, 2005, and December 31, 2004, respectively. Holders of the Class A common stock are entitled to one vote per share. The Company is authorized to issue 5,000,000 shares of Series A preferred stock at March 31, 2005 and December 31, 2004. The Company has 958,333 shares of Series A preferred stock issued and outstanding at March 31, 2005 and December 31, 2004. 13 KNOBIAS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 (UNAUDITED) NOTE F - STOCKHOLDER'S EQUITY (CONT') Common Stock In January 2005, the Company received back 100,000 shares of common stock valued at $1,000 issued in exchange for expenses. Series A Preferred Stock In November 2004, the Company accepted subscription agreements for gross proceeds of $1,150,000 for 958,333 shares of its Series A Preferred Stock for $1.20 per share. Holders of Series A Preferred Stock will receive an annual cumulative dividend of $0.12 per share payable semi-annually on April 30 and October 31 of each year beginning April 30, 2005. Holders of Series A Preferred Stock who refer customers to the Company or are themselves customers of the Company will receive a dividend equal to the greater of the cumulative dividend of $0.12 per share or a non-cumulative dividend equal to a minimum of 10% and a maximum of 25% of the net income from fees received by the Company from each referred customer and from the holder itself for (i) access to Knobias' internet-based financial services platform and (ii) execution of customer securities transactions. Each share of Series A Preferred Stock may be converted at any time at the option of the holder into two shares of common stock, subject to adjustment, as defined in the agreement. There were no beneficial conversion discounts associated with this preferred stock. NOTE G - STOCK OPTIONS AND WARRANTS Stock Options The following table summarizes the changes in options outstanding and the related prices for the shares of the Company's common stock issued to the Company employees and consultants. These options were granted in lieu of cash compensation for services performed.
Options Outstanding Options Exercisable ------------------- ------------------- Weighted Average Weighed Weighted Number Remaining Contractual Average Number Average Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price --------------- ----------- --------------------- -------------- ----------- -------------- $1.295-$3.004 158,500 8.26 $ 2.00 65,500 $ 3.004 ======= ==== ====== ====== =======
14 KNOBIAS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 (UNAUDITED) NOTE G - STOCK OPTIONS AND WARRANTS (CONT') Transactions involving options issued to employees summarized as follows: Number of Weighted Average Shares Price Per Share --------- ---------------- Outstanding at January 1, 2003 89,750 $ 3.004 Granted -- -- Exercised -- -- Canceled or expired (24,250) -- ------- ------- Outstanding at December 31, 2003 65,500 $ 3.004 Granted 93,000 1.295 Exercised (Note F) -- -- Canceled or expired -- -- ------- ------- Outstanding at December 31, 2004 158,500 $ 2.00 ======= ======= Granted -- -- Exercised -- -- Canceled or expired -- -- ------- ------- Outstanding at March 31, 2005 158,500 $ 2.00 ======= ======= The Company granted stock options for 93,000 shares to shareholders during the year ended December 31, 2004. The estimated value of the options granted to shareholders during the year ended December 31, 2004, was determined using the Black-Scholes option pricing model and the following assumptions: expected term of 1 year, a risk free interest rate of 4.00%, a dividend yield of 0% and volatility of 0%. Since the Company has not yet adopted SFAS No. 123R, it elected not to charge the calculated value of $3,975 to compensation expense in the year granted. Warrants In connection with its merger during 2004, the Company issued warrants to purchase 3,203,750 shares of the Company's common stock. The options are exercisable at prices ranging from $0.01 to $0.60 per share and are exercisable for five years after their issuance. Also, the Company assumed warrants previously issued by Knobias Holdings, Inc. under substantially the same terms in which they were originally issued. The warrants are for 18 months after the issuance of securities for the Company and are exercisable at a price of $3.25 per share. The following table summarizes the changes in warrants outstanding and the related prices for the shares of the Company's common stock.
Warrants Outstanding Warrants Exercisable -------------------- -------------------- Weighted Average Weighed Weighted Number Remaining Contractual Average Number Average Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price ---------------- ----------- --------------------- -------------- ----------- -------------- $0.01 to $3.25 4,094,968 3.89 $ 0.75 4,094,968 $ 0.75 ============== ========= ==== ======= ========= ========
