UNITED
STATES OF AMERICA




SECURITIES
AND EXCHANGE COMMISSION




WASHINGTON,
DC 20549




FORM
10-Q




(Mark
One)




x
      
      QUARTERLY REPORT PURSUANT
      TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934




FOR
THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2009




oTRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
the transition period from ___ to ____




Commission
File Number: 001-32255




ANSWERS
CORPORATION




(Exact
name of Registrant as specified in its charter)





Delaware
            98-0202855(State
      or Other Jurisdiction of Incorporation or Organization)
            (I.R.S.
      Employer Identification No.)237
      West 35th
      Street, Suite 1101, New York, New York
            10001(Address
      of principal executive offices)
            (Zip
      Code)(646)
      502-4777(Registrant’s
      telephone number)(Former
      Name, Former Address and Former Fiscal Year, if changed since last
      report)







Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.




Yes
     x
                     
No      o




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).  Yes  oNo  o




Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer", "accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):




Large
accelerated Filer   o
         Accelerated
filer         o
           Non-accelerated
filer           o




Smaller
reporting company          
x




Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).




Yes
     o
                     
No       x




The
number of the registrant’s shares of common stock outstanding was 7,936,763 as
of November 6, 2009.







ANSWERS
CORPORATION




FORM
10-Q




CONTENTS


Table of Contents





PART I
      — FINANCIAL INFORMATIONItem 1.
            Consolidated Financial Statements
      (unaudited)
            2Consolidated Balance Sheets as of September 30, 2009 and
      December 31, 2008
            2Consolidated Statements of Operations for the three and nine
      months ended September 30, 2009 and 2008
            3Consolidated Statements of Cash Flows for the nine months ended
      September 30, 2009 and 2008
            4Notes to Consolidated Financial
    Statements
            5Item 2.
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            21Item 3.
            Quantitative and Qualitative Disclosures About Market
      Risk
            39Item 4T.
            Controls and Procedures
            39PART II
      — OTHER INFORMATIONItem 1.
            Legal Proceedings
            40Item 1A.
            Risk Factors
            40Item 2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            51Item 3.
            Defaults Upon Senior Securities
            51Item 4.
            Submission of Matters to a Vote of Security
      Holders
            51Item 5.
            Other Information
            51Item 6.
            Exhibits
            51Signatures







INTRODUCTORY
NOTE




This Report on Form 10-Q for
Answers Corporation (“Answers” or the “Company”) may contain
forward-looking statements. You can identify these statements by forward-looking
words such as “may,” “will,” “expect,” “intend,” “anticipate,” believe,”
“estimate” and “continue” or similar words. Forward-looking statements include
information concerning possible or assumed future business success or financial
results. You should read statements that contain these words carefully because
they discuss future expectations and plans, which contain projections of future
results of operations or financial condition or state other forward-looking
information.  We believe that it is important to communicate future
expectations to investors. The forward-looking statements included herein are
based on current expectations that involve a number of risks and uncertainties,
which are discussed in Item 1A, “Risk Factors” and in other sections of
this Form 10-Q and in our other filings with the Securities and Exchange
Commission.  These risks and uncertainties could cause actual results
or events to differ materially from the forward-looking statements that we
make.




Although, there may be events in
the future that we are not able to accurately predict or control, we do not
undertake any obligation to update any forward-looking statements for any
reason, even if new information becomes available or other events occur in the
future.Accordingly, to the extent that this
Form 10-Q contains forward-looking statements regarding the financial condition,
operating results, business prospects or any other aspect of the Company, please
be advised that Answers' actual financial condition, operating results and
business performance may differ materially from that projected or estimated
by the Company in forward-looking statements.


Table of Contents




PART I - FINANCIAL INFORMATION


Answers
Corporation and Subsidiary








Consolidated Balance Sheets (unaudited, in thousands except share and
per share data)





September
      30
            
            December
      312009
            
            2008$
            
            $AssetsCurrent
      assets:Cash
      and cash equivalents
            21,344
            
            11,739Accounts
      receivable
            2,257
            
            1,680Prepaid
      expenses and other current assets
            789
            
            818Deferred
      tax asset
            17
            
            -Total
      current assets
            24,407
            
            14,237Long-term
      deposits (restricted)
            271
            
            257Deposits
      in respect of employee severance obligations
            1,665
            
            1,337Property
      and equipment, net of $2,606 and $2,083 accumulated depreciation as
      ofSeptember
      30, 2009 and December 31, 2008, respectively
            1,838
            
            1,234Other
      assets:Intangible
      assets, net of  $898 and $769 accumulated amortization as of
      September 30, 2009and
      December 31, 2008, respectively
            816
            
            994Goodwill
            437
            
            437Prepaid
      expenses, long-term, and other assets
            227
            
            220Deferred
      tax assets long term
            24
            
            -Total
      other assets
            1,504
            
            1,651Total
      assets
            29,685
            
            18,716Liabilities
      and stockholders' equityCurrent
      liabilities:Accounts
      payable
            436
            
            537Accrued
      expenses
            717
            
            751Accrued
      compensation
            1,024
            
            628Warrant
      to purchase units of Series B preferred stock and warrants
            -
            
            8,698Capital
      lease obligation – current portion
            81
            
            78Deferred
      revenues
            -
            
            16Total
      current liabilities
            2,258
            
            10,708Long-term
      liabilities:Liability
      in respect of employee severance obligations
            1,770
            
            1,534Capital
      lease obligation, net of current portion
            44
            
            106Deferred
      tax liability
            34
            
            26Series
      A and Series B Warrants
            8,748
            
            -Total
      long-term liabilities
            10,596
            
            1,666Commitments
      and contingenciesSeries A and B convertible
      preferred stock: $0.01 par value; stated value and
      liquidationpreference
      of $100 per share; 6% cumulative annual dividend; 130,000 and 60,000
      sharesauthorized,
      issued and outstanding as of September 30, 2009 and December 31, 2008,
      respectively
            1,796
            
            624Stockholders'
      equity:Preferred
      stock: $0.01 par value; 870,000 and 940,000 shares authorized as of
      September 30, 2009and
      December 31, 2008, respectively, none issued
            -
            
            -Common
      stock; $0.001 par value; 100,000,000 shares authorized; 7,936,763 and
      7,870,538 sharesissued
      and outstanding as of September 30, 2009 and December 31, 2008,
      respectively
            8
            
            8Additional
      paid-in capital
            88,867
            
            77,091Accumulated
      other comprehensive income (loss)
            75
            
            (28)Accumulated
      deficit
            (73,915)
            
            (71,353)Total
      stockholders' equity
            15,035
            
            5,718Total
      liabilities and stockholders' equity
            29,685
            
            18,716





The
accompanying notes are an integral part of these consolidated financial
statements.


2
 Table of Contents


Answers
Corporation and Subsidiary





Consolidated Statements of Operations (unaudited, in thousands except
share and per share data)





Three
      months ended September 30
            
            Nine
      months ended September 302009
            
            2008
            
            2009
            
            2008$
            
            $
            
            $
            
            $Revenues:Advertising
      revenue
            4,970
            
            3,539
            
            14,684
            
            9,536Answers
      service licensing
            17
            
            24
            
            53
            
            614,987
            
            3,563
            
            14,737
            
            9,597Costs
      and expenses:Cost
      of revenue
            1,264
            
            945
            
            3,489
            
            3,754Research
      and development
            921
            
            866
            
            2,611
            
            2,670Community
      development, sales and marketing
            621
            
            563
            
            1,679
            
            2,258General
      and administrative
            1,201
            
            1,311
            
            3,666
            
            3,640Write-off
      of the Brainboost Answer Engine
            -
            
            -
            
            -
            
            3,138Termination
      fees and write-off of costs relating tothe
      terminated Lexico acquisition and abandonedfollow-on
      offering
            -
            
            -
            
            -
            
            2,543Total
      operating expenses
            4,007
            
            3,685
            
            11,445
            
            18,003Operating
      income (loss)
            980
            
            (122)
            
            3,292
            
            (8,406)Interest
      income (expense), net
            4
            
            (43)
            
            (445)
            
            30Other
      income (expense), net
            (5)
            
            11
            
            -
            
            (38)Loss
      resulting from fair value adjustments ofSeries
      A Warrants, Series B Warrants and warrantto
      purchase units of Series B preferred stock and
    warrants
            (999)
            
            (2,056)
            
            (3,374)
            
            (2,056)Loss
      before income taxes
            (20)
            
            (2,210)
            
            (527)
            
            (10,470)Income
      tax benefit (expense), net
            (50)
            
            91
            
            (121)
            
            65Net
      loss
            (70)
            
            (2,119)
            
            (648)
            
            (10,405)Basic
      and diluted net loss per common share
            (0.11)
            
            (0.31)
            
            (0.28)
            
            (1.37)Number
      of shares used in computing basic and diluted net loss per common
      share
            7,930,440
            
            7,865,263
            
            7,897,391
            
            7,861,681





The
accompanying notes are an integral part of these consolidated financial
statements.


3
 Table of Contents


Answers
Corporation and Subsidiary





Consolidated Statements of Cash Flows (unaudited, in
thousands)


Nine
      months ended September 302009
            
            2008$
            
            $Cash
      flows from operating activities:Net
      loss
            (648)
            
            (10,405)Adjustments
      to reconcile net loss to net cash flows from operating
      activities:Depreciation
      and amortization
            883
            
            1,080Increase
      in deposits in respect of employee severance obligations
            (328)
            
            (198)Increase
      in liability in respect of employee severance obligations
            234
            
            380Stock-based
      compensation to employees and directors
            1,166
            
            1,312Write-off
      of the Brainboost Answers Engine
            -
            
            3,138Write-off
      of amounts paid in prior periods, relating to the terminated Lexico
      acquisitionand
      abandoned follow-on offering
            -
            
            663Fair
      value adjustments of Series A Warrants, Series B Warrants and warrant to
      purchaseUnits
      of Series B preferred stock and warrants
            3,374
            
            2,056Loss
      on disposal of property and equipment
            72
            
            4Gains
      from exchange rate forward contracts, net
            -
            
            (46)Unrealized
      gains from exchange rate forward contracts
            103
            
            -Exchange
      rate (gains) losses
            -
            
            38Changes
      in operating assets and liabilities:Increase
      in accounts receivable, and prepaid expenses and other current
      assets
            (259)
            
            (339)(Increase)
      decrease in prepaid expenses and other assets
            (12)
            
            1(Increase)
      decrease in deferred taxes, net
            (33)
            
            9Decrease
      in accounts payable
            (212)
            
            (254)Increase
      (decrease) in accrued expenses and accrued compensation
            396
            
            (150)(Decrease)
      increase in deferred revenues
            (16)
            
            6Net
      cash provided by (used in) operating activities
            4,720
            
            (2,705)Cash
      flows from investing activities:Capital
      expenditures
            (1,275)
            
            (435)Increase
      in long-term deposits
            (14)
            
            (28)Proceeds
      from sales of  investment securities
            -
            
            700Net
      cash provided by (used in) investing activities
            (1,289)
            
            237Cash
      flows from financing activities:Repayment
      of capital lease obligation
            (58)
            
            (36)Dividends
      paid on preferred shares
            (404)
            
            -Stock
      registration costs
            -
            
            (47)Exercise
      of common stock options
            177
            
            10Redpoint
      financings, net of issuance costs
            6,480
            
            5,380Net
      cash provided by financing activities
            6,195
            
            5,307Effect
      of exchange rate changes on cash and cash equivalents
            (21)
            
            36Net
      increase in cash and cash equivalents
            9,605
            
            2,875Cash
      and cash equivalents at beginning of period
            11,739
            
            6,778Cash
      and cash equivalents at end of period
            21,344
            
            9,653Supplemental
      disclosures of cash flow information:Income
      taxes paid
            121
            
            7Non-cash
      investing activities:Capital
      expenditures on account
            108
            
            -Acquisition
      of assets through capital lease obligation
            -
            
            239Non-cash
      financing activities:Increase
      in accrued dividends
            -
            
            106Amortization
      of discounts on Series A and Series B convertible preferred
      shares
            1,155
            
            279




The
accompanying notes are an integral part of these consolidated financial
statements.


4
 Table of Contents


ANSWERS CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





Note
1 - Business





Answers
Corporation (“the Parent”), a Delaware corporation, and its wholly-owned Israeli
subsidiary that engages primarily in research and development services to the
Parent (“the Subsidiary”), are collectively referred to as “the Company.” The
Parent is a public company and trades on the NASDAQ Capital Market under the
symbol “ANSW”.





As of
September 30, 2009, approximately $873 thousand of the Company’s net assets were
located outside of the United States.





The
Company provides answer-based search services to users primarily through its
website Answers.com®, which includes WikiAnswers® and ReferenceAnswersTM.  In
the Company’s reports prior to its quarterly report for the second quarter of
2009, it referred to ReferenceAnswers as Answers.com. Beginning with the
quarterly report for the second quarter of 2009 it refers to that property as
ReferenceAnswers or ReferenceAnswers.com.





On
June 16, 2008, the Company raised $6 million, before related fees and
costs, in a private placement offering, and on June 10, 2009 the Company raised
an additional $7 million, before related fees and costs, from the exercise of
the second tranche warrant of such private placement offering. See Note 4 for
further details.





In the
first quarter of 2008, the Company’s planned acquisition of Lexico Publishing
Group LLC and the related planned offering of securities were terminated due to
unfavorable market conditions. As a result, the Company recorded a charge to its
statement of operations, amounting to approximately $2.54 million.





Note
2 - Summary of Significant Accounting Policies





Basis
of Presentation





The
accompanying consolidated financial statements include the accounts of Answers
Corporation and its Subsidiary and are presented in accordance with accounting
principles generally accepted in the United States of America (“U.S. GAAP”). All
significant intercompany balances and transactions have been eliminated in
consolidation.





During
the third quarter of 2009, the new Accounting Standards Codification (ASC) as
issued by the Financial Accounting Standards Board (FASB) became effective. The
ASC has become the source of authoritative U.S. GAAP recognized by the FASB to
be applied by nongovernmental entities. The ASC does not change Generally
Accepted Accounting Principles in the U.S. (U.S. GAAP); and, therefore, does not
have any impact on the Company’s consolidated financial statements. Beginning
with this quarterly report, all references to GAAP in the notes to the
consolidated financial statements use the new Codification numbering
system.





The
Company has evaluated subsequent events for recognition or disclosure through
November 6, 2009, the date upon which these financial statements were available
to be issued.





The
accompanying unaudited consolidated financial statements were prepared in
accordance with the instructions for Form 10-Q and, therefore, do not include
all disclosures necessary for a complete presentation of financial condition,
results of operations, and cash flows in conformity with generally accepted
accounting principles. All adjustments, which are, in the opinion of management,
of a normal recurring nature and are necessary for a fair presentation of the
interim financial statements, have been included. Nevertheless, these financial
statements should be read in conjunction with the consolidated financial
statements and related notes included in the Company’s Annual Report on Form
10-K for the year ended December 31, 2008. The results of operations for the
three and nine months ended September 30, 2009 are not necessarily indicative of
the results that may be expected for the entire fiscal year or any other interim
period.





Use
of Estimates




The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported results of operations during the reporting periods. Actual results
could differ from those estimates.




5
 Table of Contents


ANSWERS
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(UNAUDITED)





Note
2 - Summary of Significant Accounting Policies (cont’d)





Revenue
Recognition





The
Company, through its website Answers.com, generates revenues via advertising in
the form of pay-per-performance ads and paid-for-impression advertising. In the
pay-per-performance model, the Company earns revenue based on the number of
clicks associated with such ads. In the paid-for-impression model, the Company’s
revenue is derived from the display of ads.





Most of
the Company’s advertising revenue is obtained through the efforts of third
parties rather than through direct contracts with advertisers. The third party
is obligated to pay the Company a portion of the revenue it receives from
advertisers, as compensation for the Company’s sale of promotional space on its
Internet properties. Amounts received from such third parties are reflected as
revenue in the period in which such advertising services are
provided.




The
Company also earns an immaterial amount of revenue from partners that pay the
Company for providing them with answer-based services that they then use in
their own products, via co-branded web pages.




The
Company earned advertising revenue from its two web properties, as
follows:





Three
      months ended September 30
            
            Nine
      months ended September 302009
            
            2008
            
            2009
            
            2008$
      (in thousands)Advertising
      revenueWikiAnswers
            3,422
            
            1,960
            
            9,984
            
            4,891ReferenceAnswers
            1,548
            
            1,579
            
            4,700
            
            4,6454,970
            
            3,539
            
            14,684
            
            9,536





Accounting
for Stock-Based Compensation





Stock-based
compensation is the fair value of stock options granted to employees and
directors and is recorded in operating expenses over the vesting periods of the
stock options. Such fair value is estimated at the date of grant using the
Black-Scholes option-pricing model, which takes into consideration the share
price at the date of grant, the exercise price of the option, the expected life
of the option, expected interest rates and the expected volatility.




6
 Table of Contents


ANSWERS
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(UNAUDITED)





Note
2 - Summary of Significant Accounting Policies (cont’d)





Net
Loss per Common Share





Basic net
loss per share is computed by dividing the net loss for the period by the
weighted average number of common shares outstanding during the period. Diluted
net loss per share is computed by dividing the net loss for the period by the
weighted average number of shares of common stock and potentially dilutive
common stock outstanding during the period. The dilutive effect of outstanding
options is reflected in diluted earnings per share by application of the
treasury stock method. The calculation of diluted net loss per share excludes
all anti-dilutive shares. The diluted net loss per share is the same as basic
net loss per share as the inclusion of the Company’s common stock equivalents
would be anti-dilutive.





The
following table sets forth the computation of basic and diluted net loss per
share for the periods indicated:




Three
      months ended September 30
              
              Nine
      months ended September 302009
              
              2008
              
              2009
              
              2008$
      (in thousands, except share and per share amounts)
              
              $
      (in thousands, except share and per share
amounts)Basic and diluted net loss per common share
      computationNumerator:Net
      loss
              (70)
              
              (2,119)
              
              (648)
              
              (10,405)Series
      A and Series B Convertible Preferred Stock dividends
              (198)
              
              (91)
              
              (404)
              
              (106)Amortization
      of Series A and Series B Convertible Preferred Stock
    discounts
              (585)
              
              (239)
              
              (1,155)
              
              (279)Net
      loss attributable to common shares (basic)
              (853)
              
              (2,449)
              
              (2,207)
              
              (10,790)Denominator:Weighted
      average number of common shares outstanding during the
    period
              7,930,440
              
              7,865,263
              
              7,897,391
              
              7,861,681Basic
      and diluted net loss per common share
              (0.11)
              
              (0.31)
              
              (0.28)
              
              (1.37)Common
      stock equivalents excluded because their effect would have been
      anti-dilutive
              3,379,837
              
              1,373,822
              
              2,704,963
              
              584,989




7
 Table of Contents


ANSWERS
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(UNAUDITED)





Note
2 - Summary of Significant Accounting Policies (cont’d)





Derivatives
and hedging





The
Company recognizes all derivatives on the balance sheet at fair value. If the
derivatives meet the definition of a hedge and are so designated, depending on
the nature of the hedge, changes in the fair value of derivatives will either be
offset against the change in fair value of the hedged assets, liabilities, firm
commitments or forecasted transactions, or recognized in other comprehensive
income until the hedged item is recognized in earnings. The ineffective portion
of a derivative’s change in fair value, if any, is recognized in earnings. Gains
(losses) from a derivative’s change in fair value that are not designated as
hedges are recognized in earnings.
 
 To
mitigate the potential impact of adverse fluctuations in cash flows resulting
from forecasted new Israeli shekels (NIS) exchange rates, the Subsidiary hedges
portions of its forecasted expenses denominated in NIS with currency forwards
and options. The Subsidiary does not speculate in these hedging instruments in
order to profit from foreign currency exchanges, nor does it enter into trades
for which there are no underlying exposures.
 
 Through
April 2009, the Subsidiary’s currency forwards and options were not designated
as hedging instruments and, therefore, the net gains (losses) that resulted from
such derivatives were recognized in earnings as they occurred.
 
 Starting
May 2009, the Subsidiary designated all of its currency hedging activity, which
currently consists only of forward contracts, as cash flow hedges as they were
all eligible. The Company documents all relationships between the hedging
instruments and hedged items, as well as its risk management objective for
undertaking these hedging transactions. The Company also formally assesses, both
at the inception of the hedge and on an ongoing basis, whether or not each
derivative is highly effective in offsetting changes in fair value of the hedged
items.
 
 Gains
(losses) from forward and option contracts are included in operating expenses,
as follows:


Three
      months ended September 30
            
            Nine
      months ended September 302009
            
            2008
            
            2009
            
            2008$
      (in thousands)
            
            $
      (in thousands)Cost
      of revenue
            8
            
            (3)
            
            (3)
            
            6Research
      and development
            42
            
            (26)
            
            (1)
            
            22Sales
      and marketing
            8
            
            (2)
            
            (2)
            
            5General
      and administrative
            22
            
            (13)
            
            (4)
            
            1380
            
            (44)
            
            (10)
            
            46





The gains
for the three months ended September 30, 2009, derived from forward contracts
that were designated as hedging instruments.





The net
loss for the nine months ended September 30, 2009 of $10 thousand, is comprised
by $90 thousand of losses from option and forward contracts that were not
designated as hedging instruments, less $80 thousand of gains from forward
contracts that were designated as hedging instruments.





As of
September 30, 2009, the notional amount of the Subsidiary’s outstanding forward
contracts was approximately $2.9million, constituting an
asset with a fair value of $103,000. Such asset is included in prepaid expenses
and other current assets as the foreign exchange forward contracts mature
through May 28, 2010, and the change in fair value has been recorded in equity
as accumulated other comprehensive income (loss) (see Note 3). The amounts
recorded as accumulated other comprehensive income will be reclassified to
earnings as the forward contracts mature or if, and to the extent the hedging
relationship is deemed ineffective.





8
 Table of Contents


ANSWERS
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(UNAUDITED)





Note
3 – Comprehensive Income (Loss)





Comprehensive
income represents net income (loss) plus any revenue, expenses, gains and losses
that are specifically excluded from net income (loss) and recognized directly as
a component of shareholders’ equity.