15 KNOBIAS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 (UNAUDITED) NOTE G - STOCK OPTIONS AND WARRANTS (CONT') Transactions involving warrants issued to investors and consultants are summarized as follows: Number of Weighted Average Shares Price Per Share --------- ---------------- Outstanding at January 1, 2003 891,218 $ 3.25 Granted - - Exercised - - Canceled or expired - - --------- -------- Outstanding at December 31, 2003 891,218 3.25 Granted 3,203,750 0.05 Exercised - - Canceled or expired - - --------- -------- Outstanding at December 31, 2004 4,094,968 0.75 --------- Granted - - Exercised - - Canceled or expired - - --------- -------- Outstanding at March 31, 2005 4,094,968 $ 0.75 ========= ======== The value of warrants was determined using the Company's estimate of value utilized during its merger and fund-raising efforts (which approximated fair market value) during November 2004. Warrants to purchase 3,000,000 shares of the Company's stock have been recorded as a debt discount (See Note D.). Other warrants were substantially the same as the fair market value of the new company at the time of their issuance. Therefore, no expense was recorded at that time. NOTE H- BUSINESS CONCENTRATION The Company has one customer which represent 17% of its revenues for the three months ended March 31, 2005. The Company's does not have any vendors which accounted for more than 10% of total purchases. NOTE I - SIGNIFICANT RISKS AND UNCERTAINTIES The Company has a limited operating history and is currently pursuing a business strategy that is largely unproven. As a result, its ability to successfully implement its business plan is dependent on, among other things, its ability to generate sufficient cash flow through operations or additional debt or equity transactions to sustain business development efforts until revenues from customers reach levels that can support ongoing operations. The Company expects to continue to incur operating losses for the near future and there can be no assurance that profitability will be achieved or sustained. 16 KNOBIAS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 (UNAUDITED) NOTE I - SIGNIFICANT RISKS AND UNCERTAINTIES (CONT') The Company is heavily dependent upon its developed and purchased database, software and hardware products. As mentioned previously, the Company amortizes capitalized database and internal use software and depreciates purchased hardware and software on a straight-line basis over an estimated useful life of three to five years. Due to inherent technological changes in the computer hardware and software industry, the period over which such items are being amortized and depreciated may be longer than its actual useful life. In the event that this fact becomes apparent, the amortization and depreciation will have to be accelerated. The Company is also heavily dependent on other vendors to provide access to the information it markets through its website. Various contracts have been entered into, mostly for a term of one year or month-to-month basis for the provision of this information. The failure of these vendors to supply the information contracted for would have a severe adverse impact on the Company's ability to provide future services to its customers. Legal Proceedings The Company is party to lawsuits and other claims that arise in the ordinary course of business. The lawsuits assert claims related to the general business activities of the Company. The cases are being vigorously contested. In the regular course of business, management evaluates estimated losses or costs related to litigation, and provision is made for anticipated losses whenever management believes that such losses are probable and can be reasonably estimated. While management believes that the final resolution of pending legal proceedings will not have a material impact on the Company's financial position or results of operations, the final resolution of such proceedings could have a material adverse effect on the Company's financial position or results of operation. NOTE J - LEASES AND COMMITMENTS The Company has entered into leases for office and warehouse space that expire in at various times during 2004. Minimum lease payments for the year ending December 31, 2005, are $58,000 with none required thereafter. The Company has entered into various agreements for the provision of custom-tailored stock quote displays and other information to be provided to subscribing customers over the Internet. The agreements are for periods ranging from 6 months to 2 years. Most of the contracts automatically renew unless specifically terminated by either party. Rent expense for each of the three months ending March 31, 2005 and 2004, totaled $23,000 and $23,000, respectively. 17 KNOBIAS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 (UNAUDITED) NOTE K - SUBSEQUENT EVENT On April 7, 2005, the Company entered into a Subordinated Promissory Note in the amount of $50,000 with a director of the Company. In connection with this promissory note, the Company also issued a warrant to purchase 10,000 shares of the Company's common stock. The warrants are exercisable until five years from the date of issuance at a purchase price of $0.75 per share. The Subordinated Promissory Note bears interest at 12% per annum, payable monthly, and matures on October 7, 2005. The Company has the option to prepay the principal and all accrued interest, at any time prior to the date of maturity. On April 28, 2005, the Company entered into a Line of Credit agreement with a local bank for $300,000 bearing interest at prime plus two percent and maturing on April 27, 2006. The Company may make periodic draws under this agreement, as deemed necessary by management. The Line of Credit is guaranteed by certain of the Company's shareholders and board of directors. 