The
reconciliation from net income to comprehensive income is as
follows:





Three
      months ended September 30
            
            Nine
      months ended September 302009
            
            2008
            
            2009
            
            2008$
      (in thousands)
            
            $
      (in thousands)Net
      loss
            (70)
            
            (2,119)
            
            (648)
            
            (10,405)Unrealized
      gains on derivative and hedging activity, net
            103
            
            -
            
            103
            
            -Less:Reclassification
      adjustment for gains on derivative
              and
      hedging activity included in net loss
            (44)
            
            -
            
            -
            
            -Total
      other comprehensive loss
            (11)
            
            (2,119)
            
            (545)
            
            (10,405)








Note
4 – Redpoint Financing





General




On
June 16, 2008 (the “Initial Closing Date”), pursuant to a private placement
of the Company’s securities, Redpoint Omega, L.P. and Redpoint Omega Associates,
LLC (collectively “ Redpoint ”) purchased $6,000,000 of the Company’s
Series A Convertible Preferred Stock (the “Series A Financing”), initially
convertible into 1,333,333 shares of common stock at a conversion price of $4.50
per share (the “Series A Convertible Preferred Stock”), and
Common Stock Purchase Warrants exercisable for 666,667 shares of common stock at
an exercise price of $4.95 per share (the “Series A Warrants”). Redpoint also
received a warrant (the “Series B Unit Warrant”), exercisable until
June 16, 2009, to purchase units of up to $7,000,000 of Series B
Convertible Preferred Stock and Common Stock Purchase Warrants. After deducting
placement agent fees and legal expenses, the Company’s net proceeds from the
private placement on June 16, 2008, were approximately $5,380,000.




On June
10, 2009, Redpoint exercised its Series B Unit Warrant and purchased $7,000,000
of the Company’s Series B Convertible Preferred Stock (the “Series B
Financing”), initially convertible into 1,272,727 shares of common stock at a
conversion price of $5.50 per share (the
“Series B Convertible Preferred Stock”), and Common Stock
Purchase Warrants exercisable for 636,364 shares of common stock at an exercise
price of $6.05 per share (the “Series B Warrants”). After deducting placement
agent fees and legal expenses, the Company’s net proceeds from the Series B
Financing were approximately $6,480,000.





Transaction
costs for both investments were allocated on a pro rata basis, based on the
amounts allocated to each of the components of the transaction. Transaction
costs relating to the Series A Convertible Preferred Stock and the Series B
Convertible Preferred Stock have been reflected as a reduction to the proceeds
from the issuance of such instruments. Transaction costs relating to the Series
B Unit Warrant were deferred and amortized to interest expense over one year,
which was the life of the unit warrant. Transaction costs relating to the Series
A Warrants were initially reflected as a reduction to the proceeds from the
issuance of such instrument and then written off to retained earnings upon
adoption of EITF Issue 07-5, “Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock” (now
incorporated in ASC 815–40, “Derivatives and hedging – Contracts
in Entity’s Own Equity”) (see below). Transaction costs relating to the
Series B Warrants have been included in the statement of operations as interest
expense for the nine months ended September 30, 2009.




The
Series A Convertible Preferred Stock, the Series B Convertible Preferred Stock,
the Series A Warrants and the Series B Warrants are collectively referred to as
the “Redpoint Securities”. The two transactions, in aggregate, are collectively
referred to as the “Redpoint Financings”.


9
 Table of Contents


ANSWERS
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(UNAUDITED)





Note
4 – Redpoint Financing (cont’d)




The
Series A Convertible Preferred Stock has the rights and preferences set
forth in the Company’s Certificate of Designations, which amended the Company’s
Amended and Restated Certificate of Incorporation on June 16, 2008. The
Series B Convertible Preferred Stock has the rights and preferences set
forth in the Company’s Certificate of Designations, which amended the Company’s
Amended and Restated Certificate of Incorporation on June 9, 2009.




In
connection with the Redpoint Financings the Company entered into a registration
rights agreement with Redpoint, pursuant to which the Company agreed to register
with the SEC for resale the common stock underlying the Redpoint Securities. In
connection with the registration rights agreements, the Company agreed to pay a
penalty of 1.0% per month, on a daily pro rata basis, up to a maximum of 8.0%,
of the aggregate purchase price, as partial liquidated damages, for certain
default events and subject to certain circumstances. The partial liquidated
damages may trigger if the registration is not declared effective or ceases to
remain continuously effective, as the case may be. On July 30, 2008, following
the Series A Financing, the Company filed a registration statement for the
registration of shares of common stock issuable upon conversion of Series A
Convertible Preferred Stock, and shares of common stock issuable upon exercise
of the Series A Warrants, which was declared effective by the SEC on September
16, 2008. On June 15, 2009, following the Series B Financing, the Company filed
a registration statement for the registration of shares of common stock issuable
upon conversion of Series B Convertible Preferred Stock, shares of common
stock issuable upon exercise of the Series B Warrants, and shares of common
stock that may be issued as dividends pursuant to the terms of the Series A
Convertible Preferred Stock and the Series B Convertible Preferred Stock, which
was declared effective by the SEC on July 28, 2009.




In
connection with the Redpoint Financings, Redpoint received the right to appoint
two individuals to serve as voting members of the Company’s board of
directors.





Accounting
for Series A Financing




The
$6,000,000 of proceeds from the Series A Financing, were first allocated to the
Series B Unit Warrant, which was classified as a liability, based on its fair
value, and the residual amount was allocated among the Series A Convertible
Preferred Stock and the Series A Warrants based on their relative fair values,
all in accordance with the guidance in ASC 480, “Distinguishing Liabilities from
Equity” (formerlySFAS 150, “Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity”), and
ASC 815–40, “Derivatives
and hedging – Contracts in Entity’s Own Equity”(formerly EITF 00-19,
”Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock”). The Series A Convertible Preferred Stock has been classified as
temporary equity, in accordance with the guidance in ASC 480-10-S99A
(formerly EITF D-98, “Classification and Measurement of
Redeemable Securities”), and, prior to January 1, 2009, the Series A
Warrants were classified in permanent equity.




In June
2008, the FASB ratified the consensus of EITF 07-5 (incorporated in
ASC 815–40).  ASC 815–40 responded to practice questions
about whether an instrument or embedded feature is indexed to the reporting
company’s own stock by establishing a framework for the determinations and by
nullifying some previous requirements. The adoption of EITF 07-5 (incorporated
in ASC 815–40) requirements affects issuers’ accounting for warrants and
many convertible instruments with provisions that protect holders from declines
in the stock price (“Down-Round” provisions). Warrants with such provisions are
no longer recorded in equity, and many convertible instruments with such
provisions require “bifurcation” with the conversion option separately accounted
for as a derivative under ASC 815 (formerly SFAS 133).


10
 Table of Contents


ANSWERS
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(UNAUDITED)





Note
4 – Redpoint Financing (cont’d)




Accounting
for Series A Financing (cont’d)




As a
result of the adoption of ASC 815–40, effective January 1, 2009, and due to
the Down-Round Protection of the Series A Warrants, such warrants are separately
accounted for as a derivative under ASC 815 (formerly SFAS 133) and are no
longer recorded in equity but rather as a liability, initially valued at fair
value to be revalued at each reporting date.




ASC 815–40
was initially applied by recording a cumulative-effect adjustment to opening
retained earnings as of January 1, 2009, to effect the accounting for the Series
A Warrants as a liability. The following table summarizes the allocation of the
Series A Financing had the Company been subject to the provisions of
ASC 815–40 at the Initial Closing Date:




Series
      A Convertible Preferred Stock
            
            Series
      A Warrants
            
            Series
      B Unit Warrant
            
            Total$
      (in thousands)Allocated
      amount
            661
            
            1,828
            
            3,511
            
            6,000Less:
      Transaction costs
            (69)
            
            (188)
            
            (363)
            
            (620)592
            
            1,640
            
            3,148
            
            5,380





On
January 1, 2009, the Company recorded a cumulative effect of change in
accounting principle as reflected in the following table:





December
      31, 2008
            
            Effect
      of
              Adoption
      of EITF 07-5
            
            January
      1, 2009$
      (in thousands)Additional
      paid-in capital
            77,091
            
            (1,657)(1)
            
            75,434Accumulated
      deficit
            (71,353)
            
            (1,726)(2)
            
            (73,267)(188)(3)Long-term
      liability – Series A Warrants
            -
            
            3,554(4)
            
            3,554Series
      A convertible preferred stock
            624
            
            17(5)
            
            641-





(1)
            Reflects
      the re-allocation of the Series A Warrants from equity to liabilities and
      the reduction of the discount relating to the Beneficial Conversion
      Feature.


(2)
            Reflects
      the cumulative change in the fair value of the Series A Warrants between
      June 16, 2008 and December 31, 2008


(3)
            Reflects
      the deferred charges attributable to the Series A Warrants that would have
      been expensed at the Redpoint Closing
Date


(4)
            Reflects
      the fair value of the Series A Warrants as of December 31,
      2008


(5)
            Reflects
      the increased amortization due to change in
  discounts.





On
September 30, 2009, the Company assessed the fair value of the Series A Warrants
as compared to their value as of December 31, 2008 and June 30, 2009. The change
in fair value has been included in the statement of operations as loss resulting
from fair value adjustment of Series A Warrants, and amounted $505,000 and
$901,000 for the three and nine months ended September 30, 2009,
respectively.


11
 Table of Contents


ANSWERS
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(UNAUDITED)





Note
4 – Redpoint Financing (cont’d)




Accounting
for Series B Financing




The
change in value of the Series B Unit Warrant from January 1, 2009 through June
10, 2009, has been included in the statement of operations as loss resulting
from fair value adjustment of warrant to purchase units of Series B preferred
stock and warrants, and amounted to $0 and $2.08 million for the three and nine
months ended September 30, 2009, respectively. On June 10, 2009, Redpoint
exercised, in full, the Series B Unit Warrant, which was valued at approximately
$10.8 million on such date, thus extinguishing this liability from the Company’s
balance sheet through a corresponding increase to additional paid-in
capital.





The $7
million of proceeds from the Series B Financing, were first allocated to the
Series B Warrants which were classified as a liability, recoded at fair value,
and the residual amount was allocated to the Series B Convertible Preferred
Stock, all in accordance with the guidance in ASC 815 (formerly
SFAS 133), ASC 480(formerly
SFAS 150) and ASC 815–40 (formerly EITF Issue No. 07-5). The Series B
Convertible Preferred Stock has been classified as temporary equity, in
accordance with the guidance in ASC  480-10-S99A (formerly EITF
D-98).





Resulting
from the allocation of the proceeds as described above, and in comparison to the
fair market value of the Company’s common stock on the date of issuance, the
effective conversion rate of the Series B Convertible Preferred Stock,
represents an additional beneficial conversion value. Thus, the Company recorded
an additional discount to the Series B Convertible Preferred Stock, with a
corresponding increase in paid-in capital, of $2,868,000, reducing the Series B
Convertible Preferred Stock to zero. In accordance with ASC 470–20, “Debt with Conversion and Other
Options” (formerly EITF 00-27, “Application of Issue No. 98-5 to
Certain Convertible Instruments”), the aforesaid discount is amortized to
paid-in capital over five years from the date of issuance, the earliest
redemption date of the stock.





The
following table summarizes the allocation of the Series B
Financing:





Series
      B Convertible Preferred Stock
            
            Series
      B Warrants
            
            Total$
      (in thousands)Allocated
      amount
            3,098
            
            3,902
            
            7,000Less:
      Transaction costs
            (230)
            
            (290)
            
            (520)2,868
            
            3,612
            
            6,480





On
September 30, 2009, the Company assessed the fair value of the Series B Warrants
as compared to their value on June 10, 2009 and June 30, 2009. The change in
fair value has been included in the statement of operations as a loss resulting
from fair value adjustment of Series B Warrants, and amounted $494,000 and
$391,000 for the three and nine months ended September 30, 2009,
respectively.


12
 Table of Contents


ANSWERS
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(UNAUDITED)





Note
5 – Fair Value Measurements




The
Company measures fair value in accordance with ASC 820-10, “Fair Value Measurements and
Disclosures” (formerly SFAS  157, “Fair Value Measurements”).
ASC  820-10 clarifies that fair value is an exit price, representing the
amount that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants. As such, fair value is a
market-based measurement that should be determined based on assumptions that
market participants would use in pricing an asset or a liability. As a basis for
considering such assumptions, ASC 820-10 establishes a three-tier value
hierarchy, which prioritizes the inputs used in the valuation methodologies in
measuring fair value:




Level 1 - Observable
inputs that reflect quoted prices (unadjusted) for identical assets or
liabilities in active markets.


Level 2 - Include other
inputs that are directly or indirectly observable in the
marketplace.


Level 3 - Unobservable
inputs which are supported by little or no market activity.





The fair
value hierarchy also requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair
value.





The
Company measures its cash equivalents, foreign currency derivative contracts and
Series A and B Warrants at fair value. In accordance with ASC 820-10, the
Company’s cash equivalents are classified within Level 1. This is because the
cash equivalents are valued using quoted active market prices. The Company’s
foreign currency derivative contracts are classified within Level 2, because
they are valued utilizing market observable inputs. The Series A and B Warrants
are classified within Level 3 because they are valued using the Black-Scholes
model which utilizes significant inputs that are unobservable in the market such
as expected stock price volatility, risk-free interest rate and the dividend
yield, and estimated period of time the warrants will be outstanding before they
are ultimately exercised.


13
 Table of Contents


ANSWERS
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(UNAUDITED)





Note
5 – Fair Value Measurements (cont’d)





The
following table presents the Company’s assets and liabilities measured at fair
value on a recurring basis as of December 31, 2008 and as of September30,
2009, aggregated by the level in the fair-value hierarchy within which those
measurements fall:





Fair value measurement at reporting date usingDescription
            
            December31,
    2008
            
            Quoted Prices in
              Active
      Markets for
              Identical
      Assets
              (Level
      1)
            
            Significant Other
              Observable Inputs
              (Level
      2)
            
            Significant
              Unobservable
              Inputs
              (Level
      3)$
      (in thousands)AssetsCash
      Equivalents - Money Market Funds
            
            10,948
            
            10,948
            
            -
            
            -Foreign
      currency derivative contracts
            
            26
            
            -
            
            26
            
            -Total
      Assets
            
            10,974
            
            10,948
            
            26
            
            -LiabilitiesSeries
      B Unit Warrant
            
            8,698
            
            -
            
            -
            
            8,698








Fair value measurement at reporting date usingDescription
            
            September30,
    2009
            
            Quoted Prices in
              Active Markets for
              Identical Assets
              (Level
      1)
            
            Significant Other
              Observable Inputs
              (Level
      2)
            
            Significant
              Unobservable
              Inputs
              (Level
      3)$
      (in thousands)AssetsCash
      Equivalents  - Money Market Funds
            
            20,670
            
            20,670
            
            -
            
            -Foreign
      currency derivative contracts (see Note 2)
            
            103
            
            -
            
            103
            
            -Total
      Assets
            
            20,773
            
            20,670
            
            103
            
            -LiabilitiesSeries
      A Warrants
            
            4,455
            
            -
            
            -
            
            4,455Series
      B Warrants
            
            4,293
            
            -
            
            -
            
            4,293Total
      Liabilities
            
            8,748
            
            -
            
            -
            
            8,748




In
addition to the above, the Company's financial instruments at September 30,
2009, consisted of cash, prepaid expenses, deposits in respect of employee
severance obligations, long term deposits, accrued expenses, accrued
compensation and related liabilities and deferred revenues. The carrying amounts
of all the aforementioned financial instruments, approximate fair
value.


14
 Table of Contents


ANSWERS
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(UNAUDITED)





Note
5 – Fair Value Measurements (cont’d)





The
following table summarizes the changes in the Company’s liabilities measured at
fair value using significant unobservable inputs (Level 3) as defined in
ASC 820-10, during the nine months ended September 30,
2009:




Level
      3Series
      B Unit Warrant
            
            Series
      A and B Warrants
            
            Total$ (in thousands)
            
            $ (in thousands)
            
            $ (in thousands)December 31,
      2008
            8,698
            
            -
            
            8,698Cumulative
      effect of change in accounting principle –adoption
      of ASC 815 – 40 (formerly EITF 07-5)
            -
            
            3,554
            
            3,554Fair
      value adjustments included in net loss
            (1,528)
            
            (482)
            
            (2,010)March
      31,2009
            7,170
            
            3,072
            
            10,242Exercise
      of the Series B Unit Warrant
            (10,780)
            
            -
            
            (10,780)Issuance
      of series B warrants
            -
            
            3,902
            
            3,902Fair
      value adjustments included in net loss
            3,610
            
            775
            
            4,385June 30,
      2009
            -
            
            7,749
            
            7,749Fair
      value adjustments included in net loss
            -
            
            999
            
            999September 30,
      2009
            -
            
            8,748
            
            8,748






15
 Table of Contents


ANSWERS
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(UNAUDITED)





Note
6 - Series A and B Convertible Preferred Stock (Redeemable)





As a
result of Redpoint’s Series A Financing (see Note 4), the Company’s Amended and
Restated Certificate of Incorporation has been amended to provide for the
issuance of up to 60,000 shares of Series A Convertible Preferred Stock,
par value $0.01, of which all were issued with a stated value of $100 per share,
pursuant to the Certificate of Designations, Number, Voting Powers, Preferences
and Rights of Series A Convertible Preferred Stock filed with the State of
Delaware on June 16, 2008 (the “Series A Certificate of
Designations”).





As a
result of Redpoint’s Series B Financing (see Note 4), the Company’s Amended and
Restated Certificate of Incorporation was further amended to provide for the
issuance of up to 70,000 shares of Series B Convertible Preferred Stock,
par value $0.01, of which all were issued with a stated value of $100 per share,
pursuant to the Certificate of Designations, Number, Voting Powers, Preferences
and Rights of Series  B Convertible Preferred Stock filed with the State of
Delaware on June 9, 2009 (the “Series B Certificate of
Designations”).





The
rights and preferences of the Series A Convertible Preferred Stock are set forth
in the Series A Certificate of Designations filed with the State of Delaware on
June 16, 2008, as disclosed in the consolidated financial statements and
related notes in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2008.





The
rights and preferences of the Series B Convertible Preferred Stock are set forth
in the Series B Certificate of Designations filed with the State of Delaware on
June 9, 2009, and are identical to the rights and preferences of the Series
A Convertible Preferred Stock.





The
following table summarizes the changes in the Series A and B Convertible
Preferred Stock during the nine-month period ending September 30,
2009:





Series
      A Convertible Preferred Stock
            
            Series
      B Convertible Preferred Stock
            
            Total$
      (in thousands)December
      31, 2008
            624
            
            -
            
            624Cumulative
      effect of change in accounting principle –adoption
      of ASC 815–40 (formerly EITF 07-5 - see Note 4)
            17
            
            -
            
            17Issuance
      of Series B Convertible Preferred Stock
            -
            
            7,000
            
            7,000Issuance
      costs
            -
            
            (230)
            
            (230)Discount
      resulting from the issuance of the Series B Warrants
            -
            
            (3,902)
            
            (3,902)Discount
      resulting from the Beneficial Conversion Feature
            -
            
            (2,868)
            
            (2,868)Amortizations
      of discounts during the period
            742
            
            413
            
            1,155September
      30, 2009
            1,383
            
            413
            
            1,796





The
Series A Convertible Preferred Stock and the Series B Convertible Preferred
Stock accrue cumulative dividends at a rate of 6% per annum whether or not
dividends have been declared by the Company’s Board of Directors and whether or
not there are profits, surplus or other funds available for the payment of such
dividends. Due to the Company’s decision to pay Series A Convertible Preferred
Stock dividends accrued through September 30, 2008, in the form of additional
shares of Series A Convertible Preferred Stock, the dividend accrual through
such date is reflected as an increase in the stated value of the Series A
Convertible Preferred Stock with a corresponding decrease in the additional
paid-in capital. All Convertible Preferred Stock dividends subsequent to
September 30, 2008, were paid in cash.




16
 Table of Contents


ANSWERS
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(UNAUDITED)





Note
7 – Stockholders’ Equity





General





The
following table summarizes the changes in the Company’s stockholders’ equity
during the nine-month period ending September 30, 2009:





$
      (in thousands)December
      31, 2008
            5,718Stock-based
      compensation
            1,166Amortizations
      of discounts from the Redpoint Financings for the nine months ended
      September 30, 2009
            (1,155)Dividends
      on Series A and Series B Convertible Preferred Stock
            (404)Cumulative
      effect of change in accounting principle - adoption of ASC 815–40
      (formerly EITF 07-5)
            (3,570)Exercise
      of Series B Unit Warrant
            10,780Discount
      to temporary equity resulting from the Beneficial Conversion Feature
      inthe
      Series B Financing
            2,868Change
      in other comprehensive income (loss), net
            103Exercise
      of stock options
            177Net
      loss for the period
            (648)September
      30, 2009
            15,035




Common
Stock





During
the nine months ended September 30, 2009, the Company issued a total of 66,225
shares of common stock due to the exercise of 66,225 stock options, for total
consideration of $177,000.





Common
Stock Warrants





In
addition to the Series A Warrants and Series B Warrants discussed in Note 3, as
of September 30, 2009 there were 1,155,591 outstanding common stock warrants
with a weighted average exercise price of $16.17. All warrants are exercisable
immediately. In April 2009, 2,172 warrants expired. No common stock warrants
were exercised during the nine months ended September 30, 2009.





Stock
Options





During
the nine months ended September 30, 2009, the Company granted a total of 369,750
stock options to its directors and employees at an average exercise price of
$7.94 per share. Additionally, during the same period, 66,225 and 58,135 stock
options were exercised and forfeited, respectively.





The total
fair value of stock options vested during the three and nine months ended
September 30, 2009, amounted to $400,000 and $1,166,000, respectively, and was
recorded as stock-based compensation expense.





At the
stockholders’ annual meeting which was held on September 9, 2009, the
stockholders of the Company agreed to amend the Company’s 2005 Incentive
Compensation Plan to increase the number of shares available for grant under
such plan from 1,350,000 shares to 1,600,000 shares. As of September 30, 2009,
222,696 and 140,340 options were available for grant under the 2005 Plan and the
2004 Stock Plan, respectively. All prior option plans are closed for future
grants.