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains forward-looking statements. Actual results and events could differ materially from those projected, anticipated, or implicit, in the forward-looking statements as a result of the risk factors set forth below and elsewhere in this report. With the exception of historical matters, the matters discussed herein are forward-looking statements that involve risks and uncertainties. Forward-looking statements include, but are not limited to, statements concerning anticipated trends in revenues and net income, projections concerning operations and available cash flow. Our actual results could differ materially from the results discussed in such forward-looking statements. The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes thereto appearing elsewhere herein. GENERAL We are a financial information services provider that has developed financial databases, information systems, tools and products following over 14,000 U.S. equities. Primarily through our wholly owned subsidiary, Knobias.com, LLC, we market our products to individual investors, day-traders, financial oriented websites, public issuers, brokers, professional traders and institutional investors. We offer a range of financial information products from multiple Knobias and third party databases via a single, integrated internet based platform. Knobias is uniquely capable of combining third party databases, news feeds and other financial content with internally generated content and analysis to create value-added, cost effective information solutions for all market participants. Our company originally was organized as Molecular Energy Corporation on January 31, 1968 under the laws of the State of Delaware, to engage in the business of research, development and manufacture of custom-built batteries. Until the Merger we had no assets and have had no revenues for several years, and we were actively seeking potential operating businesses and business opportunities with the intent to acquire or merge with such businesses. Knobias, formerly known as pennyPI.com, Inc., was originally organized as a Mississippi limited liability company in September 1998, and was reorganized as a Delaware corporation in March 2000. Knobias.com, LLC is a wholly owned subsidiary of Knobias and continues in existence for the further development and operation of its Internet web site relating to the provision of information regarding publicly traded companies. RESULTS OF OPERATIONS QUARTER ENDED MARCH 31, 2005 COMPARED TO QUARTER ENDED MARCH 31, 2004. The following table shows the consolidated statements of revenues for the quarters ended March 31, 2005 and 2004: 19 March 31, ------------------------- 2005 2004 $ CHANGE % CHANGE ----------- ----------- ---------- -------- Revenue Subscription revenue $ 503,187 $ 456,764 $ 46,423 10% Information provisions 47,699 45,000 2,699 1% ----------- ----------- Total revenue 550,886 501,764 49,122 10% Expenses Product related costs 656,512 497,078 159,434 32% Selling, general and administrative expenses 476,607 238,676 237,931 100% Depreciation and amortization 20,436 22,432 (1,996) -9% ----------- ----------- Total expenses 1,153,555 758,186 395,369 52% ----------- ----------- Operating loss (602,669) (256,422) (346,247) -135% ----------- ----------- Interest expense, net (142,000) (52,762) (89,238) -169% Merges related costs -- -- -- --% Other income -- 5,828 (5,828) -100% ----------- ----------- Net loss $ (744,669) $ (303,356) $ (441,313) -145% =========== =========== Subscription revenues have increased $46,423 or 10%. The Company in 2004 had only just begun to bill its customers for Morning+PLUS subscriptions. For the quarter ended March 31, 2005, we have significantly larger billings for Morning+PLUS with revenues approximating $30,000 each month versus only $18,000 for the entire first quarter of 2004. Much of this increase was offset by a decrease in overall revenues of approximately $30,000 each month due to certain customers who are no longer in business. Product related costs include employee costs for research and content, as well as technical personnel who are responsible for the continued performance of our website. It also includes costs paid to third parties for data services, user licenses, and exchange fees. For the quarter ended March 31, 2005, these costs increased 32% or $159,434 over the same costs for the quarter ended March 31, 2004. This increase is attributable to increases in employee costs for increases in personnel levels to provide content for our expanded subscription offerings. For the quarter ended March 31, 2005, selling, general and administrative costs increased $237,931 or 100% over the same period in 2004. Approximately $90,000 of this increase is attributable to increases in personnel costs with an additional $108,000 due to increases in professional fees. Interest expense for the quarter ended March 31, 2004, represented interest on the line of credit outstanding and on subordinated debt issued during the year ended December 31, 2003, totaling $1,050,000 bearing interest at a rate of 12% to 24%. The increase for the quarter ended March 31, 2005, is due to subordinated debt issued during 2004. While the stated interest rate to be paid on the debt is 8% to 12%, interest expense includes approximately $110,000 of amortization of debt issuance and discount costs. The total debt issuance and debt issuance costs being amortized were $845,000 and are being amortized to interest expense over the life of this debt. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2005, we had cash of $60,316 and had a working capital deficit of $280,028. During November 2004, we fully satisfied loans included in current liabilities totaling $2,017,842 with either repayment in cash or the issuance of stock. We do not have any contracts, plans or agreements in place for any additional financing, except as discussed below. There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all. 20 The following is a description of certain transactions that were entered into during 2004 and the first part of 2005 to help provide funds for ongoing operations: o We executed an Agreement and Plan of Reorganization with Consolidated Travel Systems, Inc. in which we consummated a reverse merger with that company. o On November 15, 2004, we accepted Subscription Agreements from four institutional investors, for gross proceeds of $1,150,000, and issued 958,333 shares of our Series A Preferred Stock for $1.20 per share. The proceeds of the private placement were used to pay certain expenses in connection with the merger and for debt retirement and working capital. o On November 15, 2004, we entered into a Standby Equity Distribution Agreement with Cornell Capital. Pursuant to the Standby Equity Distribution Agreement, we may, at our discretion, periodically sell to Cornell Capital shares of our common stock, for a total purchase price of up to $10 million. For each share of common stock purchased under the Standby Equity Distribution Agreement, Cornell Capital will pay us 98% of, or a 2% discount to, the lowest volume weighted average price of the common stock on the Over-the-Counter Bulletin Board or other principal market on which the common stock is traded for the five days immediately following the notice date. Cornell Capital will retain 5% of each advance under the Standby Equity Distribution Agreement. Cornell Capital's obligation to purchase shares of common stock under the Standby Equity Distribution Agreement is subject to certain conditions, including our obtaining an effective registration statement for the resale of the common stock sold under the Standby Equity Distribution Agreement. Each advance under the Standby Equity Distribution Agreement cannot exceed $250,000 and the maximum amount of advances during any 30-day period cannot exceed $1,000,000. In no event can the number of shares issued to Cornell Capital pursuant to an advance cause Cornell Capital to own more than 9.9% of the shares of common stock outstanding. Subsequent to December 31, 2004, this Standby Equity Distribution Agreement was cancelled. o On November 15, 2004, pursuant to a Securities Purchase Agreement, we issued and sold to DCOFI Master LDC, Bushido Capital Master Fund, L.P. and Gamma Opportunity Capital Partners, LP an aggregate of $1,000,000 in principal amount of our 8% Secured Convertible Notes due November 1, 2006. The Notes bear interest at the rate of 8% per annum, payable quarterly, commencing February 1, 2005. The Notes are convertible at any time, at the option of the Note Purchasers, into our common stock at an initial conversion price (subject to adjustment) of $0.60 per share; however, the conversion price will be reduced to $0.30 per share in the event that either (i) our annualized pre-tax net income for the three-month period ending December 31, 2005 is less than $2,000,000 or (ii) the volume weighted average trading price for our common stock for the month of December 2005 is less than $1.00 per share. The net proceeds from the issuance and sale of the Notes were approximately $925,000 (after payment of fees and expenses to the Note Purchasers). We utilized the proceeds to repay certain bank debt, pay certain expenses and other obligations in connection with the Merger, and for working capital. 21 o On December 16, 2004, we entered into a Securities Purchase Agreement with DCOFI Master Ltd. to obtain financing of $500,000 bearing interest at 12% with interest payable monthly and maturing June 15, 2005. The initial $275,000 of this financing was drawn at this time with the remaining $225,000 drawn in January 2005. The agreement provides that an additional 4% per annum, payable monthly which is due on the balance until it is paid in full. In the event that we raise more than $2,000,000 from the sale of our securities, we are obligated to repay the notes plus accrued interest immediately. DCOFI Master, Ltd. holds a second priority lien on substantially all of our assets. This lien is junior to the lien granted to the holders of the Secured Convertible Notes issued November 15, 2004. This Agreement was amended in 2005 to extend the due date to September 1, 2006, and to increment the amount of this financing to $550,000, including the first $50,000 of interest payments which would have been due on the account. o During April 2005, we borrowed $50,000 from one of our directors to finance ongoing operations. The note bears interest at 12% per annum, payable monthly, and matures October 7, 2005. In connection with the issuance of this note, the Company also issued 10,000 warrants to purchase the Company's common stock. o On April 28, 2005, we entered into a Line of Credit agreement with a local bank for $300,000 bearing interest at prime plus two percent and maturing on April 27, 2006. We will make periodic draws under this agreement, as deemed necessary by management. The Line of Credit is guaranteed by certain of the Company's shareholders and board of directors. We believe that the above-described actions will provide us with the immediate financial requirements to enable us to continue as a going concern. In the event that we are unable to raise additional funds, we could be required to either substantially reduce or terminate our operations. We are not aware of any material trend, event or capital commitment which would potentially adversely affect liquidity. AUDITOR'S OPINION EXPRESSES DOUBT ABOUT THE COMPANY'S ABILITY TO CONTINUE AS A "GOING CONCERN" The independent auditors report on our December 31, 2004 financial statements included in the Company's Annual Report states that the Company's historical losses raise substantial doubts about the Company's ability to continue as a going concern. If we are unable to develop our business, we have to discontinue operations or cease to exist, which would be detrimental to the value of the Company's common stock. We can make no assurances that our business operations will develop and provide us with significant cash to continue operations. 