17
 Table of Contents


ANSWERS
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(UNAUDITED)





Note
8 - Commitments and Contingencies





(a)
            Future
      minimum lease payments under non-cancelable operating leases for office
      space and cars, as of September 30, 2009, are as
  follows:





Year
      ending December 31
            $
      (in thousands)2009
      (three months ending December 31, 2009)
            2032010
            3012011
            41545





Rental
expense for operating leases for the three months ended September 30, 2009 and
2008 was $145,000, and $158,000, respectively. Rental expense for operating
leases for the nine months ended September 30, 2009 and 2008 was $420,000 and
$456,000, respectively.





(b)
            Future
      minimum lease payments under non-cancelable capital leases for computer
      equipment, as of September 30, 2009, are as
  follows:





Principal
            
            InterestYear
      ending December 31
            $
      (in thousands)2009
      (three months ending December 31, 2009)
            20
            
            12010
            82
            
            32011
            24
            
            1126
            
            5








(c)
            A
      bank guarantee given to the Subsidiary’s landlord, is secured by a lien on
      some of the Subsidiary’s bank deposits. As of September 30, 2009, such
      deposits amounted to $809,000, including a restricted long-term deposit of
      $140,000.





(d)
            In
      connection with the Redpoint Financings the Company entered into
      registration rights agreements with Redpoint, pursuant to which the
      Company agreed to register with the SEC for resale the common stock
      underlying the Redpoint Securities. In connection with the registration
      rights agreements, the Company agreed to pay a penalty of 1.0% per month,
      on a daily pro rata basis, up to a maximum of 8.0%, of the aggregate
      purchase price, as partial liquidated damages, for certain default events
      and subject to certain circumstances. The partial liquidated damages may
      trigger if the registration statements, which the Company filed on July
      30, 2008 and June 15, 2009, and which were declared effective by the SEC
      on September 16, 2008 and July 28, 2009, respectively, cease to remain
      continuously effective.





(e)
            In
      the ordinary course of business, the Company enters into various
      arrangements with vendors and other business partners, principally for
      content, web-hosting, marketing and various consulting arrangements. As of
      September 30, 2009, the total future commitments under these arrangements
      amounted to approximately
$713,000.


18
 Table of Contents


ANSWERS
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(UNAUDITED)





Note
8 - Commitments and Contingencies (cont’d)





(f)
              In
      the ordinary course of business, the Company may provide indemnifications
      of varying scope and terms to customers, vendors, lessors, business
      partners, and other parties with respect to certain matters, including,
      but not limited to, losses arising out of its breach of agreements,
      services to be provided by it, or from intellectual property infringement
      claims made by third parties. Additionally, the Company has indemnified
      its board members, officers, employees, and agents serving at the request
      of the Company to the fullest extent permitted by applicable law. It is
      not possible to determine the maximum potential amount of liability under
      these indemnification agreements due to the limited history of prior
      indemnification claims and the unique facts and circumstances involved in
      each particular agreement. Such indemnification agreements may not be
      subject to maximum loss clauses. To date, the Company has not incurred
      costs as a result of obligations under these agreements and has not
      accrued any liabilities related to such indemnification obligations in its
      accompanying financial
statements.





(g)
            From
      time to time, the Company receives various legal claims incidental to its
      normal business activities, such as intellectual property infringement
      claims and claims of defamation and invasion of privacy. Although the
      results of claims cannot be predicted with certainty, the Company believes
      the final outcome of such matters will not have a material adverse effect
      on its financial position, results of operations, or cash
      flows.





(h)
            On
      or about July 24, 2009, the Company received a letter from Wikia, Inc.
      (Wikia) advising that Wikia believes that it has superior rights in the
      Company's registered trademark WikiAnswers®, and threatening to file a
      Petition with the U.S. Trademark Office to cancel the Company's recently
      registered WikiAnswers trademark and possibly take other action, if the
      Company does not abandon its registered mark for WikiAnswers and its
      application to register WikiAnswers.com and cease use of the WikiAnswers
      trademark. In September 2009, Wikia also filed a notice of opposition
      with the Trade Marks and Design Registration Office of the European Union
      with respect to our WikiAnswers CTM application. The Company has
      investigated Wikia's claims, believes the claims are without merit
      and intends to vigorously defend its rights in and to its US
      registered mark WikiAnswers. Notwithstanding the foregoing, there is no
      assurance that we will obtain a favorable ruling, should litigation ensue.
      An adverse judgment forcing us to abandon our use of the WikiAnswers
      and/or WikiAnswers.com marks would have the potential of materially
      harming our business. Litigation could also be costly for us and divert
      management attention.


19
 Table of Contents


ANSWERS
CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(UNAUDITED)





Note
9 – Risks and Uncertainties





(a)
              Most
      of the Company's revenue was generated through the efforts of third party
      suppliers (the “Monetization Partners”). During the three and nine months
      ending September 30, 2009, the Company earned approximately 86% and 89% of
      its revenue, respectively, through one of its Monetization Partners,
      Google Inc. (“Google”), compared to 82% and 79% of advertising revenue
      from Google during the three and nine months ending September 30, 2008.
      The Company’s relationship with Google is governed by its Google Services
      Agreement, which was recently renewed for a two-year period ending
      January 31, 2012.





(b)
              Search
      engines serve as origination Web properties for users in search of
      information, and the Company’s Websites’ topic pages often appear as one
      of the top links on the pages returned by search engines in response to
      users’ search queries. Thus, in addition to the ads the Company receives
      through Google, its traffic is mostly driven by search engine traffic,
      mostly from the Google search engine. For the third quarter of 2009,
      according to the Company’s internal estimates, search engine traffic
      represented approximately 85% of traffic. Search engines, at any time and
      for any reason, could change their algorithms that direct queries to the
      Company’s Web properties or could specifically restrict the flow of users
      visiting the Company’s Web properties. On occasion the Company’s Web
      properties have experienced decreases in traffic, and consequently in
      revenue, due to these search engine actions. The Company cannot guarantee
      that it will successfully react to these actions in the future and recover
      lost traffic. Accordingly, a change in algorithms that search engines use
      to identify Web pages towards which traffic will ultimately be directed,
      or a restriction on the flow of users visiting the Company’s Web
      properties from search engines, could cause a significant decrease in
      traffic and revenues.





(c)
              Close
      to half of the Company’s operating expenses, excluding non-cash items such
      as stock-based compensation and Gain (Loss) from fair value adjustment of
      Series A Warrants, Series B Warrants and Warrant to purchase units of
      Series B preferred stock and warrants, are denominated in New Israel
      Shekels (NIS). The Company expects of the amount of such NIS expenses to
      grow in the foreseeable future. In recent years, the U.S. dollar-NIS
      exchange rate has been volatile. If the value of the U.S. dollar weakens
      against the value of NIS, there will be a negative impact on the Company’s
      operating costs. In addition, to the extent the Company holds monetary
      assets and liabilities that are denominated in currencies other than the
      U.S. dollar, the Company will be subject to the risk of exchange rate
      fluctuations. The Company uses various hedging tools, including forward
      contracts, to lessen the effect of currency fluctuations on its results of
      operations.





(d)
              The
      Series A Warrants and Series B Warrants are revalued each reporting date,
      and any change in their fair value is recorded in the Statement of
      Operations. The Company uses the Black-Scholes valuation model to
      determine the values of the warrants. Inputs used in this model include
      our stock price and risk-free interest rate. The primary reason for the
      change in value of the aforesaid warrants over the last several quarters
      has been the change in the market value of our common stock on the
      measurement dates. To the extent that the market value of our common stock
      rises or declines in future periods, the Company may continue to
      experience significant gains or losses resulting from the fair value
      adjustments of Series A Warrants and Series B
  Warrants.







20
 Table of Contents




ITEM
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      AND RESULTS OF OPERATIONS





The following discussion and
analysis should be read in conjunction with, and is qualified in its entirety
by, our financial statements (and notes related thereto) and other more detailed
financial information appearing elsewhere in this report. Consequently,
you should read the following
discussion and analysis of our financial condition and results of operations
together with such financial statements and other financial data included
elsewhere in this report. Some of the information contained in this discussion
and analysis or set forth elsewhere in this report, including information with
respect to our plans and strategy for our business, includes forward-looking
statements that involve risks and uncertainties. You should review the “Risk
Factors” section of this report for a discussion of important factors that could
cause actual results to differ materially from the results described in or
implied by the forward-looking statements contained in the following discussion
and analysis. See also “Risk Factors” in Part II, Item 1A, of this
report.





General





We own
and operate Answers.com®, the leading Q&A site, dedicated to providing
useful answers to questions about anything. Answers.com includes WikiAnswers®
and ReferenceAnswersTM. WikiAnswers is a community-generated social knowledge
Q&A platform, leveraging wiki-based technologies. Through the contributions
of the community, our questions and answers are continuously growing, improving
and being updated, to form the world’s greatest Q&A database.
ReferenceAnswers provides trusted editorial content on millions of topics
licensed from the world’s top reference publishers.
WikiAnswers.comAnswers.comAccording to comScore, under its new hybrid audience
measurement methodology, Answers.com had approximately 56.4 million unique
visitors in the U.S. in September 2009, ranking the site number 13 in the top
U.S. Web properties for that month. Also according to comScore, Answers.com
had approximately 83.1 million unique worldwide visitors in September 2009,
ranking us number 25 worldwide. Our goal is to become the Internet’s best
place for people to find and share answers to questions.





New
Answers.com: Integration of WikiAnswers and ReferenceAnswers





In
September 2009 we announced the launch of the new Answers.com, in recognition of
our completing the integration of our two Web properties, culminating a process
that began several quarters earlier. The product strategy guiding the
integration was our desire to give users the best answers to all types of
questions – be they community-generated from WikiAnswers, or editorially
licensed from ReferenceAnswers.





The first
stages of the integration were minor and subtle - creating a similar “look and
feel” for, and cross-linking between, the properties. Thus, for example, a user
looking up “Michael Jackson” in ReferenceAnswers, arrived at a page displaying
reference content covering the specific query, in addition to being asked to
answer WikiAnswers unanswered questions relating to Michael Jackson. The result
page also resembled a WikiAnswers page by way of including the standard “Ask”
and “Answer” bar in the header of the page, as opposed to the original “Search”
button displayed adjacent to the query bar. Subsequently, we added an “All”
radio button adjacent to the query bar on both properties, allowing users,
should they choose, to find a result by searching both properties. In the second
quarter of 2009, we took an additional step in integrating both Web properties
by making the “All” radio button the default setting above the
query box of both properties. As a result of this user-interface change, users
typing in queries into either of our properties are automatically directed to
the Web page our algorithms deem most appropriate as a response. For example, a
user typing the query, “When did WWII start?” in ReferenceAnswers, lands on a
Web page belonging to WikiAnswers with an answer to that question. A user typing
the query “Who is Oprah Winfrey?” in WikiAnswers, arrives at a ReferenceAnswers
page displaying the Oprah Winfrey topic. In September 2009, we took our final
step in integrating the two Web properties by creating a new unified Answers.com
home page and login, integrating features from both properties, and making other
changes in our user interface to strengthen our positioning as having one
dominant product and brand, Answers.com, comprised of the two properties,
WikiAnswers and ReferenceAnswers.





Internationalization





In the
third quarter of 2009 we launched French, Italian, German and Spanish language
versions of WikiAnswers. The Q&A platform also supports Tagalog (Filipino).
Our strategy will capitalize on the needs of users around the globe who are
searching for answers online and will leverage our core strengths: community
building and Q&A space. Further, we plan on leveraging our large and dynamic
English language database and community, to grow our foreign language
versions.  The WikiAnswers English language database contains close to
6 million answered questions. We have begun to selectively translate some of our
answered English language questions, to help accelerate the adoption of our
non-English versions, and plan to continue that effort. Our largest competitor
already has successful international sites and receives much of its traffic from
those sites, thus we view this area as critical to our future
growth.


21
 Table of Contents





Revenue





Traffic





Our
revenue is driven by the traffic generated by Answers.com and our ability to
effectively monetize that traffic. Search engines, primarily Google, are
responsible for most of the traffic to Answers.com. Users submit queries and
search engines respond by generating a list of Web pages that they deem likely
to offer the most relevant content. When an Answers.com page ranks high in the
algorithmic systems of search engines, our results are more likely to be
accessed by users. For the three and nine months ended September 30, 2009,
according to our internal estimates, this source of traffic represented
approximately 85% and 83%, respectively, of Answers.com’s traffic.





Presently,
the balance of the traffic arriving at Answers.com originates from direct usage,
i.e., users visiting our home page and/or navigating within Answers.com, and
from users who have clicked on Google’s Definition Link feature. Since 2005, we
benefited from an informal, non-contractual relationship with Google under which
Google linked certain search results related to definitional queries to
ReferenceAnswers. This link (or links, in the case of multiple-phrase queries)
appeared at the right end of the blue header bar for Google Search Results. For
the nine months ended September 30, 2009, according to our internal estimates,
this source of traffic represented approximately 5% of our overall traffic and
revenue. In October 2009, Google informed us that beginning sometime during the
fourth quarter of 2009, they will no longer be sending us traffic from the
Google Definition Link. As of the filing of this quarterly report, most of this
traffic appears to have been discontinued.





Search
engines, at any time and for any reason, could change their algorithms that
direct search queries to our Web properties or could restrict the flow of users
visiting our Web properties specifically. In fact, our Web properties – which
rely so heavily on search engine traffic – have experienced decreases in
traffic, and consequently in revenue, Thus, we expend considerable resources
guarding and improving the volume of this traffic . The industry commonly refers
to such efforts as search engine optimization, or SEO. We often refer to traffic
from search engines as SEO traffic. One of the areas that we focus on is the
“quality” of the Q&A data base, since poor quality could negatively impact
our SEO traffic.





Seasonality





Our
results of operations have historically been affected by seasonal patterns in
both traffic to our Web properties and advertising demand. Many of our users are
students who utilize our Web properties as reference sources. Our traffic
fluctuates with the academic school year, rising from January through May,
falling to lower levels during the summer months, rising again in September
through November, and falling again in December, coinciding with school breaks
and the holiday season. We expect traffic to our Web properties to continue to
fluctuate seasonally in the future. This seasonal fluctuation in traffic results
in a fluctuation in our quarterly revenues, since lower traffic on our Web
properties translates into fewer users clicking on or viewing the
advertisements on our Web properties. Our current seasonal patterns may become
more pronounced or may change as we grow domestically and
internationally.





Monetization





Advertising
Revenue.  We earn practically all of our revenue from
advertising. There are two primary categories of Internet advertising:
pay-per-performance, also known as cost-per-click, or CPC, and
pay-per-impression, also known as display ads or cost per 1,000 impressions, or
CPM. In the pay-per-performance model, we earn revenue based on the number of
clicks associated with an ad; in the pay-per-impression model, we derive revenue
from the display of ads. The overwhelming majority of our advertising revenue is
earned from CPC advertising. We obtain CPC and CPM advertisements from
third-party ad networks. These ad networks compensate us by paying us a portion
of the revenue they earn from advertisers for our provision of promotional space
on our Web properties.





We gauge
the effectiveness of our monetization efforts and trends by measuring our
revenue per thousand page views, or RPM. Throughout this quarterly report, we
refer to estimates of traffic, or page views. In our Management’s Discussion and
Analysis of Financial Condition and Results of Operations prior to our quarterly
report on Form 10-Q for the quarterly period ended June 30, 2008, we tracked the
traffic on ReferenceAnswers and WikiAnswers Web properties using two separate
systems:





·
            ReferenceAnswers
      traffic was measured using our internally developed server-side, log-based
      system (“Internal Data Warehouse”). This system was designed to identify
      traffic from search engine robots and other known Web robots, commonly
      referred to as Web spiders or Web crawlers, as well as from suspected
      automated spidering scripts, and excluded such traffic from the traffic
      activity measurements.





·
            WikiAnswers
      traffic was tracked using HBX Analytics, a tag-based Web analytics system
      offered by Omniture, Inc., which we will refer to as Omniture. Traffic
      measurements from this system are generated by our placement of tags on
      our Web pages. The Omniture system then independently generates traffic
      metrics.


22
 Table of Contents





Beginning
with the Management’s Discussion and Analysis of Financial Condition and Results
of Operations contained in our quarterly report on Form 10-Q for the quarterly
period ended June 30, 2008, all traffic measurements (including measurements
previously reported in past filings using our Internal Data Warehouse) for
ReferenceAnswers are also presented based on the Omniture data. We estimate that
the historical page views for ReferenceAnswers pursuant to Omniture data, as set
forth in our reports beginning with our  quarterly report on Form 10-Q
for the quarterly period ended June 30, 2008, are approximately 11% lower than
the traffic measurements reported in previous filings. Consequently, our
ReferenceAnswers RPMs, as reported in our current reports, reflect higher values
than those presented in previous filings.





We also
use Google, Inc.’s Google Analytics measurement services and Google AdSense data
to estimate the breakdown of our traffic sources, noted above.  Google
Analytics measurements are generated by our placement of tags on our Web
properties’ pages, which Google Analytics uses to count and report audience
metrics independently.





In this
Quarterly Report, statistics gathered from Omniture and Google Analytics are
also referred to as “internal estimates”.





Third
party services measuring traffic audiences may provide different estimates than
the estimates reported by other similar services and our internal estimates.
These discrepancies may result from differences in methodologies applied or the
sampling approaches used by each measuring service.





We also
generate community-related statistics, including total number of questions,
answers and users, from our own systems contained in the WikiAnswers
property.





Our
primary third party ad network, Google AdSense, accounted for approximately 86%
and 89% of our total revenue in the three and nine months ending September 30,
2009, as compared to approximately 82% and 79% of our total revenue in the three
and nine months ending September 30, 2008. We obtain CPC ads from Google. In
addition to Google, we utilize the services of other third party ad networks
that provide us with CPM ads. We expect that for the foreseeable future, CPC ads
will continue to generate the overwhelming majority of our revenue, and we have
no plans to reduce our reliance on CPC ads.





Direct Ad Sales. In the
second quarter of 2008, we decided to suspend our direct ad sales efforts and to
instead focus on selling ads through advertising networks, primarily Google
AdSense. In the second and third quarter of 2008 we terminated all of our direct
ad sales employees. This decision allowed us to focus on our core competency –
growing the community, growing our traffic and monetizing via Google and other
ad networks. Notwithstanding the lack of a direct ad sales team, we are
occasionally approached directly by advertisers who wish to advertise on
Answers.com, and we often facilitate such requests.





Licensing Revenue. We earn a
negligible portion of our revenues from partners that pay us for providing them
with our answer-based services that they then use in their own products, via
co-branded Web pages. Revenue from these arrangements are based on various
formulae, including fees based on the number of user queries and fixed periodic
fees.





Costs
and Expenses





Cost
of Revenue





Cost of
revenue consists of fees to third parties to license and translate content, data
center costs, including depreciation of information technology assets,
compensation, travel and overhead costs relating to personnel who are engaged in
production operations, content editing and content integration, Web search
service fees, ad serving fees, amortization of the cost of acquired software
used in our products, and contractual revenue sharing fees to various Web
property operators for visitors directed to our Web properties, or traffic
acquisition costs. Our cost of revenue, as a percentage of revenue, is generally
expected to decrease as we grow revenue, since many of its components, such as
content licensing, are not directly tied to revenue. Notwithstanding, we do not
expect to experience margin improvement over the next few quarters because of
the various initiatives we are planning, including translation of
English-language content into foreign languages. Depending on the pace of such
initiatives, our margins may even decline.





Research
and Development Expenses





Research
and development expenses consist of compensation, travel and overhead costs of
personnel conducting research and development of our products and services, and
consulting costs. Our research and development team works primarily on projects
to improve and enhance product functionality, quality, performance, user
interface, and monetization. We generally expect that our research and
development expenses will decline as a percentage of revenue as we grow our
revenue.


23
 Table of Contents





Community
Development, Sales and Marketing Expenses





Community
development, sales and marketing expenses consist of compensation, travel and
overhead costs of personnel in charge of developing and encouraging the
WikiAnswers community of users asking and answering questions and volunteer
supervisors, sales and marketing, product management, marketing and market
information services, public relations and promotional costs. As a result of our
termination of direct ad sales in 2008, we expect that the primary future growth
in this expense line item will be in the area of WikiAnswers community
development. We generally expect that our sales, marketing and community
development expenses will decline as a percentage of revenue as we grow our
revenue.





General
and Administrative Expenses





General
and administrative expenses consist primarily of compensation, travel and
overhead costs for financial, legal, human resources, and other administrative
personnel, professional services, including investor relations, legal,
accounting, payroll and other consulting services, insurance fees, amortization
of domain names, and other general corporate expenses. We generally expect that
our general and administrative expenses will decline as a percentage of revenue
as we grow our revenue.





Overhead
Costs





Overhead
costs consist primarily of rent, telecommunications, utilities and depreciation
expenses.





Stock-Based
Compensation





New
employees typically receive stock option awards within three months of their
start date. We also grant additional stock option awards to existing employees
and directors. We account for stock-based awards under Accounting Standards
Codification (“ASC”) 718, “Compensation – Stock
Compensation” (formerly SFAS No. 123 (revised 2004), “Share-Based Payment”), which
requires measurement of compensation cost for all stock-based awards at fair
value on date of grant and recognition of compensation over the service period
awards are expected to vest. Costs resulting from stock-based compensation are
part of our compensation expense and are included in the operating expense
categories in our Statements of Operations.





Impact
of Foreign Currency Fluctuations





The
dollar cost of our operations is heavily influenced by changes in the value of
the dollar in relation to the New Israeli Shekel (“NIS”), mostly due to the
NIS-based salaries of our Israel-based employees. Close to half of our operating
expenses, excluding non-cash items such as stock-based compensation, are
denominated in New Israel Shekels (NIS). We enter into forward contracts to
hedge some of our NIS-based expenses. Prior to May 2009, these derivatives were
not designated as hedging instruments under the rules of ASC 815,“Derivatives and Hedging”(formerly SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities”), and therefore, the net gains
(losses) arising from these derivatives were recognized in operating expenses as
they occurred. Starting May 2009, we designated all of our currency hedging
activity as cash flow hedges as they were all eligible.





In the
three months ended September 30, 2009, compensation, excluding stock-based
compensation (thereafter, “Cash-Based Compensation”), to employees amounted to
$1,791 thousand compared to $1,727 thousand during the same period in 2008, a
net increase of $64 thousand. As a result of the strengthening of the dollar as
compared to the NIS and the effect of foreign currency derivatives, Cash-Based
Compensation in the three months ended September 30, 2009 would have declined
approximately $104 thousand as compared to the same period in 2008, however,
such decline was offset by other compensation changes, including increases in
headcount and raises, amounting to $168 thousand.





In the
nine months ended September 30, 2009, Cash-Based Compensation to employees
amounted to $5,233 thousand compared to $5,553 thousand during the same period
in 2008, a decrease of $320 thousand. As a result of the strengthening of the
dollar as compared to the NIS and the effect of foreign currency derivatives,
Cash-Based Compensation in the nine months ended September 30, 2009 would have
declined approximately $509 thousand as compared to the same period in 2008,
however, such decline was offset, to some extent, by other compensation changes,
including increases in headcount and raises, amounting to $190
thousand.


Our
period-over-period discussion regarding operating expenses includes the impact
of foreign currency on such expenses. We expect our NIS-based expenses in 2009,
to be in excess of 2008 levels, which approximated $6.5 million, thus, if the
dollar continues to fluctuate as compared to the NIS, we will experience further
fluctuation in the dollar amount of our NIS-based expenses.


24
 Table of Contents





Termination
fees and write-off of cost relating to the terminated Lexico acquisition and
abandoned follow-on offering





In the
first quarter of 2008, we recorded a charge of $2,543 thousand consisting of
$1,618 thousand of accounting, legal, banking, consulting and travel costs we
incurred in 2007 and in the first quarter of 2008, in connection with the
terminated acquisition of Lexico and abandoned follow-on offering of securities,
and $925 thousand relating to termination fees we paid as a result of the
termination of the acquisition and a Securities Purchase Agreement with an
institutional investor, for the optional purchase and sale of $8.5 million
of our senior secured convertible notes. A summary of the events that led to the
termination of the acquisition and financing follows:





On
July 13, 2007, we entered into a Purchase Agreement that we subsequently
amended on July 31, 2007 and November 12, 2007; and on January 15, 2008 we
entered into an Amended and Restated Purchase Agreement, which we subsequently
amended on February 8, 2008, to acquire all of the outstanding limited liability
interests of Lexico Publishing Group, LLC for an aggregate purchase price of
$100 million in cash, subject to adjustments for closing net working
capital.  Consummation of the acquisition of Lexico was subject to our
ability to secure financing for the acquisition.





On July
17, 2007, we filed a universal shelf registration statement on Form S-3 with the
Securities and Exchange Commission which was declared effective on August 6,
2007.  The registration statement covered up to an aggregate of $140
million of common stock, preferred stock, warrants, debt securities, units or
any combination thereof. On January 16, 2008, we filed a prospectus supplement
for a proposed public offering which we later amended on February 8,
2008.  On February 13, 2008 we canceled our proposed public offering
due to unfavorable market conditions. On March 1, 2008, the members of Lexico
terminated the purchase agreement, due to our inability to finance the
acquisition.  Additionally, in connection with the Lexico transaction,
on January 15, 2008, we entered into a Securities Purchase Agreement with
an institutional investor, or the senior notes investor, for the optional
purchase and sale of $8.5 million of our senior secured convertible notes.
Our intent was to close the senior secured convertible notes financing in
conjunction with our follow-on offering, if we needed such funds to close the
Lexico acquisition. Since our purchase agreement with Lexico was terminated, the
Securities Purchase Agreement also terminated.





Interest
Income (Expense), Net





Interest
income (expense), net, is comprised of interest income earned on cash, cash
equivalents and investment security balances, interest expense on capital
leases, transaction costs we incurred in connection with the issuance of the
Series B Warrants in June 2009 and amortization of deferred costs we incurred in
connection with the issuance of the Series B Unit Warrant, in June
2008.





Other
Income (Expense), Net





Other
income (expense), net, is comprised of foreign currency gains and
losses.





Loss
Resulting from Fair Value Adjustment of Series A and Series B Warrants and
Warrant to Purchase Units of Series B Preferred Stock and Warrants





The
Series A and Series B Warrants and the Series B Unit Warrant (prior to
exercise), which are components of transactions with Redpoint Omega, L.P. and
Redpoint Omega Associates, LLC (collectively, “Redpoint”) are revalued each
reporting date. Any change to their fair value is recorded as a gain or loss in
the statement of operations. Background regarding the transaction with Redpoint
follows.




Redpoint
Financings




On
June 16, 2008, pursuant to a private placement of our securities, Redpoint
purchased $6 million of our Series A Convertible Preferred Stock (60,000
shares), convertible into 1,333,333 shares of common stock at an initial
conversion price of $4.50 per share, along with Common Stock Purchase Warrants
exercisable for 666,667 shares of common stock at an exercise price of $4.95 per
share (“Series A Warrants”). In conjunction therewith, Redpoint also received a
warrant, referred to as the “Series B Unit Warrant”, exercisable until
June 16, 2009, to purchase units of up to $7 million of Series B
Convertible Preferred Stock (70,000 shares) and Common Stock Purchase Warrants
exercisable for 636,364 shares of common stock (“Series B Warrants”). The
Series B Convertible Preferred Stock is initially convertible into
1,272,727 shares of common stock at an initial conversion price of $5.50 per
share. The Series B Warrants have an exercise price of $6.05 per
share. On June 10, 2009, Redpoint exercised the Series B Unit Warrant, in
full.




After
deducting placement agent fees and legal expenses, our net proceeds from the
private placement, in June 2008, were $5,380,000, while our net proceeds from
the exercise of the Series B Unit warrant, in June 2009, were $6,480,000. The
transaction that took place on June 16, 2008 is referred to as the “Series A
Financing”.  The transaction that took place on June 10, 2009 is
referred to as the “Series B Financing”. The two transactions, in aggregate, are
collectively referred to as the “Redpoint Financings”. The Series A Convertible
Preferred Stock, the Series B Convertible Preferred Stock, the Series A Warrants
and the Series B Warrants are collectively referred to as the “Redpoint
Securities”.


25
 Table of Contents





The
Series A Convertible Preferred Stock has the rights and preferences set
forth in our Certificate of Designations, Number, Voting Powers, Preferences and
Rights of Series A Convertible Preferred Stock, which, as of its date of filing
on June 16, 2008, amended our Amended and Restated Certificate of Incorporation.
For a detailed description of the rights and preferences of the Series A
Convertible Preferred Stock, we refer you to the notes to the financial
statements included in our annual report on form 10-K filed on March 9,
2009.  The rights and preferences of the Series B Convertible
Preferred Stock are set forth in the Series B Certificate of Designations filed
with the State of Delaware on June 9, 2009, and are identical to the rights
and preferences of the Series A Convertible Preferred Stock.




In
connection with the Redpoint Financings, Redpoint received the right to appoint
two individuals to serve as voting members of our board of
directors.




In
connection with the Redpoint Financings we entered into a registration rights
agreement with Redpoint, pursuant to which we agreed to register with the SEC
for resale the common stock underlying the Redpoint Securities. In connection
with the registration rights agreement, we agreed to pay a penalty of 1.0% per
month, on a daily pro rata basis, up to a maximum of 8.0%, of the aggregate
purchase price, as partial liquidated damages, for certain default events and
subject to certain circumstances. The partial liquidated damages may trigger if
the registration statements covering the Series A Convertible Preferred Stock
and the Series B Convertible Preferred Stock, which we filed on July 30, 2008
and June 15, 2009 respectively, and which were declared effective by the SEC on
September 16, 2008 and July 28, 2009 respectively, cease to remain continuously
effective.





Income
Tax Benefit (Expense), Net





Our
effective tax rate differs from the statutory federal rate primarily due to
differences between income and expense recognition prescribed by income tax
regulations and Generally Accepted Accounting Principles. We utilize different
methods and useful lives for depreciating and amortizing property, equipment and
intangible assets and different methods and timing for certain expenses.
Furthermore, permanent differences arise from certain income and expense items
recorded for financial reporting purposes but not recognizable for income tax
purposes. In addition, our income tax expense has been adjusted for the effect
of state and local taxes and foreign income from our wholly owned subsidiary. At
September 30, 2009, our deferred tax assets were almost entirely offset by a
valuation allowance because realization depends on generating future taxable
income, which, in our estimation, is not more likely than not to
transpire.





Our
Israeli subsidiary had net income in 2008 and 2007, resulting from services we
received from the Israeli subsidiary. The Israeli subsidiary charges us for
research & development and certain management services it provides us, plus
a profit margin, currently 8.3%. However, the subsidiary is an “approved
enterprise” (and a “beneficiary enterprise” as later amended in amendment No. 60
to the Investment Law) under Israeli law, which means that income arising from
the subsidiary’s approved research & development activities, is subject to
zero percent tax under the “alternative benefit” path for a period of ten years.
Management services are taxable at the Israeli corporate tax rate in effect at
the time (26 % and 27% in 2009 and 2008, respectively). Currently, the
subsidiary operates under two separate “approved enterprise” plans, ending
December 31, 2009 and December 31, 2014, respectively, and a “beneficiary
enterprise” plan ending December 31, 2017.  After the close of the
first approved enterprise plan in 2009, the subsidiary will have to pay taxes at
the regular corporate income tax rate on the relative proportion of taxable
income attributable to the first approved enterprise plan.





In the
event of distributions by the subsidiary to the parent, the subsidiary would
have to pay a 10% corporate tax on the amount distributed, and the recipient
would have to pay a 15% tax to be withheld at source on the amounts of such
distributions received. Furthermore, the parent would be subject to a 35%
federal tax on dividends received, before applying any credits possibly allowed
for NOL carryforwards or by the income tax treaty between the United States and
Israel. At present, we do not plan on having the subsidiary distribute a
dividend to Answers Corporation.





Three
Months and Nine Months Ended September 30, 2009 and 2008





Revenue





Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2009
            
            2008
            
            Change
            
            2009
            
            2008
            
            Change($
      - in thousands)
            
            ($
      - in thousands)WikiAnswers
      advertising revenue
            3,422
            
            1,960
            
            1,462
            
            9,984
            
            4,891
            
            5,093ReferenceAnswers
      advertising revenue
            1,548
            
            1,579
            
            (31)
            
            4,700
            
            4,645
            
            55Licensing
      revenue
            17
            
            24
            
            (7)
            
            53
            
            61
            
            (8)4,987
            
            3,563
            
            1,424
            
            14,737
            
            9,597
            
            5,140


26
 Table of Contents





Revenue
increased $1,424 thousand, or 40%, to $4,987 thousand for the three months ended
September 30, 2009 from $3,563 thousand for the three months ended September 30,
2008.  Revenue increased $5,140 thousand, or 54%, to $14,737 thousand
for the nine months ended September 30, 2009 from $9,597 thousand for the nine
months ended September 30, 2008.





WikiAnswers
advertising revenue in the three months ended September 30, 2009 increased
$1,462 thousand, or 75%, compared to the same period in 2008, due to increases
in traffic, offset to some extent by decreased RPM. WikiAnswers average daily
page views in the three months ended September 30, 2009 were 6,336,000, an
increase of 105% compared to the average daily page views of 3,094,000 in the
same period in 2008. We believe that the traffic growth that WikiAnswers has
experienced in the three months ended September 30, 2009 as compared to the same
period in 2008 is primarily due to the dynamics of the property. As our database
of questions and answers grows, we draw new traffic, primarily from SEO, which
in turn results in the creation of new questions and answers, or new content,
which in turn drives additional growth. The growth in revenue from the aforesaid
traffic growth was partially offset by a decrease in our RPM. The WikiAnswers
RPM in the three months ended September 30, 2009 was $5.87, a decrease of 15%
compared to the RPM of $6.89 in the same period in 2008. We believe the general
economic downturn is the primary cause for the decline in RPM.





WikiAnswers
advertising revenue in the nine months ended September 30, 2009 increased $5,093
thousand, or 104%, compared to the same period in 2008, due to increased
traffic, offset, to some extent, by decreased RPM.  WikiAnswers
average daily page views in the nine months ended September 30, 2009 were
5,919,000, an increase of 143% compared to the average daily page views of
2,432,000 in the same period in 2008. We believe that the traffic growth that
WikiAnswers has experienced in the nine months ended September 30, 2009 as
compared to the same period in 2008 is primarily due to the dynamics of the
property. As our database of questions and answers grows, we draw new traffic,
primarily from SEO, which in turn results in the creation of new questions and
answers, or new content, which in turn drives additional growth. The growth in
revenue from the aforesaid traffic growth was partially offset by a decrease in
our RPM. The WikiAnswers RPM in the nine months ended September 30, 2009 was
$6.16, a decrease of 12% compared to the RPM of $6.97 in the same period in
2008. We believe the general economic downturn is the primary cause for the
decline in RPM.





ReferenceAnswers
advertising revenue in the three months ended September 30, 2009 decreased $31
thousand, or 2%, compared to the same period in 2008, due to lower RPM, offset,
to some extent, by an increase in traffic. The ReferenceAnswers RPM in the three
months ended September 30, 2009 was $5.89, a decrease of 8%, compared to the RPM
of $6.44 during the same period in 2008. We attribute the decline in RPM to the
general economic downturn, as well as the elimination of direct sales in the
third quarter of 2008.  ReferenceAnswers average daily page views in
the three months ended September 30, 2009 were 2,857,000, an increase of 7%
compared to the average daily page views of 2,666,000 in the same period in
2008.





ReferenceAnswers
advertising revenue in the nine months ended September 30, 2009 increased $55
thousand, or 1%, compared to the same period in 2008. The increase was the
result of an increase in traffic, offset, to some extent, by lower RPM.
ReferenceAnswers average daily page views in the nine months ended September 30,
2009 were 2,935,000, an increase of 3% compared to the average daily page views
of 2,844,000 in the same period in 2008. The ReferenceAnswers RPM in the nine
months ended September 30, 2009 was $5.85, a decrease of 7%, compared to the RPM
of $6.28, during the same period in 2008. We attribute the decline in RPM to the
general economic downturn, as well as the elimination of direct sales in the
third quarter of 2008.





Integration
of ReferenceAnswers and WikiAnswers





As
described in further detail above, in September 2009, we announced the launch of
the new Answers.com, in recognition of our completing the integration of
WikiAnswers and ReferenceAnswers. The product strategy guiding such integration
was our desire to give users the best answers to all types of questions – be
they community-generated from WikiAnswers, or editorially licensed from
ReferenceAnswers. In September 2009, we took our final step in this integration
by creating a new unified Answers.com home page and login, integrating features
from both properties, and making other changes in our user interface to
strengthen our positioning as having one dominant product and brand,
Answers.com, comprised by two properties, WikiAnswers and ReferenceAnswers.
Since the new unified Answers.com home page was designed to give prominence to
WikiAnswers and to encourage users to enter their questions into the site’s
query bar, beginning September 2009, visits to that page, which on average
approximate 175,000 per day, are being recorded as a WikiAnswers page-view
rather than a ReferenceAnswers page-view, contrary to the previous
practice.


27
 Table of Contents





Traffic
and Revenue Trends





The
following table illustrates the historical trends of our two Web properties’
revenues, average daily page views and RPMs, by quarter, beginning the first
quarter of 2008:





2008
            
            2009Q1
            
            Q2
            
            Q3
            
            Q4
            
            Q1
            
            Q2
            
            Q3Ad
      Revenue ($ - in thousands)WikiAnswers
            1,185
            
            1,500
            
            1,960
            
            2,879
            
            3,162
            
            3,400
            
            3,422ReferenceAnswers
            1,828
            
            1,485
            
            1,579
            
            1,730
            
            1,567
            
            1,585
            
            1,548Total
            3,013
            
            2,985
            
            3,539
            
            4,609
            
            4,729
            
            4,985
            
            4,970WikiAnswers
            39%
            
            50%
            
            55%
            
            62%
            
            67%
            
            68%
            
            69%ReferenceAnswers
            61%
            
            50%
            
            45%
            
            38%
            
            33%
            
            32%
            
            31%Total
            100%
            
            100%
            
            100%
            
            100%
            
            100%
            
            100%
            
            100%Traffic
      – Average Daily Page ViewsWikiAnswers
            1,885,000
            
            2,318,000
            
            3,094,000
            
            4,350,000
            
            5,337,000
            
            6,082,000
            
            6,336,000ReferenceAnswers
            3,225,000
            
            2,641,000
            
            2,666,000
            
            3,027,000
            
            2,982,000
            
            2,965,000
            
            2,857,000Total
            5,110,000
            
            4,959,000
            
            5,760,000
            
            7,377,000
            
            8,319,000
            
            9,047,000
            
            9,193,000WikiAnswers
            37%
            
            47%
            
            54%
            
            59%
            
            64%
            
            67%
            
            69%ReferenceAnswers
            63%
            
            53%
            
            46%
            
            41%
            
            36%
            
            33%
            
            31%Total
            100%
            
            100%
            
            100%
            
            100%
            
            100%
            
            100%
            
            100%RPMWikiAnswers
            $6.91
            
            $7.11
            
            $6.89
            
            $7.19
            
            $6.58
            
            $6.14
            
            $5.87ReferenceAnswers
            $6.23
            
            $6.18
            
            $6.44
            
            $6.21
            
            $5.84
            
            $5.87
            
            $5.89





Traffic
Trends


WikiAnswers’
average daily page views in the third quarter of 2009 were 6.34 million, an
increase of 4% compared to the previous quarter. WikiAnswers’ average daily page
views in the third quarter of 2008 grew 33% as compared to the second quarter of
2008. The primary reason for the mere 4% traffic growth in the third quarter of
2009 as compared to the growth in third quarter of 2008 was the traffic declines
we experienced in July and August of 2009, which we attribute to summer
seasonality which was more pronounced than in previous years, and the effect of
product changes intended to improve longer-term traffic and quality. The decline
in July and August was followed by strong traffic growth in September and
October, similar to our experience in previous years.
 
 Since we
purchased WikiAnswers in November 2006, the Web property has grown
significantly, each quarter, both in terms of traffic and revenue. We believe
that the growth that WikiAnswers has experienced is primarily due to the
dynamics of the property. As our database of questions and answers grows, we
draw new traffic, primarily from SEO, which in turn results in the creation of
new questions and answers, or new content, which in turn drives additional
growth. This is a self-reinforcing growth model that we consider a “virtuous
cycle of growth”. Notwithstanding our belief in this cycle of growth,
WikiAnswers’ growth has, over time decelerated, and we believe that, as
WikiAnswers grows further, its rate of growth will decelerate further. In
addition, since the integration of our two Web properties was completed only
fairly recently, we cannot predict how that integration will impact future
growth.
  Beginning
the third quarter of 2007, when we experienced a drop in our traffic to
ReferenceAnswers due to a search engine algorithm adjustment by Google, through
the first quarter of 2009, ReferenceAnswers average daily page views in every
quarter has declined, compared to the same quarter in the immediately preceding
year. This trend was reversed beginning the second quarter of 2009. In the
second and third quarters of 2009, ReferenceAnswers average daily page
views were 12% and 7% higher, respectively, than the average daily page views
for the same periods in 2008. We attribute this increase to a number of factors.
First, in the second quarter of 2008, in an effort to defend and improve our SEO
traffic, we made changes to the property, that caused traffic in the third and
fourth quarters of 2008 and in the first quarter of 2009 to decline compared to
the same periods in the immediately preceding year. Hence, beginning the second
quarter of 2009, ReferenceAnswers traffic was no longer in decline, compared to
2008. Second, the integration of our two Web properties resulted in a net
increase of traffic to ReferenceAnswers in May 2009. However, ReferenceAnswers
experienced traffic declines in the months of September and October 2009, as
compared to the same months in 2008. We believe that the final steps of
integration taken in September 2009, namely a new Answers.com homepage geared
more towards WikiAnswers, was one of the factors that led to these declines. We
are presently not able to identify a predictable traffic trend for this
property. Finally, for the nine months ended September 30, 2009, according to
our internal estimates, approximately 5% of our overall Company traffic and
revenue was derived from the Google Definition Link. In October 2009, Google
informed us that beginning sometime during the fourth quarter of 2009, they will
no longer be sending us traffic from the Google Definition Link. As of the
filing of this quarterly report, most of this traffic appears to have been
discontinued.





28
 
 
 RPM
Trends





We
believe that the general economic downturn has hurt our RPMs during the nine
months ended September 30, 2009. Based on recent trends in the industry, we are
hopeful that RPMs have stabilized and that we will begin to see RPM improvement
in the coming months. Notwithstanding, the current general economic downturn may
continue or escalate and may result in fewer page views that result in
commercial activities by our users. Further, the revenue rates we receive from
Google depend upon a number of factors outside of our control, including the
amount Google charges its network of advertising businesses. If Google charges
its advertisers less, due to a weaker economy, our ultimate revenue share will
also decrease. These potential developments could delay improvement in RPMs or
could even have a further negative impact on the RPM of both our Web
properties.





Our
relationship with Google, our primary third-party ad network, is governed by our
Google Services Agreement, or GSA, which was recently renewed for a two-year
period ending January 31, 2012 at financial terms that are slightly less
favorable than the terms we had for the two-year period ending January 31,
2010.





Costs
and Expenses





Cost
of Revenue





Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2009
            
            2008
            
            Change
            
            2009
            
            2008
            
            Change($
      - in thousands)
            
            ($
      - in thousands)Cost
      of revenue
            1,264
            
            945
            
            319
            
            3,489
            
            3,754
            
            (265)





Cost of
revenue increased $319 thousand, or 34%, to $1,264 thousand in the three months
ended September 30, 2009, from $945thousand in the three months ended September
30, 2008. The change in cost of revenue was due primarily to an increase of $71
thousand in compensation related expenses, excluding stock based compensation, a
$7 thousand decrease in stock based compensation, increased data center costs,
including depreciation of equipment, of $192 thousand, and increased
content-related costs of $58 thousand.