22 CRITICAL ACCOUNTING ESTIMATES Revenue recognition and accounts receivable Subscription revenues are recognized over the period in which services are provided. Information provisioning revenues are recognized as the services are performed or when the goods are delivered. We recognize deferred revenue for customers who are billed and pay on a quarterly, semi-annual or annual basis. The amount received is amortized into income over the term of the pre-payment in order to match the revenue with the proper period of service. Amounts deferred as of the balance sheet date are shown in the liabilities section as Deferred Revenue. We record an estimate for our estimate of uncollectible accounts at the end of each accounting period based upon a detailed analysis of the aging of accounts receivable and specific customer analysis. Our policy is to block access to services for users who become delinquent for a certain period of time on their accounts. Because we adhere strictly to this policy, we have had a minimal number of accounts which have become uncollectible once their service has become established. We periodically write off accounts for which all collection efforts have been exhausted against the allowance for doubtful accounts. Depreciation and amortization We provide for depreciation of furniture, equipment and software over periods of five to seven years on the straight line basis. Initial website and database development costs which we incurred in our application development phase were capitalized and amortized over a three year period on the straight line basis. These costs became fully amortized during the year ended December 31, 2003. We expense post-implementation and maintenance costs in the period in which they are incurred. No project costs have been capitalized since the initial development of our website. RISK FACTORS Much of the information included in this quarterly report includes or is based upon estimates, projections or other "forward-looking statements". Such forward-looking statements include any projections or estimates made by us and our management in connection with our business operations. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. Such estimates, projections or other "forward-looking statements" involve various risks and uncertainties as outlined below. We caution the reader that important factors in some cases have affected and, in the future, could materially affect actual results and cause actual results to differ materially from the results expressed in any such estimates, projections or other "forward-looking statements". Our common shares are considered speculative. Prospective investors should consider carefully the risk factors set out below. 23 WE HAVE A HISTORY OF LOSSES WHICH MAY CONTINUE, WHICH MAY NEGATIVELY IMPACT OUR ABILITY TO ACHIEVE OUR BUSINESS OBJECTIVES. We incurred net losses of $2,811,127 for the year ended December 31, 2004 and $1,830,803 for the year ended December 31, 2003. In addition, for the quarter ended March 31, 2005, we incurred a net loss of $744,669. We cannot assure you that we can achieve or sustain profitability on a quarterly or annual basis in the future. Our operations are subject to the risks and competition inherent in the establishment of a business enterprise. There can be no assurance that future operations will be profitable. Revenues and profits, if any, will depend upon various factors, including whether we will be able to continue expansion of our revenue. We may not achieve our business objectives and the failure to achieve such goals would have an adverse impact on us. IF WE CANNOT GENERATE NEW SUBSCRIBERS, WE MAY NOT ACHIEVE PROFITABILITY. To increase our revenues and achieve profitability, we must increase our subscriber base significantly. We generate most of our leads for new subscribers from our website and through our existing customer relationships. These leads must be converted into subscriptions for our products and services at a rate higher than what we have been able to achieve so far. If we fail to do so, we may not achieve profitability. THE INDUSTRY IN WHICH WE OPERATE IS HIGHLY COMPETITIVE AND HAS RELATIVELY LOW BARRIERS TO ENTRY. INCREASED COMPETITION COULD RESULT IN MARGIN EROSION, WHICH WOULD MAKE PROFITABILITY EVEN MORE DIFFICULT TO ACHIEVE AND SUSTAIN. The market for financial information services is extremely competitive and the barriers to entry are relatively low. Increased competition could result in reduced operating margins, as well as a loss of market share and brand recognition. We compete with many providers of business and financial information including Bloomberg, Capital IQ, Dun & Bradstreet, Global Securities Information, Reuters, Standard & Poor's, Thomson Financial, thestreet.com, Edgar Online, 10-K Wizard, MSN and Yahoo! We also compete with large investment banking, brokerage and investment advisory firms that provide financial information services to their clients and others. Other competitors and potential competitors include education and publishing companies as well as e-commerce providers. Many of our existing and potential competitors have greater financial resources, larger market share, broader and more varied databases and libraries, technology and delivery systems that are more flexible or cost-effective, stronger alliances and/or lower cost structures than we do, which may enable them to establish a stronger competitive position than we have, in part through greater marketing opportunities. If we fail to address competitive developments quickly and effectively, we will not be able to grow. OUR BUSINESS COULD BE ADVERSELY AFFECTED BY ANY ADVERSE ECONOMIC DEVELOPMENTS IN RHE FINANCIAL SERVICES INDUSTRY AND/OR THE ECONOMY IN GENERAL. We depend on the continued demand for the distribution of business and financial information. Therefore, our business is susceptible to downturns in the financial services industry and the economy in general. Any significant downturn in the market or in general economic conditions would likely hurt our business. 