Cost of
revenue decreased $265 thousand, or 7%, to $3,489 thousand in the nine months
ended September 30, 2009, from $3,754 thousand in the nine months ended
September 30, 2008. The change in cost of revenue was due primarily to the
following factors: Amortization expense from intangible technology assets we
purchased in connection with the Brainboost acquisition that took place in
December 2005 decreased $358 thousand, because we wrote off the Brainboost
Answer Engine on May 25, 2008, thus there was no amortization in the nine months
ended September 30, 2009. Additionally, data center costs decreased $113
thousand and stock-based compensation decreased $26 thousand. The aforesaid
decreases were partially offset by a $101 thousand increase in compensation
costs, excluding stock based compensation, increases in recruitment fees of $28
thousand and increases in content licensing costs of $101 thousand.





Research
and Development Expenses





Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2009
            
            2008
            
            Change
            
            2009
            
            2008
            
            Change($
      - in thousands)
            
            ($
      - in thousands)Research
      and development
            921
            
            866
            
            55
            
            2,611
            
            2,670
            
            (59)




Research
and development expenses increased $55 thousand, or 6%, to $921 thousand in the
three months ended September 30, 2009, from $866 thousand in the three months
ended September 30, 2008. The change in research and development expenses was
due primarily to an increase of $28 thousand in compensation related expenses,
excluding stock based compensation, a $4 thousand decrease in stock based
compensation and a $29 thousand increase in overhead.
 
 Research
and development expenses decreased $59 thousand, or 2%, to $2,611 thousand in
the nine months ended September 30, 2009, from $2,670 thousand in the nine
months ended September 30, 2008. The change in research and development expenses
was due primarily to a decrease of $53 thousand in compensation related
expenses, excluding stock based compensation, and a decrease in stock based
compensation of $43 thousand, offset, to some extent, by increases in travel and
overhead of $21 thousand and $20 thousand, respectively.


29
 Table of Contents




Community
Development, Sales and Marketing Expenses





Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2009
            
            2008
            
            Change
            
            2009
            
            2008
            
            Change($
      - in thousands)
            
            ($
      - in thousands)Community
      development, sales and marketing
            621
            
            563
            
            58
            
            1,679
            
            2,258
            
            (579)





Community
development, sales and marketing expenses increased $58 thousand or 10%, to $621
thousand, in the three months ended September 30, 2009, from $563 thousand in
the three months ended September 30, 2008. The primary factors that caused this
expense to increase were increases in promotion and advertising of $30 thousand,
increases in community consulting services of $23 thousand and that in the third
quarter of 2008 expenses were reduced by $40 thousand to reflect an adjustment
to the cost of terminating our direct ad sales operation. The aforesaid
increases were partially offset by decreases in compensation related expenses,
excluding stock based compensation, of $15 thousand. At the end of the second
quarter of 2008 we decided to abandon direct ad sales, and terminated most of
our direct ad sales staff. On the other hand, the savings we experienced from
decreasing headcount in direct ad sales was mostly offset by hiring additional
WikiAnswers community staff due to the growth we are experiencing in
WikiAnswers. Additionally, overhead expenses increased $15
thousand.





Community
development, sales and marketing expenses decreased $579 thousand, or 26%, to
$1,679 thousand, in the nine months ended September 30, 2009, from $2,258
thousand in the nine months ended September 30, 2008. The primary factor that
caused this line item to decrease was that compensation related expenses,
excluding stock based compensation, decreased $429 thousand, and stock based
compensation decreased $84 thousand, mostly due to the termination of our direct
ad sales team in the second and third quarters of 2008. At the end of the second
quarter of 2008 we decided to abandon direct ad sales, and terminated most of
our direct ad sales staff. Further, as a result of our decision to abandon our
direct ad sales efforts, there was a net charge of $90 thousand, in the nine
months ended September 30, 2008, to account for the termination of certain
service contracts relating to our abandoned direct ad sales
efforts.  Finally, there was also a decrease of $43 thousand in
overhead expenses in the nine months ended September 30, 2009 as compared to the
same period in 2008. The aforesaid decreases were partially offset by increases
in costs relating to promotion and marketing of $60 thousand, and increases in
community consulting services of $67 thousand.





General
and Administrative Expenses





Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2009
            
            2008
            
            Change
            
            2009
            
            2008
            
            Change($
      - in thousands)
            
            ($
      - in thousands)General
      and administrative
            1,201
            
            1,311
            
            (110)
            
            3,666
            
            3,640
            
            26





General
and administrative expenses decreased $110 thousand, or 8%, to $1,201 thousand
in the three months ended September 30, 2009, from $1,311 thousand in the three
months ended September 30, 2008. The change in general and administrative
expenses was due primarily to the following factors: Accounting and legal fees
decreased by $63 thousand, compensation related expenses, excluding stock based
compensation, decreased $20 thousand, stock administration decreased by $20
thousand and overhead expenses decreased by $48 thousand. The aforesaid
decreases were partially offset by an increase in stock-based compensation of
$14 thousand and a $20 thousand increase in non-income related
taxes.





General
and administrative expenses increased $26 thousand, or 1%, to $3,666 thousand in
the nine months ended September 30, 2009, from $3,640 thousand in the nine
months ended September 30, 2008. The change in general and administrative
expenses was due primarily to the following factors: Compensation costs,
excluding stock based compensation, increased by $56 thousand, stock based
compensation increased $8 thousand, travel and conference expenses increased by
$62 thousand, investor relations increased $47 thousand and non-income related
taxes increased by $43 thousand. The aforesaid increases were partially offset
by a decrease of $113 thousand in accounting and legal fees, $60 thousand in
stock administration, and $27 thousand in overhead expenses.


30
 Table of Contents





Write-off
of the Brainboost Answer Engine





Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2009
            
            2008
            
            Change
            
            2009
            
            2008
            
            Change(in
      thousands)
            
            (in
      thousands)Write-off
      of the Brainboost Answer Engine
            -
            
            -
            
            -
            
            -
            
            3,138
            
            (3,138)





As a
result of our decision to effectively abandon our use of the Brainboost Answer
Engine, the net book value of the Brainboost Answer Engine, as of May 25, 2008,
in the amount of $3,138 thousand, was written off and the resulting charge
included in our statement of operations for the nine months ended September 30,
2008.





Termination
Fees and Write-off of Costs Relating to the Terminated Lexico Acquisition and
Abandoned Follow-on Offering





Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2009
            
            2008
            
            Change
            
            2009
            
            2008
            
            Change($
      - in thousands)
            
            ($
      - in thousands)Termination
      fees and write-off of costs relating to the terminated Lexico acquisition
      and abandoned follow-on offering
            -
            
            -
            
            -
            
            -
            
            2,543
            
            (2,543)





During
the nine months ended September 30, 2008, we recorded a charge of $2,543
thousand for various costs and fees we incurred in connection with the
terminated acquisition of Lexico and the abandoned follow-on offering of
securities.








Interest
Income (Expense), Net





Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2009
            
            2008
            
            Change
            
            2009
            
            2008
            
            Change($
      - in thousands)
            
            ($
      - in thousands)Interest
      income (expense), net
            4
            
            (43)
            
            47
            
            (445)
            
            30
            
            (475)





Interest
income (expense), net changed $47 thousand to $4 thousand income, net, in the
three months ended September 30, 2009, from $(43) thousand expense, net, in the
three months ended September 30, 2008. The change in interest income (expense),
net, resulted mostly from two matters. Firstly, in the three months ended
September 30, 2008, we recorded $91 thousand of amortization relating to $363
thousand of transaction costs that we incurred in connection with the Series B
Unit Warrant in June 2008. In the three months ended September 30, 2009, we did
not incur this expense since the charges were fully amortized by June 2009.
Secondly, interest earned from our cash balance in the three months ended
September 30, 2009 was $5 thousand, compared to interest of $40 thousand earned,
during the same period in 2008. The reduction in interest income earned on our
cash balances was the result of lower short-term interest rates.





Interest
income (expense), net changed $475 thousand to $(445) thousand expense, net, in
the nine months ended September 30, 2009, from $30 thousand income, net, in the
nine months ended September 30, 2008. The change in interest income (expense),
net, resulted mostly from the following matters. Firstly, in the nine months
ended September 30, 2009, we recorded $166 thousand of amortization relating to
$363 thousand of transaction costs that we incurred in connection with the
Series B Unit Warrant in June 2008. In the nine months ended September 30, 2008,
such amortization amounted to $110 thousand. Secondly, in the nine months ended
September 30, 2009, we recorded a $290 thousand charge relating to the Series B
Warrants transaction costs we incurred in June 2009. Those costs were charged in
full in the second quarter of 2009. Finally, interest earned from our cash
balance in the nine months ended September 30, 2009 was $15 thousand, compared
to interest of $102 thousand earned, during the same period in 2008. The
reduction in interest income earned on our cash balances was the result of lower
short-term interest rates.


31
 Table of Contents





Other
Income (Expenses), Net
 
 Three
      Months Ended September 30,
              
              Nine
      Months Ended September 30,2009
              
              2008
              
              Change
              
              2009
              
              2008
              
              Change($
      - in thousands)
              
              ($
      - in thousands)Other
      income (expense), net
              (5)
              
              11
              
              (16)
              
              -
              
              (38)
              
              38





Other
income (expense), net, in the three months ended September 30, 2009 was $(5)
thousand expense, net, compared to $11 thousand income, net, in the same period
in 2008. Other income (expense), net, results from foreign currency net gains
and losses.





Other
income (expense), net, in the nine months ended September 30, 2009 was $0
thousand income, net, compared to $(38) thousand expense, net, in the same
period in 2008. Other income (expense), net, results from foreign currency net
gains and losses.





Loss
Resulting from Fair Value Adjustments of Series A Warrants, Series B Warrants
and Warrant to Purchase Units of Series B Preferred Stock and
Warrants








Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2009
            
            2008
            
            Change
            
            2009
            
            2008
            
            Change($
      - in thousands)
            
            ($
      - in thousands)Loss
      resulting from fair value adjustment of Series A Warrants, Series B
      Warrants and warrant to purchase units of Series B preferred stock and
      warrants
            (999)
            
            (2,056)
            
            1,057
            
            (3,374)
            
            (2,056)
            
            (1,318)





The
Series A Warrants and Series B Warrants are revalued each reporting date, and
any change to their fair value is recorded in the statement of operations. The
Warrant to Purchase Units of Series B Preferred Stock and Warrants was, up to
its exercise in June 2009, revalued each reporting period and the change in fair
value was recorded in the statement of operations.





The
primary reason for the change in value of the aforesaid warrants is the market
price of our common stock on the measurement dates. An increase in the price of
our common stock increases the value of the warrants and thus results in a loss
on our statement of operations. Conversely, a decline in the price of our common
stock decreases the value of the warrants and thus results in a gain on our
statement of operations.





Income
Tax Benefit (Expense), Net




Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2009
            
            2008
            
            Change
            
            2009
            
            2008
            
            Change($
      - in thousands)
            
            ($
      - in thousands)Income
      tax benefit (expense), net
            (50)
            
            91
            
            (141)
            
            (121)
            
            65
            
            (186)





Income
tax benefit (expense), net changed by $141 thousand for the three months ended
September 30, 2009, as compared to the same period in 2008. The tax expense for
the three months ended September 30, 2009 was primarily the result of $35
thousand related to estimated income taxes for U.S. federal, state and local,
and Israeli income taxes.  The tax benefit for the three months ended
September 30, 2008 was primarily the result of the recognition of $93 thousand
of tax benefits relating to closed tax years.





Income
tax benefit (expense), net, changed by $186 thousand in the nine months ended
September 30, 2009 as compared to the same period in 2008. The tax expense for
the nine months ended September 30, 2009 was primarily the result of $149
thousand related to estimated income taxes for U.S. federal, state and local,
and Israeli income taxes, partially offset by $36 thousand of net deferred tax
assets recorded by the subsidiary. The tax benefit for the nine months ended
September 30, 2008 was primarily the result of the recognition of $93 thousand
of tax benefits relating to closed tax years, which was partially offset by
Israeli income taxes amounting to approximately $20 thousand.





We had
net operating loss carryforwards, or NOLs, for federal income tax purposes of
approximately $59 million at December 31, 2008, and approximately $54 million at
December 31, 2007. The federal net operating losses will expire if not utilized
on various dates from 2019 through 2028. Because we have experienced one or more
ownership changes, within the meaning of Section 382 of the Internal
Revenue Code of 1986, as amended, an annual limitation is imposed on our ability
to use at least $32 million of these carryforwards. We estimate that the
annual limitation on the use of such $32 million of our NOLs is
approximately $1.8 million per year. Any unused portion of the
$1.8 million annual limitation applicable to our restricted NOLs is
available for use in future years until such NOLs are scheduled to expire. The
recent Redpoint Financing and other financing events that transpired since
October 2004 may further impact our ability to use our NOLs, however, since we
have not conducted a Section 382 Study since October 2004 we cannot make that
determination. We plan to complete a new Section 382 Study in 2009. At December
31, 2008, our Israeli subsidiary has capital loss carryforwards of approximately
$790 thousand that can be applied to future capital gains for an unlimited
period of time under current tax rules.


32
 Table of Contents





We file
U.S. federal, various state and local and foreign income tax returns. Answers
Corporation is no longer subject to U.S. federal income tax examinations by tax
authorities for years prior to 2005 and New York State and City income tax
examinations for years prior to 2006. In September 2008, the Israeli income tax
authorities completed its audit of our Israeli subsidiary for the tax years 2004
through 2006, resulting in no adjustments.





Liquidity
and Capital Resources





Historically,
our principal sources of liquidity were our cash inflows from revenues and funds
that were raised through various financing events that took place through June
2008. Beginning the last quarter of 2008, our principal source of liquidity has
been our cash inflows from operations, and we expect that going forward, cash
flow from operations will continue to be our principal source of liquidity.
Notwithstanding, as a result of Redpoint’s exercise of their  Series B
Unit Warrant in June 2009, we received an additional infusion of funds in the
amount of $7 million before transaction costs.





Nine
      Months Ended September 30,2009
            
            2008($
      - in thousands)Net
      cash provided by (used in) operating activities
            4,720
            
            (2,705)Net
      cash provided by (used in) investing activities
            (1,289)
            
            237Net
      cash provided by financing activities
            6,195
            
            5,307





Operating
Activities





Despite a
net loss of $648 thousand in the nine months ended September 30, 2009, the net
cash provided by operations was $4,720 thousand. The adjustments to reconcile
the two amounts, including changes to the balances of our various operating
assets and liabilities, are noted in detail on the accompanying statement of
cash flows. The largest reconciling items are the non-cash loss resulting from
the fair value adjustment of the Series A Warrants, Series B Warrants and
warrant to purchase units of Series B preferred stock and warrants of $3,374
thousand, stock-based compensation of $1,166 thousand, and depreciation and
amortization of $883 thousand.




Despite a
net loss of $10,405 thousand in the nine months ended September 30, 2008,
net cash used in operations was $2,705 thousand. The adjustments to reconcile
the two amounts, including changes to the balances of our various operating
assets and liabilities, are noted in detail on the accompanying statement of
cash flows. The largest reconciling items are the write-off of the Brainboost
Answers Engine of $3,138 thousand, the non-cash loss resulting from the fair
value adjustment of the warrant to purchase units of Series B preferred stock
and warrants of $2,056 thousand, stock-based compensation of $1,312 thousand,
depreciation and amortization of $1,080 thousand, and the write-off of amounts
that were paid in prior periods relating to the terminated Lexico acquisition
and abandoned follow-on offering, of $663 thousand.





Investing
Activities





Net cash
used in investing activities of $1,289 thousand, in the nine months ended
September 30, 2009, is attributable to cash used for capital expenditures
of $1,275 thousand, and cash used to increase long-term deposits of $14
thousand. Most of our capital expenditures resulted from the establishment of
our second colocation facility in the second quarter of 2009.




Net cash
provided by investing activities in the nine months ended September 30,
2008 is attributable to the proceeds from the sale of investment securities, of
$700 thousand, less cash used for capital expenditures of $435 thousand and cash
used to increase long-term deposits of $28 thousand.





Financing
Activities





Net cash
flow from financing activities in the nine months ended September 30, 2009
resulted almost entirely from the Redpoint Financing event in June 2009, less
dividends paid to Redpoint. Net cash flow from financing activities in the nine
months ended September 30, 2008 resulted almost entirely from the Redpoint
Financing event in June 2008.




Future
Operations





Based on
our current cash and cash equivalent levels and expected cash flow from
operations, we believe we have sufficient cash and cash equivalents to meet our
working capital and operating requirements for at least the next twelve months.
Further, in estimating our expected cash flow, we have considered the current
general economic downturn and its impact on our future revenue, as discussed in
the earlier revenue discussion.


33
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We assess
acquisition opportunities as they arise. Financing in excess of our current cash
and cash equivalents may be required if we decide to make additional
acquisitions. There can be no assurance, however, that any such opportunities
may arise, or that any such acquisitions may be consummated. Additional
financing may not be available on satisfactory terms when required. To the
extent that we raise additional funds by issuing equity securities, our
stockholders may experience significant dilution.




As a
result of the Redpoint Financings in June 2008 and June 2009, we raised net
proceeds of approximately $11.9 million, significantly improving our cash
position. The Series A and Series B Preferred Stock contain redemption
provisions which allow the holders of a majority of the Series A and Series B
Preferred Stock to request redemption, at any time on or after June 16, 2014, of
all or any part of their stock.





Off-Balance
Sheet Arrangements





As of
September 30, 2009, there were no off-balance sheet arrangements.





Critical
Accounting Estimates





While our
significant accounting policies are more fully described in the notes to our
audited consolidated financial statements for the years ended December 31,
2008 and 2007, and our unaudited consolidated financial statements for the three
and nine months ended September 30, 2009 and 2008, we believe the following
accounting policies to be the most critical in understanding the judgments and
estimates we use in preparing our consolidated financial
statements.





Goodwill,
Intangibles and Other Long-Lived Assets





We
account for our purchases of acquired companies in accordance with ASC 805,
“Business Combinations”
)formerly SFAS 141(, and for goodwill and other identifiable
definite and indefinite-lived acquired intangible assets in accordance with
ASC 350, “Intangibles –
Goodwill and Other” (formerly SFAS 142, “Goodwill and Other Intangible
Assets”). Additionally, we review our long-lived assets for
recoverability in accordance with ASC 360, “Property, Plant and Equipment”(formerly SFAS 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets”).





The
identification and valuation of intangible assets and the determination of the
estimated useful lives at the time of acquisition are based on various valuation
methodologies including reviews of projected future cash flows. The use of
alternative estimates and assumptions could increase or decrease the estimated
fair value of our goodwill and other intangible assets, and potentially result
in a different impact to our results of operations. Further, changes in business
strategy and/or market conditions may significantly impact these judgments
thereby impacting the fair value of these assets, which could result in an
impairment of the goodwill and acquired intangible assets.





We
evaluate our long-lived tangible and intangible assets for impairment in
accordance with ASC 350, with the annual goodwill impairment testing date
set at September 30. Further, in accordance with ASC 360 and ASC 350, we
also evaluate our long-lived tangible and intangible assets, respectively,
 for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable.  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 assets exceeds the
fair value of the assets. While we use available information to prepare our
estimates and to perform impairment evaluations, the completion of annual
impairment tests requires significant management judgments and
estimates.





As of
September 30, 2009, we determined that there was no impairment of goodwill and
that there were no events or changes in circumstances indicating that the
carrying amount of our intangible and other long-lived assets may not be
recoverable; therefore, there was no need to evaluate the recoverability or
compute impairment of any of the aforesaid assets.





Accounting
for Stock-based Compensation





We
account for stock-based awards under ASC  718, “Compensation – Stock Compensation”(formerly SFAS 123R, “Share-Based Payment”), which
requires measurement of compensation cost for stock-based awards at fair value
on date of grant and recognition of compensation over the service period awards
are expected to vest. The estimation of stock-based awards that will ultimately
vest requires judgment, and to the extent actual results differ from our
estimates, such amounts will be recorded as a cumulative adjustment in the
period estimates are revised. We consider various factors when estimating
expected forfeitures, including historical experience. Actual results may differ
substantially from these estimates.


34
 Table of Contents





We
determine the fair value of stock options granted to employees and directors
using the Black-Scholes valuation model, which requires significant assumptions
regarding the expected stock price volatility, the risk-free interest rate and
the dividend yield, and the estimated period of time option grants will be
outstanding before they are ultimately exercised. We estimate our expected stock
volatility based on our own historical stock volatility rates. Had we made
different assumptions about our stock price volatility or the estimated time
option and warrant grants will be outstanding before they are ultimately
exercised, the related stock based compensation expense, and our net income
(loss) and net earnings (loss) per share amounts could have been significantly
different, in the three and nine months ended September 30, 2009 and
2008.





Accounting
for Income Taxes





As part
of the process of preparing our consolidated financial statements, we are
required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves management estimating our actual current tax
exposure together with assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included within our consolidated
balance sheet. We must then assess the likelihood that our deferred tax assets
will be recovered from future taxable income and, to the extent we believe that
recovery is not more likely than not, we must establish a valuation allowance.
Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. At September 30, 2009,
we have fully offset our U.S. net deferred tax asset with a valuation
allowance. Our lack of earnings history and the uncertainty surrounding our
ability to generate US taxable income prior to the expiration of such deferred
tax assets were the primary factors considered by management in establishing the
valuation allowance.





ASC 740,
“Income Taxes”
(formerly FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes — an Interpretation of FASB Statement 109”), prescribes
how a company should recognize, measure, present and disclose in its financial
statements uncertain tax positions that the company has taken or expects to take
on a tax return. Additionally, for tax positions to qualify for deferred tax
benefit recognition under ASC 740, the position must have at least a “more
likely than not” chance of being sustained upon challenge by the respective
taxing authorities, and whether or not it means that criteria is a matter if
significant judgment.





Accounting
for Redpoint Financings





In
accounting for Redpoint’s Series A Financing, the proceeds were first allocated
to the Series B Unit Warrant, which was classified as a current liability, based
on its fair value, and the residual amount was allocated among the Series A
Convertible Preferred Stock and the Series A Warrants based on their relative
fair values, all in accordance with the guidance in ASC 480, “Distinguishing Liabilities from
Equity” (formerlySFAS 150, “Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity”), ASC
815,“Derivatives and Hedging”(formerly SFAS 133,“Accounting for Derivative
Instruments and Hedging Activities”) and ASC 815–40, “Derivatives and hedging – Contracts
in Entity’s Own Equity”(formerly EITF 00-19, ”Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock”). The Series B Unit Warrant has been revalued at each reporting
date, since its inception until it was exercised on June 10, 2009. The Series A
Convertible Preferred Stock has been classified as temporary equity, in
accordance with the guidance in ASC 480-10-S99A (formerly EITF D-98, “Classification and Measurement of
Redeemable Securities”),and, prior to January 1, 2009, the Series A
Warrants were classified in permanent equity.





In June
2008, the FASB ratified the consensus of EITF 07-5, “Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock” (incorporated
in ASC 815–40).   ASC 815–40 responded to practice
questions about whether an instrument or embedded feature is indexed to the
reporting company’s own stock by establishing a framework for the determinations
and by nullifying some previous requirements. The adoption of ASC 815–40’s
requirements affects issuers’ accounting for warrants and many convertible
instruments with provisions that protect holders from declines in the stock
price (“Down-Round” provisions). Warrants with such provisions are no longer
recorded in equity, and many convertible instruments with such provisions
require “bifurcation” with the conversion option separately accounted for as a
derivative under ASC 815. As a result of ASC 815–40, effective January
1, 2009, and due to the Down-Round Protection of the Series A Warrants, such
warrants are separately accounted for as a derivative under ASC 815 and are
no longer recorded in equity but rather as a liability to be revalued at each
reporting date.





On June
10, 2009, Redpoint exercised, in full, the Series B Unit Warrant, which was
valued at approximately $10.8 million on such date, thus extinguishing this
liability from the Company’s balance sheet through a corresponding increase to
additional paid-in capital. In accounting for Redpoint’s Series B Financing, the
proceeds were first allocated to the Series B Warrants which were classified as
a liability, based on its fair value, and the residual amount was allocated to
the Series B Convertible Preferred Stock, all in accordance with the guidance in
ASC 480,ASC 815 and ASC  815-40. The Series B Convertible Preferred
Stock has been classified as temporary equity, in accordance with the guidance
in ASC 480-10-S99A.


We used
various valuation models and techniques to determine the individual values of
the various components in the Redpoint Financings, including Monte Carlo and
Black-Scholes. Inputs used in the models include our stock price and risk-free
interest rate. Additionally, significant assumptions used in applying these
techniques included redemption behavior estimates (including likelihood of
forced conversion, and timing of liquidation event if such event transpires) and
expected volatility of our stock price. While we believe we applied appropriate
judgment in the aforesaid assumptions, variations in judgment could have
materially affected the valuation results, and thus, our financial statements.
We continue to use the Black-Scholes valuation model in our periodic fair value
adjustments.





The
Series A Convertible Preferred Stock and the Series B Convertible Preferred
Stock issued as part of the Redpoint Financings contain an embedded conversion
option which could potentially require separate accounting under ASC 815.
According to ASC  815-15 (formerly paragraph 12(a) of SFAS 133), in order
to determine whether separate accounting is required, one has to evaluate
whether the economic characteristics and risks of the conversion option are
closely related to the host contract, and the nature of the host
contract.  We exercised judgment and evaluated this matter in
accordance with ASC 815-10 (formerly EITF Topic D-109, "Determining the Nature of a Host
Contract Related to a Hybrid Financial Instrument Issued in the Form of a Share
under FASB Statement No.133"). ASC 815-10 conveys the SEC staff's
views on determining whether the characteristics of a host contract in a hybrid
financial instrument issued in the form of a share is more akin to debt or
equity. In evaluating an embedded derivative feature for separation under
ASC 815, the consideration of the economic characteristics and risks of the
host contract should not ignore the stated or implied substantive terms and
features of the hybrid financial instrument. We considered various factors
including redemption provisions, stated rate, voting rights, whether returns are
discretionary or mandatory, collateral requirements, participation in residual
earnings and liquidation preferences, in making our determination that the host
contract was more akin to equity. The most important factor that led us to the
conclusion that the host contract was more akin to equity was the fact that the
redemption feature was not mandatory or likely to occur. Had we determined that
the host contract was more akin to debt and not equity it would have impacted
the accounting for the host contract and the embedded conversion option and
could have had a material impact on our financial statements.





35
 Table of Contents





Quarterly
Results





The
following table sets forth our historical quarterly consolidated statement of
operations data and certain non-GAAP financial measures beginning with the first
quarter of 2008. You should read this information together with our consolidated
financial statements and the related notes appearing elsewhere in our filings.
The results of historical periods are not necessarily indicative of the results
of operations for a full year or any future period.




Quarter
      EndedMar.
      31,
              2008
            
            Jun.
      30,
              2008
            
            Sep.
      30,
              2008
            
            Dec.
      31,
              2008
            
            Mar.
      31,
              2009
            
            Jun.
      30,
              2009
            
            Sep.
      30,
              2009(in
      thousands, except page views and RPM data)Revenues:Advertising
      revenue
            $3,013
            
            $2,985
            
            $3,539
            
            $4,609
            
            $4,729
            
            $4,985
            
            $4,970Answers
      services licensing
            18
            
            18
            
            24
            
            21
            
            18
            
            19
            
            173,031
            
            3,003
            
            3,563
            
            4,630
            
            4,747
            
            5,004
            
            4,987Costs
      and expenses:Cost
      of revenue
            1,393
            
            1,416
            
            945
            
            887
            
            1,059
            
            1,166
            
            1,264Research
      and development
            875
            
            929
            
            866
            
            812
            
            873
            
            817
            
            921Community
      development, sales and marketing
            762
            
            933
            
            563
            
            476
            
            499
            
            558
            
            621General
      and administrative
            1,131
            
            1,198
            
            1,311
            
            1,159
            
            1,219
            
            1,248
            
            1,201Write-off
      of the Brainboost Answers Engine
            —
            
            3,138
            
            —
            
            —
            
            —
            
            —
            
            —Termination
      fees and write-off of costs relatingto
      the terminated Lexico acquisition andabandoned
      follow-on offering
            2,543
            
            —
            
            —
            
            —
            
            —
            
            —
            
            —Total
      operating expenses
            6,704
            
            7,614
            
            3,685
            
            3,334
            
            3,650
            
            3,789
            
            4,007Operating
      income (loss)
            (3,673)
            
            (4,611)
            
            (131)
            
            1,296
            
            1,097
            
            1,215
            
            980Interest
      income (expense), net
            55
            
            18
            
            (43)
            
            (86)
            
            (87)
            
            (362)
            
            4Other
      income (expense), net
            (38)
            
            (11)
            
            11
            
            57
            
            15
            
            (9)
            
            (5)Gain
      (loss) resulting from fair value adjustmentof
      Series A Warrants, Series B Warrants andwarrant to purchase units of Series B preferredstock
      and warrants
            —
            
            —
            
            (2,056)
            
            (3,131)
            
            2,010
            
            (4,385)
            
            (999)Income
      (loss) before income taxes
            (3,655)
            
            (4,604)
            
            (2,210)
            
            (1,864)
            
            3,035
            
            (3,541)
            
            (20)Income
      tax benefit (expense), net
            (11)
            
            (15)
            
            91
            
            17
            
            6
            
            (78)
            
            (50)Net
      income (loss)
            $(3,667)
            
            $(4,619)
            
            $(2,119)
            
            $(1,847)
            
            $3,041
            
            $(3,619)
            
            $(70)Other
      Data:Adjusted
      EBITDA(1)
            $(181)
            
            $(670)
            
            $520
            
            $1,950
            
            $1,744
            
            $1,895
            
            $1,708ReferenceAnswers
      average daily page views
            3,225,000
            
            2,641,000
            
            2,666,000
            
            3,027.000
            
            2,982,000
            
            2,965,000
            
            2,857,000WikiAnswers
      average daily page views
            1,885,000
            
            2,318,000
            
            3,094,000
            
            4,350,000
            
            5,337,000
            
            6,082,000
            
            6,336,000ReferenceAnswers
      RPM
            $6.23
            
            $6.18
            
            $6.44
            
            $6.21
            
            $5.84
            
            $5.87
            
            $5.89WikiAnswers
      RPM
            $6.91
            
            $7.11
            
            $6.89
            
            $7.19
            
            $6.58
            
            $6.14
            
            $5.87


36
 Table of Contents





(1)       We
define Adjusted EBITDA as net earnings before interest, taxes, depreciation,
amortization, gain (loss) resulting from fair value adjustment of Series A
Warrants, Series B Warrants and warrant to purchase units of Series B preferred
stock and warrants, stock-based compensation, foreign currency exchange rate
differences and certain non-recurring revenues and expenses.





We use
Adjusted EBITDA as an additional measure of our overall performance for purposes
of business decision-making, developing budgets and managing expenditures. It is
useful because it removes the impact of our capital structure (interest expense
and gain (loss) resulting from fair value adjustment of Series A Warrants,
Series B Warrants and warrant to purchase units of Series B preferred stock and
warrants), asset base (amortization and depreciation), stock-based compensation
expenses, taxes, foreign currency exchange rate differences and certain
non-recurring revenues and expenses from our results of operations. We believe
that the presentation of Adjusted EBITDA provides useful information to
investors in their analysis of our results of operations for reasons similar to
the reasons why we find it useful and because these measures enhance their
overall understanding of the financial performance and prospects of our ongoing
business operations. By reporting Adjusted EBITDA, we provide a basis for
comparison of our business operations between current, past and future periods,
and peer companies in our industry.





More
specifically, we believe that removing these impacts is important for several
reasons:





·
            Amortization
      of Intangible Assets. Adjusted EBITDA disregards amortization of
      intangible assets. Specifically, we exclude (a) amortization, and the
      write-off, of acquired technology from the acquisition of Brainboost
      Technology, LLC, developer of the Brainboost Answer Engine in December
      2005; and (b) amortization of intangible assets resulting from the
      acquisition of WikiAnswers and other related assets in November 2006.
      These acquisitions resulted in operating expenses that would not otherwise
      have been incurred. We believe that excluding such expenses is significant
      to investors, due to the fact that they derive from prior acquisition
      decisions and are not necessarily indicative of future cash operating
      costs. In addition, we believe that the amount of such expenses in any
      specific period may not directly correlate to the underlying performance
      of our business operations. While we exclude the aforesaid expenses from
      Adjusted EBITDA we do not exclude revenues derived as a result of such
      acquisitions. The amount of revenue that resulted from the acquisition of
      WikiAnswers and other related assets is disclosed in the revenue
      discussion of this Item 2. The amount of revenue that resulted from the
      acquisition of technology from Brainboost is not quantifiable due to the
      nature of its integration.






·
            Stock-based
      Compensation Expense. Adjusted EBITDA disregards expenses associated with
      stock-based compensation, a non-cash expense arising from the grant of
      stock-based awards to employees and directors. We believe that, because of
      the variety of equity awards used by companies, the varying methodologies
      for determining stock-based compensation expense, and the subjective
      assumptions involved in those determinations, excluding stock-based
      compensation from Adjusted EBITDA enhances the ability of management and
      investors to compare financial results over multiple
    periods.






·
            Depreciation,
      Interest, Gain (Loss) Resulting from Fair Value Adjustment of Series A
      Warrants, Series B Warrants and Warrant to Purchase Units of Series B
      Preferred Stock and Warrants, Taxes and Exchange Rate Differences. We
      believe that, excluding these items from the Adjusted EBITDA measure
      provides investors with additional information to measure our performance,
      by excluding potential differences caused by variations in capital
      structures (affecting interest expense), asset composition, and tax
      positions.






·
            Terminated
      Lexico Acquisition and Follow-On Offering. Adjusted EBITDA disregards
      $2,543 thousand in costs associated with our terminated acquisition of
      Lexico and the cancellation of our follow-on offering. We believe that,
      excluding these costs provides investors with additional information to
      measure our performance, by excluding events that are of a non-recurring
      nature.




Adjusted
EBITDA is not a measure of liquidity or financial performance under generally
accepted accounting principles, or GAAP, and should not be considered in
isolation from, or as a substitute for, a measure of financial performance
prepared in accordance with GAAP. Investors are cautioned that there are
inherent limitations associated with the use of Adjusted EBITDA as an analytical
tool. Some of these limitations are:





·
            Non-GAAP
      financial measures are not based on a comprehensive set of accounting
      rules or principles;





·
            Many
      of the adjustments to Adjusted EBITDA reflect the exclusion of items that
      are recurring and will be reflected in our financial results for the
      foreseeable future;





·
            Other
      companies, including other companies in our industry, may calculate
      Adjusted EBITDA differently than us, thus limiting its usefulness as a
      comparative tool;





·
            Adjusted
      EBITDA does not reflect the periodic costs of certain tangible and
      intangible assets used in generating revenues in our
    business;





·
            Adjusted
      EBITDA does not reflect interest income from our investments in cash and
      investment securities;


37
 Table of Contents





·
            Adjusted
      EBITDA does not reflect foreign exchange net gains and
    losses;





·
            Adjusted
      EBITDA does not reflect interest expense and other cost relating to
      financing our business, including gains and losses resulting from fair
      value adjustment of Redpoint Venture’s Series A Warrants, Series B
      Warrants and their Warrant to Purchase Units of Series B Preferred Stock
      and Warrants;





·
            Adjusted
      EBITDA excludes taxes, which are an integral cost of doing
      business; and





·
            Because
      Adjusted EBITDA does not include stock-based compensation, it does not
      reflect the cost of granting employees equity awards, a key factor in
      management’s ability to hire and retain
  employees.




We
compensate for these limitations by providing specific information in the
reconciliation to the GAAP amounts excluded from Adjusted EBITDA, as
follows:




Quarter
      EndedMar. 31,
                2008
              
              Jun. 30,
                2008
              
              Sep. 30,
                2008
              
              Dec. 31,
                2008
              
              Mar. 31,
                2009
              
              Jun. 30,
                2009
              
              Sep. 30,
                2009$
      (in thousands)Net
      income (loss)
              (3,667)
              
              (4,619)
              
              (2,119)
              
              (1,847)
              
              3,041
              
              (3,619)
              
              (70)Interest
      (income) expense, net
              (55)
              
              (18)
              
              43
              
              86
              
              87
              
              362
              
              (4)Foreign
      currency (gains) losses
              38
              
              11
              
              (11)
              
              (57)
              
              (15)
              
              9
              
              5Income
      tax (benefit) expense, net
              11
              
              15
              
              (91)
              
              (17)
              
              (6)
              
              78
              
              50Depreciation
      and amortization
              448
              
              383
              
              250
              
              248
              
              261
              
              299
              
              328Stock-based
      compensation
              501
              
              420
              
              392
              
              406
              
              386
              
              381
              
              400Write-off
      of the Brainboost Answers Engine
              —
              
              3,138
              
              —
              
              —
              
              —
              
              —
              
              —Termination
      fees and write-off of costs relatingto
      the terminated Lexico acquisition and abandonedfollow-on
      offering
              2,543
              
              —
              
              —
              
              —
              
              —
              
              —
              
              —(Gain)
      loss resulting from fair value adjustmentof
      Series A Warrants, Series B Warrants and warrantto
      purchase units of Series B preferred stock and warrants
              —
              
              —
              
              2,056
              
              3,131
              
              (2,010)
              
              4,385
              
              999Adjusted
      EBITDA
              (181)
              
              (670)
              
              520
              
              1,950
              
              1,744
              
              1,895
              
              1,708




38
 Table of Contents





ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




Currency Risk. Our revenue is
denominated solely in U.S. dollars. However, close to half of our operating
expenses (excluding non-cash items such as stock-based compensation and gain
(loss) from fair value adjustment of Series A Warrants, Series B Warrants and
Warrant to purchase units of Series B preferred stock and warrants) are
denominated in New Israel Shekels (NIS). In recent years, the U.S. dollar-NIS
exchange rate has been volatile. We expect the amount of such NIS denominated
expenses to grow in the foreseeable future. If the value of the U.S. dollar
weakens against the value of NIS, there will be a negative impact on our results
of operations. In addition, to the extent we hold cash and cash equivalents that
are denominated in currencies other than the U.S. dollar; we are subject to the
risk of exchange rate fluctuations. We often hedge our foreign currency
commitments. Such transactions are mainly designed to hedge short term cash
flows related to anticipated expenses.





Other Market Risk. Currently,we invest all of our excess cash in highly
liquid investments with an original maturity of three months or less. Due to the
short-term nature of these investments, we believe that there is no material
exposure to interest rate risk arising from our investments. Based on our
investment policy, such instruments are highly rated by rating agencies and
therefore we believe that there is no material exposure to the principal amount
from our investments. We expect that in the future a certain portion of our cash
will be invested in investments with maturities in excess of three
months.





ITEM 4T. CONTROLS AND PROCEDURES





Based on
the evaluation of our disclosure controls and procedures (as defined in
Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of
1934, as amended) required by paragraph (b) of Rule 13a-15 or
Rule 15d-15, as of September 30, 2009, our Chief Executive Officer and
Principal Financial Officer have concluded that our disclosure controls and
procedures were effective in ensuring that information required to be disclosed
by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Commission’s rules and forms. Our Chief Executive Officer and Principal
Financial Officer also concluded that, as of September 30, 2009, our disclosure
controls and procedures were effective in ensuring that information required to
be disclosed by us in the reports that we file or submit under the Exchange Act
is accumulated and communicated to our management, including our Chief Executive
Officer and Principal Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.





During
the three months ended September 30, 2009, there were no changes in our internal
control over financial reporting identified in connection with the evaluation
required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.


39
 Table of Contents




PART II. OTHER
INFORMATION




ITEM 1. LEGAL PROCEEDINGS





We are
not currently involved in any legal proceedings. However, from time to time, we
may receive various legal claims incidental to our normal business activities,
such as intellectual property infringement claims and claims of defamation and
invasion of privacy. Results of claims cannot be predicted with certainty.
Regardless of the legal outcome of any such claims, litigation can have an
adverse impact on us because of defense costs, diversion of management resources
and other factors.




ITEM 1A. RISK FACTORS





Risks
Relating to our Business





If search engines
alter their algorithms or methods or otherwise restrict the flow of users visiting
Answers.com, our business and financial results could
suffer.





Search
engines serve as the primary Web entry point for most users in search of
information, and our topic and answer pages often appear as one of the top links
on the pages returned by search engines in response to users’ search queries. As
a result, we rely heavily on search engines for the overwhelming share of
users visiting Answers.com. According to our internal estimates, traffic to
Answers.com originating from search engines during the first three quarters of
2009, excluding Google-directed definition link traffic, was approximately 83%
of overall traffic, the majority of which originated from Google. If our traffic
from search engines declines for any reason, we would suffer a significant
decline in overall traffic and revenue. For example, in July 2007, a search
engine algorithm adjustment by Google led to a drop in Google directed traffic
to ReferenceAnswers. This adjustment reduced our overall traffic by
approximately 28% based on the average traffic directed to ReferenceAnswers from
Google for the week prior to the adjustment as compared to the week after. As a
result, our revenue declined proportionately. In September 2007, Yahoo! dropped
our content from its search index, which led to a drop in our Yahoo! directed
traffic. This action was reversed within a week. We have experienced other such
cases of decreases, and at times, increases, in traffic due to adjustments made
by the search engines.





Search
engines, at any time and for any reason, could change their algorithms that
direct search queries to, or could restrict the flow of users visiting,
Answers.com. In fact, as illustrated above, Answers.com has on occasion
experienced decreases in traffic, and consequently in revenue, due to these
search engine actions. We cannot guarantee that we will successfully react to
these actions in the future and recover the lost traffic. Accordingly, a change
in algorithms that search engines use to identify Web pages towards which
traffic will ultimately be directed, or a restriction on users visiting
Answers.com from the search engines, could cause a significant decrease in
traffic and revenues, which could adversely affect our business and financial
results.





If
Answers.com results do not continue to rank high in the result pages of search
engines, traffic to our site may decline, which could adversely affect our
business and financial results.





The
search algorithms used by search engines are designed to offer users the best
results to the queries searched. For this reason, the level of quality of
content offered by Websites plays an important role in determining whether a
search engine will include links to any given Website on its result page.
Particularly in light of the enormous amount of user-generated content offered
on Answers.com via the WikiAnswers component, in the event the quality of
content on Answers.com pages does not improve and/or if it deteriorates, our
pages may rank low in the algorithmic systems of search engines. Low ranking
content could cause Answers.com’s results to be less likely to be accessed by
users, resulting in traffic declines which could adversely impact our business
and financial results.
  If our Google
Service Agreement, or GSA, is terminated by Google, we would have to seek an
alternative provider of listings and
advertisements, which could adversely affect our business and financial
results.





Our
business is dependent on the GSA, under which we obtain most of the
advertisements displayed on Answers.com and earn most of our ad revenues. Google
may terminate the GSA with no advance notice if we:





·
            take
      certain prohibited actions including, among other
  things:




o
            editing
      or modifying the order of search
results,




o
            redirecting
      end users, producing or distributing any software which prevents the
      display of ads by Google,




o
            modifying,
      adapting or otherwise attempting to obtain source code from Google
      technology, content, software and
  documentation or




o
            engaging
      in any action or practice that reflects poorly on Google or otherwise
      disparaging or devaluing Google’s reputation or
  goodwill;




·
            breach
      the grant of a license to us by Google of certain trade names, trademarks,
      service marks, logos, domain names and other distinctive brand features of
      Google;




·
            breach
      the confidentiality provisions of the
GSA;




·
            breach
      the exclusivity provisions of the
GSA; or




·
            materially
      breach the GSA more than two times, irrespective of any cure to such
      breaches.




The GSA,
extended for an additional two years pursuant to an October 2009 amendment, is
scheduled to expire on January 31, 2012.





Google’s
termination of the GSA would result in our need to replace this relationship and
obtain listings and advertisements from alternative providers, and we may not
succeed in receiving equally favorable terms as those provided in the GSA.
Termination of the GSA and our failure to replace it on equally favorable terms
could result in a material reduction in our ad revenues and could adversely
affect our business and financial results.





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 Table of Contents





A
downturn in the United States and global economic conditions could adversely
affect the profitability of our business.