24 IF WE FAIL TO KEEP UP WITH CHANGES AFFECTING THE MARKETS THAT WE SERVE, WE WILL BECOME LESS COMPETITIVE, ADVERSELY AFFECTING OUR FINANCIAL PERFORMANCE. In order to remain competitive and serve our customers effectively, we must respond on a timely and cost-efficient basis to changes in technology, industry standards and procedures and customer preferences. We need to continuously develop new products and services to address new developments. In some cases these changes may be significant and the cost to comply with these changes may be substantial. We cannot assure you that we will be able to adapt to any changes in the future or that we will have the financial resources to keep up with changes in the marketplace. Also, the cost of adapting our products and services may have a material and adverse effect on our operating results. OUR GROWTH STRATEGY ASSUMES THAT WE WILL MAKE TARGETED STRATEGIC ACQUISITIONS. ACQUISITIONS MAY DISRUPT OUR BUSINESS, DILUTE SHAREHOLDER VALUE OR DISTRACT MANAGEMENT'S ATTENTION FROM OPERATIONS. Unless we develop or acquire new content that we can market to our existing and new clients, our rate of revenue growth will continue to be slow and achieving profitability will be slow and difficult. We believe that the quickest and most efficient way for us to acquire new content is through targeted strategic acquisitions. If we fail to execute on this strategy, our revenues may not increase and our ability to achieve significant profitability will be delayed. Until now, our ability to acquire complimentary businesses has been hampered by our limited capital resources and the lack of a public market for our stock. An acquisition strategy is inherently risky. Some of the risks we may face in connection with acquisitions include: o identifying appropriate targets in an efficient and timely fashion; o negotiating terms that we believe are reasonable; o Failing to accurately assess the true cost of entering new markets or marketing new products; o integrating the operations, technologies, products, personnel and customers of the acquired enterprise; o maintaining our focus on our existing business; o losing key employees; and o reducing earnings because of disproportionately large depreciation and amortization deductions relating to the acquired assets. We may not be able to identify any appropriate targets or acquire them on reasonable terms. Even if we make strategic acquisitions, we may not be able to integrate these businesses into our existing operations in a cost-effective and efficient manner. 25 WE MAY ENCOUNTER RISKS RELATING YO SECURITY OR OTHER SYSTEM DISRUPTIONS AND FAILURES THAT COULD REDUCE THE ATTRACTIVENESS OF OUR WEBSITE AND THAT COULD HARM OUR BUSINESS. Although we have implemented in our products various security mechanisms, our business is vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays or loss of data. Additionally, our operations depend on our ability to protect systems against damage from fire, earthquakes, power loss, telecommunications failure, and other events beyond our control. Moreover, our website and business solutions have, in the past, and may in the future, experience slower response times or other problems for a variety of reasons, including hardware and communication line capacity restraints, software failures or during significant increases in traffic when there have been important business or financial news stories and during the seasonal periods of peak SEC filing activity. These strains on our system could cause customer dissatisfaction and could discourage visitors from becoming paying subscribers. These types of occurrences could cause users to perceive our website and technology solutions as not functioning properly and cause them to use other methods or services of our competitors. Any disruption resulting from these actions may harm our business and may be very expensive to remedy, and could damage our reputation and discourage new and existing users from using our products and services. Any disruptions could increase costs and make profitability even more difficult to achieve. WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY ADEQUATELY OR COST EFFECTIVELY, WHICH MAY CAUSE US TO LOSE MARKET SHARE OR REDUCE OUR PRICES. Our success depends in part on our brand identity and our ability to protect and preserve our proprietary rights. We cannot assure you that we will be able to prevent third parties from using our intellectual property rights and technology without our authorization. We do not own any patents on our technology. Rather, to protect our intellectual property, we rely on trade secrets, common law trademark rights and trademark registrations, as well as confidentiality and work for hire, development, assignment and license agreements with our employees, consultants, third party developers, licensees and customers. However, these measures afford only limited protection and may be flawed or inadequate. Also, enforcing our intellectual property rights could be