The U.S.
and global economies are currently experiencing a contraction, and we may see
further economic downturn in the immediate and near future. The deterioration in
economic conditions generally has caused, and may continue to cause, decreases
and/or delays in advertising expenditures and decreases in queries likely to
generate revenue, one or both of which would reduce revenues shared with us by
our advertising partners, including Google, and adversely affect our business,
financial condition and results of operations.





We face
significant competition from question and answer sites, search engines and
other free reference
and industry-specific Web properties that could adversely impact our
competitive
position.





We face
significant competition from a wide variety of Web properties. Question and
answer sites, such as Yahoo! Answers, Askville (owned by Amazon), Yedda (owned
by AOL), eHow and Answerbag (both owned by Demand Media, Inc.) and Wikia,
Inc. compete with the WikiAnswers component of Answers.com. As part of this
competition, we run the risk of other Q&A and content sites outranking us in
the search engine algorithms, thus causing fewer users to find our answers
and/or content and visit our site which could adversely affect our ad revenues
and our financial results.





Destination
portals and other free online information and/or reference services, such as
About.com (owned by the New York Times), TheFreeDictionary.com, Dictionary.com
(owned by IAC/InterActiveCorp) and Wikipedia.org, compete with the
ReferenceAnswers component of Answers.com. Other competitors of ReferenceAnswers
include vertical industry-specific Web properties, such as Bankrate.com and
WebMD.com. Since several companies operating traditional search engines, such as
Yahoo!, Microsoft, AOL and Ask.com offer their own question and answer services,
they too can be viewed as competitors of our answers-driven products,
particularly in light of the fact that some search engines have begun putting
snippets of useful answers at the top of many of their pages, in response to
queries made by users. Nevertheless, search engines remain the greatest source
of traffic arriving at Answers.com.





Many of
our competitors have longer operating histories, more extensive management
experience, an employee base with more extensive experience, better geographic
coverage, larger consumer bases, greater brand recognition and significantly
greater financial, marketing and other resource than we do. We expect
competition to intensify in the future. If our competitors are more successful
than we are in developing compelling products or attracting and retaining more
users, then our competitive position and financial results could be adversely
affected.





The failure of
WikiAnswers to grow in accordance with our expectations could have an
adverse
impact on our business and financial results.





WikiAnswers
is currently our primary growth driver, and it exceeds ReferenceAnswers in both
traffic and revenue. Our projections assume that the growth of WikiAnswers will
continue to be greater than that of ReferenceAnswers. If, for whatever reason,
WikiAnswers fails to perform as well as we anticipate, and the growth we are
experiencing decelerates significantly, falters or ceases, our business and
financial results could be adversely affected.





If Internet users
do not interact with WikiAnswers frequently or if we fail to
attract new users to the service, our business and financial results will
suffer.





The
success of WikiAnswers is largely dependent upon users constantly visiting
the site by asking questions, posting answers and improving upon both. We have
seen a very high correlation between growth in questions and answers and growth
in the site’s page views. We need to attract users to visit the Web property
frequently and spend increasing amounts of time on the Web property when they
visit. If we are unable to encourage users to interact more frequently with
WikiAnswers and to increase the amount of user generated content they provide,
our ability to attract new users to the Web property and increase the number of
loyal users will be diminished and adversely affected. In addition, our efforts
aimed at integrating WikiAnswers and ReferenceAnswers may ultimately have a
negative impact on the dynamics of the creation of user-generated content on
WikiAnswers. Users arriving at pages displaying non-editable reference content
may not become engaged with the site, in which case the growth of our community
and database of questions and answers could be harmed. As a result, we may not
be able to grow our business as planned and our business and financial results
would suffer.





If we are unable
to maintain and improve the quality of content being contributed to WikiAnswers and
if we fail to fight vandalism the site has been experiencing, the Web property
will become less valuable to the users, less popular as a destination for
obtaining answers to questions and its growth will be negatively affected, which
in turn could adversely impact our financial results.





It is
critical that we ensure that the quality of content being posted on WikiAnswers,
both questions and answers, is maintained and improved over time. The better the
quality of the content generated on the Web property, the more valuable the Web
property will be for users in search of answers, as well as for search engines
indexing the content to continue featuring it in their search engine result
pages. Improved quality content should lead to stronger growth in the community
size and will lessen the risk of a search engine’s algorithm and/or policy
makers downgrading the rank of WikiAnswers. In addition, it is critical that we
ward off vandals and eliminate vandalism on the Web property to the greatest
extent possible. If we fail to maintain and improve the quality of the Web
property’s content, the appeal of WikiAnswers to users and search engines may
diminish and the growth of the Web property may be negatively affected, which in
turn could cause our financial results to suffer.


41
 Table of Contents




We
have launched additional versions of WikiAnswers, in foreign languages,
targeting non-English speaking users, resulting in additional
risks.





In
September 2009, we launched several versions of WikiAnswers in foreign languages
– French, Italian, German and Spanish. In the future, we may continue to expand
our international presence. In order for our products and services in foreign
languages to achieve widespread acceptance, commercial use and acceptance of the
Internet must continue to grow, which growth may occur at slower rates than
those experienced in the U.S. Moreover, we must continue to successfully tailor
our services to the unique customs and cultures of non-English speaking
audiences, which can be difficult and costly and the failure to do so could slow
our international growth. Operating sites in languages other than English
exposes us to additional risks, including difficulties in managing operations
due to cultural differences, and including compliance with laws and regulations
governing the Internet in foreign jurisdictions. Our success in international
markets may also depend, in part, on our ability to identify potential
acquisition candidates, joint venture or other partners, and to enter into
arrangements with these parties on favorable terms, given that we could
encounter significant barriers to entry in connection with expansion efforts
outside of these arrangements.





If,
in the interest of improving user experience and user satisfaction, we decide to
decrease the number of ad elements displayed on Answers.com, our advertising
revenues will decline and our financial results will be adversely
impacted.





We
closely monitor the ratio between ad elements and actual content appearing on
our Web pages. In the future we may decide that in order to enhance the
user-experience and increase user satisfaction, our pages should display fewer
ad elements. Displaying less ad-intensive Web pages is likely to result in
faster page-load and offering more content per-page is likely to appeal more to
the user. A better user experience may result in more stickiness on Answers.com
and a higher rate of user-retention and return visits. However, there is no
assurance that reducing advertising on Answers.com will result in better
user-retention and return visits and there can be no guarantee that the short
term reduction in ad revenues will pay off in the long term in the form of
increased traffic.  A decrease in the number of ad elements displayed on
Answers.com will result in a drop in RPM and advertising revenues which may not
be recovered through higher traffic, thus having an adverse impact on our
results of operations.





If we are unable
to attract and retain dedicated volunteer supervisors for encouraging the
community’s expansion, our
plans for growing WikiAnswers may fail and our results of operations
may be
adversely affected.





We
benefit from the heavy involvement of a large group of external volunteer
supervisors who are not employed by us and are not compensated for their site
activity. The volunteer supervisors, for their own personal motives and
enjoyment, are involved in monitoring questions and answers in specific
categories in an effort to help questions get answered quickly. Volunteers also
help prevent vandalism, improve content consistency, encourage high-quality
contributions and identify potential new volunteers. Volunteers are also engaged
in various community programs aimed at strengthening the community and
contributors’ sense of connection to the site and the community at large and
help instill a sense of camaraderie among users interested in various categories
of WikiAnswers. As of September 30, 2009, the community enjoyed the benefit of
over 600 such supervisors. If we are not able to attract enough
volunteers, WikiAnswers may suffer and the Web property may become
less attractive to users, which in turn will adversely affect the site’s growth,
our business and financial results. Alternatively, we may be forced to hire paid
employees to engage in many of the initiatives that volunteers currently take
upon themselves for their own personal pleasure and gratification, which, in
turn, would increase the cost of maintaining and improving WikiAnswers and
adversely affect our financial results.





Components of our
business and operations are experiencing rapid growth. If we fail to effectively
manage our growth, our business and operating results could be
harmed.





We have
experienced rapid growth in our operations over the past several years, which
has placed, and will continue to place, significant demands on our management,
operational and financial infrastructure. If we do not effectively manage our
growth, the quality of our products and services could suffer, which could
negatively affect our brand and operating results. To effectively manage this
growth, we will need to continue to improve our operational, financial and
management controls and our reporting systems and procedures. These systems
enhancements and improvements will require significant capital expenditures and
management resources. Failure to implement these improvements could hurt our
ability to manage our growth and our financial position.





We may not be
able to obtain capital when desired on favorable terms, if at all, or
without
dilution to our stockholders.





We
believe we have sufficient cash and cash equivalents to meet our working capital
and operating requirements for at least the next twelve months, based on our
current cash and cash equivalent levels and expected cash flow from
operations.  Further, in estimating our expected cash flow during the
next twelve months, we have considered the current general economic
downturn and its impact on our future revenue. However, we may need or
desire additional financing to execute on our current or future business
strategies, including to:





·
            improve
      traffic monetization and expand content on
  Answers.com;




·
            enhance
      our operating infrastructure;




·
            acquire
      businesses or technologies; or




·
            otherwise
      respond to competitive pressures.




If we
decide to raise additional funds through the issuance of equity or convertible
debt securities, and are successful at raising such capital, the percentage
ownership of our stockholders could be significantly diluted, and these newly
issued securities may have rights, preferences or privileges senior to those of
existing stockholders. We cannot assure you that additional financing will be
available on terms favorable to us, or at all, particularly in light of the
weakness of the financial markets and the economic crisis. For example, we
experienced such financing difficulties during the course of our failed attempt
to acquire Lexico Publishing Group, LLC and our ultimate abandonment of a
follow-on offering. If adequate funds are not available or are not available on
acceptable terms, when we desire them, our ability to fund our operations, take
advantage of unanticipated opportunities, develop or enhance our services, or
otherwise respond to competitive pressures would be significantly
limited.





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 Table of Contents





We generate our
revenue almost entirely from advertising so uncertainties in the Internet
advertising market and our failure to increase advertising inventory on
Answers.com could adversely affect our ad revenues.





Although
worldwide online advertising spending is growing, it represents only a moderate
percentage of total advertising expenditures. Our advertisers can generally
terminate their contracts with us at any time. Advertisers will not continue to
do business with us if their investment in Internet advertising with us does not
generate sales leads, and ultimately customers, or if we do not deliver their
advertisements in an appropriate and effective manner. If the Internet does not
continue to be as widely accepted as a medium for advertising and the rate of
advertising on the Internet does not increase, our ability to generate increased
revenues could be adversely affected. We believe that growth in our ad revenues
will also depend on our ability to increase the number of pages on our Web
properties to provide more advertising inventory. If we fail to increase our
advertising inventory at a sufficient rate, our ad revenues could grow more
slowly than we expect, which could have an adverse effect on our financial
results.





New
technologies could block Internet ads, which could harm our financial
results.





Technologies
have been developed, and are likely to continue to be developed, that can block
the display of Internet ads. Most of our revenues are derived from fees paid to
us by advertisers in connection with the display of their ads. Ad-blocking
technology may cause a decrease in the number of ads that we can display on
Answers.com, which could adversely affect our ad revenues and our financial
results.




Our failure to
generate direct traffic to Answers.com could adversely affect our business and
financial results.





Some
Internet users arrive at Answers.com directly by typing our website address
directly into their Web browser, bookmarking Answers.com, visiting sites that
direct users to our Answers.com, or, by using AnswerTips. Given the wide
availability of free search engines and reference content sites, we may not be
able to retain current Internet users or attract new Internet users in this
direct fashion. If we are unable to retain our direct Internet users or attract
new direct Internet users, our ability to generate revenues would be adversely
impacted, which could adversely affect our business and financial
results.





Traffic to
Answers.com and advertising demand fluctuates significantly on a seasonal basis,
which impacts our operations from quarter to quarter.





Many of
our users are students that utilize Answers.com as reference sources. Our
traffic fluctuates with the academic school year, rising from January through
May, falling to lower levels during the summer months, rising again in September
through November, and falling again in December, coinciding with school breaks
and the holiday season. We expect traffic to Answers.com to continue to
fluctuate seasonally in the future. This seasonal fluctuation in traffic results
in a fluctuation in our quarterly revenues, since fewer visits to Answers.com
translates into fewer users clicking on or viewing advertisements. In addition,
the demand for our advertising inventory fluctuates during the year based on the
seasonal needs of our advertisers, rising to its highest levels during the
fourth quarter and falling to its lowest levels in the first quarter.
Accordingly, our revenue fluctuates based on the seasonality of our traffic and
advertising demand. Further, sometimes seasonal trends intensify or change,
depending on the size and composition of our traffic, which makes it difficult
to estimate future revenues based on the results of any specific quarter, thus
it is difficult to make operating plans relating to hiring and expenses.
Additionally, as a result of the difficulty to estimate revenues, we may be
unable to meet our revenue or profit and loss forecasts which could have a
negative impact on the market price of our common stock.





Our
operating results may fluctuate, which makes comparing our operating results on
a period-to-period basis difficult and could cause our results to fall short of
expectations.





Our
operating results may fluctuate as a result of a number of factors, many outside
of our control. As a result, comparing our operating results on a
period-to-period basis may not be meaningful, and you should not rely on our
past results as an indication of our future performance. Our quarterly,
year-to-date and annual expenses as a percentage of our revenues may differ
significantly from our historical or projected rates. Our operating results in
future quarters may fall below expectations. Any of these events could cause our
stock price to fall.





We may not be
successful in expanding our business through acquisitions, business combinations and
other transactions, and, even if we are successful, our operations may be adversely
affected as a result of these transactions.





We may
pursue acquisitions, business combinations and joint ventures, which we refer to
as extraordinary transactions. Our ability to implement this business strategy
depends in large part on our ability to compete successfully with other entities
for acquisition candidates and joint venture partners. Factors affecting our
ability to compete successfully include:





·
            our
      financial condition and resources relative to the financial condition and
      resources of competitors;




·
            our
      ability to issue common stock as potential
  consideration;




·
            the
      attractiveness of our common stock as potential consideration relative to
      the common stock of competitors;




·
            our
      ability to obtain
financing; and




·
            our
      available cash, which depends upon our results of operations and our cash
      demands.




In
addition, we may not be able to find suitable acquisition candidates and we may
not be able to complete acquisitions on favorable terms, if at all. If we do
complete acquisitions, we may not ultimately strengthen our competitive position
or achieve our goals, or such acquisitions may be viewed negatively by
customers, financial markets or investors. In addition, any acquisitions that we
make could lead to difficulties in integrating personnel and operations from the
acquired businesses and in retaining and motivating key personnel from these
businesses. Acquisitions may disrupt our ongoing operations, divert management
from day-to-day responsibilities, increase our expenses or adversely affect our
business, operating results and financial condition. For example, we experienced
such disruption, diversion and increased expenses during the course of our
recent failed attempt to acquire Lexico Publishing Group, LLC. Future
acquisitions may reduce our cash available for operations and other uses and
could result in an increase in amortization expense related to identifiable
assets acquired, potentially dilutive issuances of equity securities or the
incurrence of debt, which could harm our business, financial condition and
operating results.





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 Table of Contents





If we fail to
maintain and enhance awareness of Answers.com, our business and financial results
could be adversely affected.





We
believe that maintaining and enhancing awareness of Answers.com is critical to
achieving widespread acceptance of our services and to the success of our
business. We also believe that the importance of brand recognition will increase
due to the relatively low barriers to entry in our market. Maintaining and
enhancing awareness of Answers.com may require us to spend increasing amounts of
money on, and devote greater resources to, advertising, marketing and other
brand-building efforts, and these investments may not be successful. Further,
even if these efforts are successful, they may not be cost-effective. If we are
unable to continuously maintain and enhance the Answers.com brand, our traffic
may decrease and we may fail to attract advertisers, which could in turn result
in lost revenues and adversely affect our business and financial
results.





Our failure to
offer compelling content and provide our users with quality information on
ReferenceAnswers could result in lost revenue, as a result of a loss of
users and
advertisers.





We
believe our future success depends in part upon our ability to deliver valuable
editorial content through ReferenceAnswers. We are heavily dependent on licensed
content. We cannot guarantee that we will be able to enter into new or renew
current or future content agreements on commercially acceptable terms or at all.
If we are unable to maintain and enhance our existing relationships with content
providers or develop new relationships with alternative providers of content,
our ReferenceAnswers property may become less attractive to Internet users,
resulting in decreased traffic to ReferenceAnswers, which could have an adverse
effect on our ad revenues and a negative impact on our business.





If we are unable
to maintain and expand our computer and communications systems, then
interruptions and
failures in our services could result, making our services less attractive to
consumers and subjecting us to lost revenue from the loss of users and
advertisers.





Our
ability to provide high quality user experience depends on the efficient and
uninterrupted operation of our computer and communications systems. Over time,
Answers.com has experienced significant increases in traffic, and we
continuously seek to further increase our user base. Accordingly, our Internet
servers must accommodate spikes in demand for our Web pages in addition to
potential significant growth in traffic. Delays and interruptions could
frustrate users and reduce traffic on Answers.com, adversely affecting our
operations and growth prospects.  Furthermore, our systems may be
vulnerable to damage or interruption from earthquakes, terrorist attacks,
floods, fires, power loss, telecommunications failures, computer viruses,
computer denial of service attacks or other attempts to harm our systems, which
could adversely affect our operations.





We manage
our Web operations through our own colocation facilities. Our facility located
in New Jersey is provided by NetAccess Corporation (the “First Facility”) and
our facility located in Utah is provided by C7 Data Centers, Inc (the “Second
Facility”). The Second Facility was recently deployed and currently partially
supports our daily flow of data. Further, we expect that no later than the
latter half of the fourth quarter of 2009 that data center will provide
redundancy of Web operations at the data center level. Until such time, failures
of our First Facility could cause interruptions and/or delays in our service,
making our services less attractive to consumers and subjecting us to lost
revenue. Additionally, if we are unable to recruit and retain skilled employees
to manage the Web hosting operations, we may not be able to properly manage the
necessary tasks to keep our systems running smoothly and grow the
business.





If we were to
lose the services of our key personnel, we may not be able to execute
our
business plan and our business could be adversely affected.





Our
ability to execute our business plan depends upon the continued service of our
executive officers and other key personnel. Our employment agreements with our
executive officers and key employees are terminable by either party upon
30-90 days notice. If we lose the services of one or more of our key
employees, or if one or more of our executive officers or key employees joined a
competitor or otherwise competed with us, our business could be adversely
affected. We cannot assure you that we will be able to retain or replace our key
personnel, and the services of key members of our research and development team,
in particular, would be difficult to replace. If we do not succeed in retaining
or replacing our key personnel, we may be unable to execute our business plan
and, as a result, our stock price may decline.


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Our business
depends on increasing use of the Internet by users searching for information,
advertisers marketing products and services and Web properties seeking
to earn
revenue to support their web content. If the Internet infrastructure does
not grow and is not
maintained to support these activities, our business will be
harmed.





Our
success will depend on the continued growth and maintenance of the Internet
infrastructure. This includes maintenance of a reliable network backbone with
the necessary speed, data capacity and security for providing reliable Internet
services. Internet infrastructure may be unable to support the demands placed on
it if the number of Internet users continues to increase, or if existing or
future Internet users access the Internet more often or increase their bandwidth
requirements. In addition, viruses, worms and similar programs may harm the
performance of the Internet. The Internet has experienced a variety of outages
and other delays as a result of damage to portions of its infrastructure, and
could face outages and delays in the future. These outages and delays could
reduce the level of Internet usage as well as our ability to provide our
solutions.





Rules established
by the Financial Accounting Standards Board, or FASB, require us to expense equity
compensation given to our employees and may impact our ability to effectively
utilize equity compensation to attract and retain employees.





The FASB
has adopted changes that require companies to record a charge to earnings for
employee stock option grants and other equity incentives effective
January 1, 2006, which we have adopted. These accounting changes may cause
us to reduce the availability and amount of equity incentives provided to
employees, which may make it more difficult for us to attract, retain and
motivate key personnel. Additionally, it may be difficult for us to estimate the
impact of such compensation charges on future operating results because they
will be based upon the fair market value of our common stock and other
assumptions at future dates.





We may be subject
to liability for online services, which may not be limited by the safe harbors in
The Digital Millennium Copyright Act, or DMCA, The Communications Decency Act, or
CDA, or the U.S. Children’s Online Privacy Protection Act, or COPPA.
If we do
not meet the safe harbor requirements, or if it is otherwise determined
that Answers.com
contains actionable content, we could be subject to claims, which could be costly
and time-consuming to defend.





We host
certain services that enable individuals to generate content and engage in
various online activities. The law relating to the liability of providers of
these online services for activities of their users is currently unsettled both
within the United States and internationally. Claims have been threatened and
may in the future be brought against us for defamation, invasion of privacy,
negligence, copyright or trademark infringement, unlawful activity, tort,
including personal injury, fraud, or other theories based on the nature and
content of information to which we provide links, or that may be posted online
or generated by the users of Answers.com. Our defense of any of these actions
could be costly and involve significant time and attention of our management and
other resources.





The DMCA
is intended, among other things, to reduce the liability of online service
providers for listing or linking to third party Web properties that include
materials that infringe copyrights or rights of others. Additionally, portions
of the CDA are intended to provide statutory protections to online service
providers who distribute third party content. A safe harbor for copyright
infringement is also available under the DMCA to certain online service
providers that provide specific services, if the providers take certain
affirmative steps as set forth in the DMCA. Important questions regarding the
safe harbor under the DMCA and the CDA have yet to be litigated, and we can not
guarantee that we will meet the safe harbor requirements of the DMCA or of the
CDA. If we are not covered by a safe harbor, for any reason, we could be exposed
to claims, which could be costly and time-consuming to defend.





In
addition, COPPA was enacted in October 1998. COPPA imposes civil and
criminal penalties on persons distributing material harmful to minors over the
Internet to persons under the age of 17 or collecting personal information from
children under the age of 13. We do not knowingly collect and disclose personal
information from minors. The manner in which COPPA may be interpreted and
enforced cannot yet be determined. Moreover, the applicability to the Internet
of existing laws governing issues such as property ownership, copyright,
defamation, obscenity and personal privacy is uncertain. We may be subject to
claims that our content violates such laws, which could damage our business and
cause our stock price to decline.