costly and time-consuming and could distract management's attention from operating business matters. OUR INTELLECTUAL PROPERTY MAY INFRINGE ON THE RIGHTS OF OTHERS, RESULTING IN COSTLY LITIGATION. In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. In particular, there has been an increase in the filing of suits alleging infringement of intellectual property rights, which pressure defendants into entering settlement arrangements quickly to dispose of such suits, regardless of their merits. Other companies or individuals may allege that we infringe on their intellectual property rights. Litigation, particularly in the area of intellectual property rights, is costly and the outcome is inherently uncertain. In the event of an adverse result, we could be liable for substantial damages and we may be forced to discontinue our use of the subject matter in question or obtain a license to use those rights or develop non-infringing alternatives. Any of these results would increase our cash expenditures, adversely affecting our financial condition. IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US, AND THIS COULD DEPRESS OUR STOCK PRICE. Delaware corporate law and our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws contain provisions that could delay, defer or prevent a change in control of our company or our management. These provisions could discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. As a result, these provisions could limit the price that investors are willing to pay in the future for shares of common stock. For example: 26 o Without prior stockholder approval, the board of directors has the authority to issue one or more classes of preferred stock with rights senior to those of common stock and to determine the rights, privileges and preferences of that preferred stock; o There is no cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates; o Stockholders cannot call a special meeting of stockholders and cannot act by written consent; and o Our Bylaws establish advance notice requirements for submitting nominations for election to the board of directors and for proposing matters that can be acted upon by stockholders at a meeting. OUR PRINCIPAL STOCKHOLDERS, OFFICERS AND DIRECTORS OWN A CONTROLLING INTEREST IN OUR VOTING STOCK AND INVESTORS WILL NOT HAVE ANY VOICE IN OUR MANAGEMENT. Our officers and directors beneficially own approximately 32% of our outstanding common stock. As a result, these officers and directors, acting together, will have the ability to control substantially all matters submitted to our stockholders for approval, including: o election of our board of directors; o removal of any of our directors; o amendment of our certificate of incorporation or bylaws; and o adoption of measures that could delay or prevent a change in control or impede a merger, takeover, or other business combination involving us. As a result of their ownership and positions, our directors and executive officers collectively are able to influence all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, sales of significant amounts of shares held by our directors and executive officers, or the prospect of these sales, could adversely affect the market price of our common stock. Management's stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price. RISKS RELATING TO OUR CURRENT FINANCING AGREEMENTS: WE MAY NOT BE ABLE TO OBTAIN, ON A TIMELY BASIS, THE EFFECTIVENESS OF A REGISTRATION STATEMENT COVERING THE RESALE OF OUTSTANDING SHARES OR SHARES TO BE PURCHASED UPON THE EXERCISE OF OUTSTANDING WARRANTS OR THE CONVERSION OF CONVERTIBLE SECURITIES. We are obligated to file with the SEC one or more registration statements covering the resale of (i) the shares of common stock to be issued upon conversion of our Series A Preferred Stock, (ii) the shares of common stock issuable on the conversion of the Notes and (iv) the shares of common stock issuable upon the exercise of the warrants issued to the Note Purchasers. Under the terms of the various registration rights agreements executed by us in connection with these financing agreements, if we fail to timely file such 27 registration statements or are unable to cause such registration statements to become effective on a timely basis, we are obligated to make certain payments as liquidated damages to the holders of such securities. There can be no assurance that the registration statements will be declared effective by the SEC. IF WE ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING SECURED CONVERTIBLE NOTES, WE WOULD BE REQUIRED TO DEPLETE OUR WORKING CAPITAL, IF AVAILABLE, OR RAISE ADDITIONAL FUNDS. OUR FAILURE TO REPAY THE SECURED CONVERTIBLE NOTES, IF REQUIRED, COULD RESULT IN LEGAL ACTION AGAINST US, WHICH COULD REQUIRE THE SALE OF SUBSTANTIAL ASSETS. In November 2004, we entered into a Securities Purchase Agreement for the sale of an aggregate of $1,000,000 principal amount of secured convertible notes. The secured convertible notes are due and payable, with 8% interest, two years from the date of issuance, unless sooner converted into shares of our common stock. In addition, any event of default such as our failure to repay the principal or interest when due, our failure to issue shares of common stock upon conversion by the holder, our failure to timely file a registration statement or have such registration statement declared effective, breach of any covenant, representation or warranty in the Securities Purchase Agreement or related convertible note, the commencement of a bankruptcy, insolvency, reorganization or liquidation proceeding against us, we are a party to any change in control transaction or fundamental transaction resulting in our disposing of at least 33% of our assets in one or more transactions and the delisting of our common stock could require the early repayment of the secured convertible notes, including a default interest rate of 18% on the outstanding principal balance of the notes if the default is not cured within the specified grace period. We anticipate that the full amount of the secured convertible notes will be converted into shares of our common stock, in accordance with the terms of the secured convertible notes. If we were required to repay the secured convertible notes, we would be required to use our limited working capital and raise additional funds. If we were unable to repay the notes when required, the note holders could commence legal action against us and foreclose on all of our assets to recover the amounts due. Any such action would require us to curtail or cease operations. IF AN EVENT OF DEFAULT OCCURS UNDER THE SECURITIES PURCHASE AGREEMENT, SECURED CONVERTIBLE NOTES, WARRANTS OR SECURITY AGREEMENT, THE INVESTORS COULD TAKE POSSESSION OF ALL OUR GOODS, INVENTORY, CONTRACTUAL RIGHTS AND GENERAL INTANGIBLES, RECEIVABLES, DOCUMENTS, INSTRUMENTS, CHATTEL PAPER, INTELLECTUAL PROPERTY AND EQUITY SECURITIES OF OUR SUBSIDIARIES. In connection with the Securities Purchase Agreement we entered into in November 2004, we executed a Security Agreement in favor of the investors granting them a first priority security interest in all of our goods, inventory, contractual rights and general intangibles, receivables, documents, instruments, chattel paper, intellectual property and equity securities in our subsidiaries. The Security Agreement states that if an event of default occurs under the Securities Purchase Agreement, Secured Convertible Notes, Warrants or Security Agreement, the Investors have the right to take possession of the collateral, to operate our business using the collateral, and have the right to assign, sell, lease or otherwise dispose of and deliver all or any part of the collateral, at public or private sale or otherwise to satisfy our obligations under these agreements. RISKS RELATING TO OUR COMMON STOCK: IF WE FAIL TO REMAIN CURRENT ON OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED FROM THE OTC BULLETIN BOARD WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO SELL OUR SECURITIES AND THE ABILITY OF STOCKHOLDERS TO SELL THEIR SECURITIES IN THE SECONDARY MARKET. Companies trading on the OTC Bulletin Board, such as us, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as 28 amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board. If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board. As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market. OUR COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC AND THE TRADING MARKET IN OUR SECURITIES IS LIMITED, WHICH MAKES TRANSACTIONS IN OUR STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN INVESTMENT IN OUR STOCK. The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: o that a broker or dealer approve a person's account for transactions in penny stocks; and o the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person's account for transactions in penny stocks, the broker or dealer must: o obtain financial information and investment experience objectives of the person; and o make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form: o sets forth the basis on which the broker or dealer made the suitability determination; and o that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock. Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. TRENDS, RISKS AND UNCERTAINTIES We have sought to identify what we believe to be the most significant risks to our business, but we cannot predict whether, or to what extent, any of such risks may be realized nor can we guarantee that we have identified all possible risks that might arise. Investors should carefully consider all of such risk factors before making an investment decision with respect to our Common Stock. 29 ITEM 3. CONTROLS AND PROCEDURES a) Evaluation of Disclosure Controls and Procedures. As of March 31, 2005, the Company's management carried out an evaluation, under the supervision of the Company's Chief Executive Officer and the Chief Financial Officer of the effectiveness of the design and operation of the Company's system of disclosure controls and procedures pursuant to the Securities and Exchange Act, Rule 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective, as of the date of their evaluation, for the purposes of recording, processing, summarizing and timely reporting material information required to be disclosed in reports filed by the Company under the Securities Exchange Act of 1934. b) Changes in internal controls. There were no changes in internal controls over financial reporting, known to the Chief Executive Officer or Chief Financial Officer that occurred during the period covered by this report that has materially affected, or is likely to materially effect, the Company's internal control over financial reporting. 30 PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a), promulgated under the Securities and Exchange Act of 1934, as amended 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer) 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer) 31 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KNOBIAS, INC. Date: May 13, 2005 By: /s/ E. Key Ramsey --------------------------------------- E. Key Ramsey President, Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Accounting Officer and Principal Financial Officer) 32