We also
periodically enter into arrangements to offer third party products, services or
content under the Answers brand or through Answers.com. We may be subject to
claims concerning these products, services or content by virtue of our
involvement in marketing, branding, broadcasting or providing access to them,
even if we do not ourselves host, operate, provide, or provide access to
them.





It is
also possible that, if any information provided directly by us contains errors
or is otherwise negligently provided to users, third parties could make claims
against us. While it is our belief that the Terms of Use governing the use of
Answers.com covers us against these types of claims, there are no assurances as
to the final determination of these types of claims by any court of law.
Furthermore, investigating and defending any of these types of claims is
expensive, even to the extent that the claims are without merit or do not
ultimately result in liability.


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Third parties may
claim that we are infringing on their patents, trademarks or copyrights, which
could result in substantial costs, diversion of significant managerial
resources and significant harm to our reputation.





The
industry in which we operate is characterized by the existence of a large number
of patents and frequent litigation based on allegations of patent infringement.
We expect that Internet technologies, software products and services may be
increasingly subject to third party patent infringement claims as the number of
competitors in our industry segment grows and the functionality of products in
different industry segments overlaps. From time to time, third parties have
asserted, and may in the future assert, patent infringement claims against us in
various jurisdictions that are important to our business. Further, we have
received, and may receive in the future, notices or offers from third parties
claiming to have intellectual property rights in technologies that we use in our
businesses and inviting us to license those rights. Additionally, third parties
may assert trademark infringement claims with respect to brand names we use from
time to time and content we display on Answers.com. We have received, and may
receive in the future, cease and desist demands based on claims that a brand and
trademark of ours infringes upon a name used by a competitor. For example, in
July 2009 we received a letter from Wikia, Inc., advising that it believes it
has superior rights in our registered trademark WikiAnswers, and threatening to
file a Petition with the U.S. Trademark Office to cancel the mark and possibly
take other action. A third party may also make claims against us over the
display of search results triggered by search terms that include trademark
terms. With respect to copyright laws, we may be faced with copyright
infringement claims. We have received, and are likely to continue to receive,
“cease and desist” letters demanding that we remove infringing content from
Answers.com based on a theory of copyright and trademark
infringement.





A
successful patent, trademark or copyright infringement claim against us by any
third party, could subject us to:





·
            substantial
      liability for damages and litigation costs, including attorneys’
      fees;




·
            lawsuits
      that prevent us from further use of intellectual property and require us
      to permanently cease and desist from selling or marketing products that
      use the intellectual property;




·
            licensing
      intellectual property from a third party, which could include significant
      licensing and royalty fees not presently paid by us, adding materially to
      the our costs of operations;




·
            developing
      new intellectual property, as a non-infringing alternative, that could
      delay projects, add materially to our costs of operations and be
      unacceptable to our users, which in turn could adversely affect our
      traffic and revenues; and




·
            indemnifying
      third parties who have entered into agreements with us with respect to
      losses they incurred as a result of the infringement, which could include
      consequential and incidental damages that are material in
      amount.







Regardless
of the merit of third party infringement claims, these claims could result in
substantial costs, diversion of significant resources and management attention,
loss of users and significant harm to our reputation.





Finally,
many of our agreements with advertisers, distribution partners, and other third
party partners require us to indemnify these partners for certain third party
intellectual property infringement claims, which could increase our costs as a
result of defending the claims and may require that we pay damages if there were
an adverse ruling in any of the claims. An adverse determination could also
prevent us from offering our products and services to others and may require
that we procure substitute products or services, which could adversely affect
our business and financial results.





Misappropriation
of our intellectual property could harm our reputation, adversely affecting our
competitive position and financial results.





Our
ability to compete depends in part upon the strength of our proprietary rights
in our technologies, brands and content. We rely on a combination of
U.S. and foreign patents, copyrights, trademark, trade secret laws and
license agreements to establish and protect our intellectual property and
proprietary rights. The efforts we have taken to protect our intellectual
property and proprietary rights may not be sufficient or effective at stopping
unauthorized use of our intellectual property and proprietary rights. In
addition, effective trademark, patent, copyright and trade secret protection may
not be available or cost-effective in every country in which our services are
made available through the Internet. There may be instances where we are not
able to fully protect or utilize our intellectual property in a manner that
maximizes competitive advantage. If we are unable to protect our intellectual
property and proprietary rights from unauthorized use, the value of Answers.com
may be reduced, which could negatively impact our business. In addition,
protecting our intellectual property and other proprietary rights is expensive
and diverts critical managerial resources. If any of the foregoing were to
occur, or if we are otherwise unable to protect our intellectual property and
proprietary rights, our business and financial results could be adversely
affected.


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We have incurred
significant net losses and may continue to incur
losses.





We
incurred net losses of approximately $12.3 million and $648 thousand for
the year ended December 31, 2008 and for the nine months ended September
30, 2009, respectively. As of December 31, 2008 and September 30, 2009, we
had an accumulated deficit of approximately $71 million and approximately
$74 million, respectively. We cannot assure you that we will be able to achieve
net income on a quarterly or annual basis. If our revenues do not increase, or
if our operating expenses exceed expectations or cannot be reduced, we will
continue to incur substantial losses, which would materially adversely affect
our business and financial results.





New government
regulation and legal uncertainties could require us to incur significant
expenses.





The laws
and regulations applicable to the Internet, and to our products and services,
are evolving and unclear and could damage our business. In addition, we will be
subject to any new laws and regulations directly applicable to our products and
services. It is possible that laws and regulations may be adopted covering
issues such as user privacy, pricing, taxation, content regulation, quality of
products and services, and intellectual property ownership and infringement.
This legislation could expose us to substantial liability as well as dampen the
growth in use of the Internet generally, decrease the acceptance of the Internet
as a communications and commercial medium, or require us to incur significant
compliance expenses. Compliance with these laws and regulations may also cause
us to change or limit our business practices in a manner adverse to our
business. Upon launching sites in foreign languages, our exposure to legislation
and regulation by foreign jurisdictions may increase, which may expose us to
additional substantial liability.





Increased
regulation or the imposition of access fees could substantially increase the
costs of communicating on the Internet, potentially decreasing the demand for
our products. A number of proposals have been made at the federal, state and
local level that would impose additional taxes on the sale of goods and services
through the Internet. Such proposals, if adopted, could substantially impair the
growth of electronic commerce and could adversely affect us.





Due to
the global nature of the Internet, it is possible that the governments of other
states and foreign countries might attempt to regulate its transmissions or
prosecute us for violations of their laws. We might unintentionally violate
these laws. Such laws may be modified, or new laws may be enacted, in the
future. Our business may be negatively affected by a variety of new or existing
laws and regulations, which may expose us to substantial compliance costs and
liabilities and may impede the growth in use of the Internet
generally.





Risks
Related to our Common Stock





Our common stock
may be affected by limited trading volume and may fluctuate significantly.





Our
common stock is traded on The NASDAQ Capital Market. Although an active trading
market has developed for our common stock, there can be no assurance that an
active trading market for our common stock will be sustained. Failure to
maintain an active trading market for our common stock may adversely affect our
shareholders’ ability to sell our common stock in short time periods, or at all.
Our common stock has experienced, and may experience in the future, significant
price and volume fluctuations, which could adversely affect the market price of
our common stock.





You may
experience dilution in your percentage ownership interest as a result of any
additional issuances of our common stock.





We have
authorized 100 million shares of our common stock, of which approximately 15.4
million shares were issued and outstanding after giving effect to the assumed
exercise of all outstanding warrants and options and assumed conversion of
preferred stock as of September 30, 2009.  Our board of directors has the
authority, without action or vote of our stockholders in many cases, to issue
all or a part of any authorized but unissued shares. Such stock issuances may be
made at a price that reflects a discount from the then-current trading price of
our common stock. In addition, we may need to issue securities that are
convertible into or exercisable for a significant amount of our common stock.
For example, on June 16, 2008, we sold Series A Convertible Preferred Stock
and related warrants for $6.0 million and issued the Unit Warrant to Redpoint
Ventures.  On June 10, 2009 Redpoint Ventures exercised in full its
Unit Warrant and we issued Series B Convertible Preferred Stock and related
warrants in exchange for $7.0 million.   These issuances may
dilute your percentage ownership interest, which will have the effect of
reducing your influence on matters on which our stockholders vote.





You may
incur additional dilution if holders of stock options, whether currently
outstanding or subsequently granted, exercise their options or if warrant
holders exercise their warrants to purchase shares of our common stock.  In
addition, these issuances, or the perception that such issuances may occur in
the future, may have a depressant effect on our stock price and make it more
difficult to raise capital in the future on reasonable terms or at
all.


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There may be
substantial sales of our common stock, which could cause our stock price
to
fall.





All of
our issued and outstanding shares are immediately available for sale in the
public market without registration under Rule 144. Sales of a substantial
number of shares of our common stock could cause the price of our securities to
fall and could impair our ability to raise capital by selling additional
securities.





We
do not intend to pay dividends on our common stock.





We have
never declared or paid any cash dividend on our common stock. We currently
intend to retain any future earnings and do not expect to pay any dividends on
our common stock in the foreseeable future.





We
may incur penalties if the registration statement covering the common stock
underlying the Series A Convertible Preferred Stock, the Series B
Convertible Preferred Stock and the Common Stock Purchase Warrants and the
Common Stock issued for the payment of accrued dividends on the Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock does not
remain effective.





Under the
terms of the registration rights agreement we entered into with the holders of
our Series A Convertible Preferred Stock and Series B Convertible Stock, we
are obligated to register the common stock underlying the Series A Convertible
Preferred Stock, Series B Convertible Preferred Stock and the Common Stock
Purchase Warrants and register the common stock issued for the payment of
accrued dividends on the Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock. The registration rights carry penalties in the
event we do not meet these registration obligations. The registration statement
registering the common stock underlying the Series A Convertible Preferred Stock
and the Common Stock Purchase Warrants was declared effective by the Securities
and Exchange Commission on September 16, 2008. The registration statement
registering the common stock underlying the Series B Convertible Preferred Stock
and the Common Stock Purchase Warrants, as well as the common stock issued for
the payment of past accrued and future dividends on the Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock, was declared effective
by the Securities and Exchange Commission on July 28, 2009. We agreed to use our
commercially reasonable best efforts to ensure the continued effectiveness of
the registration statement thereafter. In the event sales of any or all of the
securities covered by the registration statement cannot be made, whether because
of our failure to keep the registration statement effective, or for various
other reasons, then we must pay liquidated damages in cash to the holders of our
Series A Convertible Preferred Stock and Series B Convertible Preferred
Stock in the amount of 1.0% per month, on a daily pro rata basis, up to a
maximum of 8.0%, of the aggregate purchase price of $6,000,000 with respect to
the shares issued or issuable in connection with the Series A Purchase Agreement
and aggregate purchase price of $7,000,000 with respect to the shares issued or
issuable in connection with the Series B Warrant Agreement.





We have issued
and could issue additional “blank check” preferred stock without stockholder
approval with the effect of
diluting then current stockholder interests.





Our
certificate of incorporation authorizes the issuance of up to
1,000,000 shares of “blank check” preferred stock with designations, rights
and preferences as may be determined from time to time by our board of
directors. Accordingly, our board of directors is empowered, without stockholder
approval, to issue a series of preferred stock with dividend, liquidation,
conversion, voting or other rights, which could dilute the interest of, or
impair the voting power of, our stockholders. The issuance of a series of
preferred stock could be used as a method of discouraging, delaying or
preventing a change in control. Although we do not presently intend to issue any
additional shares of preferred stock, we may do so in the future. On June 16,
2008, we issued 60,000 shares of Series A Convertible Preferred Stock to
Redpoint Ventures.  In addition, on June 10, 2009 Redpoint Ventures
exercised its Unit Warrant and we issued 70,000 shares of Series B Convertible
Preferred Stock to them.





The
holders of our Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock are entitled to receive liquidation payments in
preference to the holders of our common stock.





Pursuant
to the terms of the certificates of designation creating the Series A
Convertible Preferred Stock and the Series B Convertible Preferred Stock, upon a
liquidation of our company, the holders of shares of the Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock are
entitled to receive a liquidation payment prior to the payment of any amount
with respect to the shares of our common stock. The amount of this preferential
liquidation payment is equal to the greater of (i) $100 per share of
Series A Convertible Preferred Stock or Series B Convertible Preferred
Stock, as the case may be, plus the amount of any accrued but unpaid dividends
on those shares and any other fees or liquidated damages owing thereon or (ii)
such amount per share as would have been payable had all shares of Series A
Convertible Preferred Stock or Series B Convertible Preferred Stock, as the case
may be, been upon any such liquidation converted to common stock immediately
prior to such liquidation.  Dividends accrue on the shares of Series A
Convertible Preferred Stock and Series B Convertible Stock at a rate of 6% per
annum.


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Provisions in our
charter documents and under Delaware law could discourage a takeover that
stockholders may consider favorable.





Provisions
of our Amended and Restated Certificate of Incorporation and Bylaws could make
it more difficult for a third party to acquire us, even if doing so would be
beneficial to our stockholders. For example, our board of directors is divided
into three classes, with one class being elected each year by our stockholders,
which generally makes it more difficult for stockholders to replace a majority
of directors and obtain control of our board. In addition, stockholder meetings
may be called only by our board of directors, the chairman of the board and the
president, advance notice is required prior to stockholder proposals and
stockholders may not act by written consent. Furthermore, we have authorized
preferred stock that is undesignated, making it possible for our board of
directors to issue preferred stock with voting or other rights or preferences
that could impede the success of any attempt to change control of our
company.





Delaware
law also could make it more difficult for a third party to acquire us.
Specifically, Section 203 of the Delaware General Corporation Law, to which
our company is subject, may have an anti-takeover effect with respect to
transactions not approved in advance by our board of directors, including
discouraging attempts that might result in a premium over the market price for
the shares of common stock held by our stockholders.





We
are at risk of securities class action litigation.





Securities
class action litigation has often been brought against a company following a
decline in the market price of its securities. This risk is especially relevant
for us because Internet companies often experience significant stock price
volatility. If we faced such litigation, it could result in substantial costs
and diversion of management’s attention and resources, which could adversely
affect our business.





Weaknesses in our
internal controls may impede our ability to produce timely
and accurate financial statements, which could cause us to fail to file our periodic
reports timely, result in inaccurate financial reporting or restatements of
our financial statements, subject our stock to delisting and materially harm
our business reputation and stock price.





As a
public company, we are required to file annual and quarterly periodic reports
containing our financial statements with the Securities and Exchange Commission
within prescribed time periods. As part of The NASDAQ Capital Market listing
requirements, we are also required to provide our periodic reports, or make them
available, to our shareholders within prescribed time periods. If we are
required to restate our financial statements in the future, any specific
adjustment may be adverse and may cause our operating results and financial
condition, as restated, on an overall basis to be materially and adversely
impacted. As a result, we or members of our management could be the subject of
adverse publicity, investigations and sanctions by such regulatory authorities
as the Securities and Exchange Commission and subject to shareholder lawsuits.
Any of the above consequences could cause our stock price to decline materially
and could impose significant unanticipated costs on us.





If we are
not able to issue our financial statements in a timely manner, we will not be
able to comply with the periodic reporting requirements of the Securities and
Exchange Commission and the listing requirements of The NASDAQ Capital Market.
If these events occur, our common stock listing on The NASDAQ Capital Market
could be suspended or terminated and our stock price could materially suffer. In
addition, we or members of our management could be subject to investigation and
sanction by the Securities and Exchange Commission and other regulatory
authorities and to shareholder lawsuits, which could impose significant
additional costs on us, divert management attention and materially harm our
operating results, financial condition, business reputation and stock
price.





Risks
Related to our Location in Israel





Conditions in
Israel may limit our ability to produce and sell our product, which would lead to a
decrease in revenues.





Because
most of our operations are conducted in Israel, our operations are directly
affected by economic, political and military conditions affecting Israel.
Specifically, we could be adversely affected by:





·
            any
      major hostilities involving Israel;




·
            a
      full or partial mobilization of the reserve forces of the Israeli
      army;




·
            the
      interruption or curtailment of trade between Israel and its present
      trading partners;




·
            risks
      associated with the fact that a certain number of our key employees and
      one officer reside in what are commonly referred to as occupied
      territories;




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·
            risks
      associated with outages and disruptions of communications networks due to
      any hostilities involving
Israel; and




·
            a
      significant downturn in the economic or financial conditions in
      Israel.




Since the
establishment of the State of Israel in 1948, a number of armed conflicts have
taken place between Israel and its Arab neighbors and a state of hostility,
varying in degree and intensity, has led to security and economic problems for
Israel. Despite negotiations to effect peace between Israel and its Arab
neighbors, the future of these peace efforts is uncertain. Since
October 2000, there has been a significant increase in violence, civil
unrest and hostility, including armed clashes between the State of Israel and
the Palestinians, and acts of terror have been committed inside Israel and
against Israeli targets in the West Bank and Gaza Strip. There is no indication
as to how long the current hostilities will last or whether there will be any
further escalation. Any further escalation in these hostilities or any future
conflict, political instability or violence in the region may have a negative
effect on our business, harm our results of operations and adversely affect our
share price.





Furthermore,
there are a number of countries that restrict business with Israel or with
Israeli companies, which may limit our ability to promote our products and
services those countries.





We may not be
able to enforce covenants not-to-compete under current Israeli law that
might
result in added competition for our products.





We have
non-competition agreements with all of our employees, almost all of which are
governed by Israeli law. These agreements prohibit our employees from competing
with or working for our competitors, generally during and for up to
12 months after termination of their employment. However, Israeli courts
are reluctant to enforce non-compete undertakings of former employees and tend,
if at all, to enforce those provisions for relatively brief periods of time in
restricted geographical areas and only when the employee has obtained unique
value to the employer specific to that employer’s business and not just
regarding the professional development of the employee. If we are not able to
enforce non-compete covenants, we may be faced with added
competition.





The Israeli
government tax benefits program in which we currently participate and
from which
we receive benefits requires us to meet several conditions. These
programs or benefits may
be terminated or reduced in the future, which may result in an increase in our
tax liability.





Our
Israeli subsidiary receives tax benefits authorized under Israeli law for
capital investments that are designated as “Approved Enterprises” and
“Beneficial Enterprise.” To be eligible for these tax benefits, we must meet
certain conditions on a recurring basis. If we fail to meet such conditions,
these tax benefits could be cancelled, and we could be required to pay increased
taxes or refund the amount of tax benefits we received, together with interest
and penalties. Israeli governmental authorities have indicated that the
government may in the future reduce or eliminate the benefits of such programs.
The termination or reduction of these programs and tax benefits could increase
our Israeli tax rates, and thereby reduce our net profits or increase our net
losses.





U.S. and Israeli
tax authorities may interpret tax issues in manners other than those
which we
have adopted, which may expose us to tax liabilities.





We
operate in the U.S. and in Israel and our earnings are subject to taxation
in both jurisdictions, at different rates. Relevant tax authorities may disagree
with our interpretation and application in practice of tax laws and may dispute
various assumptions we make during our tax planning process. Further, the tax
authorities in the U.S. and/or Israel may take exception with the transfer
price of transactions between Answers Corporation and its wholly owned Israeli
subsidiary. If there is a successful tax challenge of our tax position, our
interpretation and/or application of tax laws in practice, we may be forced to
recognize additional tax liabilities, which may include interest and penalties.
This may harm our results of operations and adversely affect our financial
condition.





Our business may
be impacted by NIS exchange rate fluctuations, which may negatively affect our
earnings.





Exchange
rate fluctuations between the U.S. dollar and the NIS may negatively affect
our earnings. Our revenues are denominated in U.S. dollars. However, a
significant portion of our expenses, associated with our Israeli operations,
including personnel and facilities-related expenses, are incurred in NIS.
Consequently, a devaluation of the U.S. dollar in comparison to the NIS
will have the effect of increasing the dollar cost of our operations in Israel
and an increase in the value of the U.S. dollar in comparison to the NIS may
artificially reduce the U.S. dollar cost of our operations in Israel. Despite
the fact that we often use various hedging tools, including forward contracts,
to minimize the effect of currency fluctuations on our income, if the
U.S. dollar cost of our operations in Israel increases, our dollar-measured
consolidated results of operations will be adversely affected.


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ITEM
2.                     UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  N/A





ITEM
3.                      DEFAULTS
UPON SENIOR SECURITIES





N/A




ITEM
4.                   SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS




At our
Annual Meeting of Stockholders held on September 9, 2009, the following
actions were taken:




A
proposal to amend the Company’s 2005 Incentive Compensation Plan to increase the
number of shares available for grant under such plan from 1,350,000 shares to
1,600,000 shares was approved. The stockholders cast 4,109,007 votes in favor of
this proposal and 812,422 votes against. There were 4,621
abstentions.




A
proposal to ratify the appointment by the Company’s Audit Committee of Somekh
Chaikin, a firm member of KPMG International, to serve as independent registered
public accounting firm for the Company for the fiscal year ending December 31,
2009 was approved. The stockholders cast 8,758,278 votes in favor of this
proposal and 608,886 votes against. There were 2 abstentions.




ITEM
5.                OTHER
INFORMATION




N/A




ITEM
6.                     EXHIBITS





10.1*
            
            Amendment 7 to Google Order Form and Google Services
      Agreement.31.1
            
            Certification of Chief Executive Officer required under
      Rule 13a-14(a)/15d-14(a) under the Exchange
    Act.31.2
            
            Certification of Principal Financial Officer required
      under Rule 13a-14(a)/15d-14(a) under the Exchange
      Act.32.1
            
            Certification of Chief Executive Officer pursuant to 18
      U.S.C Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.32.2
            
            Certification of Principal Financial Officer pursuant
      to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.*
      Portions of this exhibit were omitted and filed separately with the U.S
      Securities and Exchange Commission pursuant to a request for confidential
      treatment.


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SIGNATURES




Pursuant to the requirements of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.







ANSWERS
      CORPORATION(Registrant)Date:
      November 9, 2009
            By:
            /s/ Robert S. RosenscheinRobert
      S. RosenscheinChief
      Executive OfficerDate:
      November 9, 2009
            By:
            /s/ Steven SteinbergSteven
      SteinbergChief
      Financial Officer(Principal
      Financial Officer)