UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-QSB
 
 x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE
 SECURITIES
EXCHANGE ACT OF 1934
 
 FOR THE
QUARTERLY PERIOD ENDED MARCH 31, 2005
 
 o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE
 SECURITIES
EXCHANGE ACT OF 1934
 
 
 COMMISSION
FILE NUMBER 001-32255
 
 GURUNET
CORPORATION
 (EXACT
NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
 
 DELAWARE
    
    98-0202855(STATE OR OTHER JURISDICTION
      OF
    
    (I.R.S. EMPLOYER IDENTIFICATION
      NO.)INCORPORATION OR
    ORGANIZATION)
 
 Jerusalem
Technology Park
 Building
98
 Jerusalem
91481 Israel
 
 (ADDRESS
INCLUDING ZIP CODE OF PRINCIPAL EXECUTIVE OFFICES)
 
 +972-2-649-5123
 
 (REGISTRANT'S
TELEPHONE NUMBER, INCLUDING AREA CODE)
 
  Indicate
by an (X) 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 o NO x
 Indicate
by an (X) whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yeso NO x
 
 As of May
10, 2005, the registrant had outstanding 6,945,292 shares of Common Stock,
$0.001 par value per share.
    
  PART I.
FINANCIAL INFORMATION2
 Item
      1. Financial StatementsConsolidated
      Balance Sheets as of March 31, 2005 (unaudited) and December 31,
      2004.
    2Consolidated
      Statements of Operations (unaudited) for the three months ended March 31,
      2005 and 2004 and cumulative from December 22, 1998 (inception) through
      March 31, 2005
    4Consolidated
      Statements of Cash Flows (unaudited) for the three months ended March 31,
      2005 and 2004and
      cumulative from December 22, 1998 (inception) through March 31,
      2005
    5Notes
      to unaudited Consolidated Financial Statements
    7Item
      2. Management's Discussion and Analysis of Financial Condition or Plan of
      Operation
    14Item
      3. Controls and Procedures
    21PART
      II. OTHER INFORMATIONItem
      1. Legal Proceedings
    21Item
      2. Changes in Securities
    21Item
      3. Defaults Upon Senior Securities
    21Item
      4. Submission of Matters to a Vote of Security Holders
    21Item
      5. Other Information
    22Item
      6. Exhibits
    22SIGNATURES
    22
 **Cautionary
Note regarding Forward-Looking Statements**
   In addition to historical information, this Quarterly Report on Form 10-QSB
contains forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Exchange Act. Forward-looking
statements are those that predict or describe future events or trends and that
do not relate solely to historical matters. You can generally identify
forward-looking statements as statements containing the words “believe,”
“expect,” “will,” “anticipate,” “intend,” “estimate,” “project,” “assume” or
other similar expressions, although not all forward-looking statements contain
these identifying words. All statements in this report regarding our future
strategy, future operations, projected financial position, estimated future
revenues, projected costs, future prospects, and results that might be obtained
by pursuing management’s current plans and objectives are forward-looking
statements. You should not place undue reliance on our forward-looking
statements because the matters they describe are subject to known and unknown
risks, uncertainties and other unpredictable factors, many of which are beyond
our control. Our forward-looking statements are based on the information
currently available to us and speak only as of the date on which this report was
filed with the SEC. We expressly disclaim any obligation to issue any updates or
revisions to our forward-looking statements, even if subsequent events cause our
expectations to change regarding the matters discussed in those statements. Over
time, our actual results, performance or achievements will likely differ from
the anticipated results, performance or achievements that are expressed or
implied by our forward-looking statements, and such difference might be
significant and materially adverse to our stockholders. Many important factors
that could cause such a difference are described in our most recent registration
statement on Form SB-2 under the captions “Competition,” “Proprietary
Rights” and “Risk Factors,” all of which you should review carefully. Please
consider our forward-looking statements in light of those risks as you read this
report.
 
 i
  GuruNet
Corporation (Formerly Atomica Corporation)
 and
Subsidiary
 (A
Development Stage Enterprise)
 
 **Consolidated
Financial Statements as of March 31, 2005**




**Contents**PageConsolidated
      Balance Sheets as of March 31, 2005 (unaudited) and December 31,
      2004
    2Consolidated
      Statements of Operations (unaudited) for the three months ended March 31,
      2005 and 2004,and for the cumulative period from inception through
      March 31, 2005
    4Consolidated
      Statements of Cash Flows (unaudited) for the three months ended March 31,
      2005 and 2004,and for the cumulative period from inception through
      March 31, 2005
    5Notes
      to the unaudited Consolidated Financial Statements
    7








GuruNet
Corporation (Formerly Atomica Corporation)


and
Subsidiary


(A
Development Stage Enterprise)





**Consolidated
Balance Sheets**





****
    
    
    **March
      31**
    
    
    **December
      31****2005**
    
    
    **2004**$
    
    
    $****
    
    
    **(Unaudited)**
    
    
    **(Audited**)****
    ****





**Assets****Current
      assets:**Cash
      and cash equivalents
    
    
    **3,050,760**
    
    
    1,565,415Investment
      securities
    
    
    **16,850,000**
    
    
    5,850,000Receivables
    
    
    **143,642**
    
    
    18,145Prepaid
      expenses
    
    
    **648,117**
    
    
    259,674**Total
      current assets**
    
    
    **20,692,519**
    
    
    7,693,234**Long-term
      deposits (restricted)**
    
    
    **192,493**
    
    
    167,304**Deposits
      in respect of employee severance obligations**
    
    
    **482,621**
    
    
    462,735**Property
      and equipment, net**
    
    
    **322,691**
    
    
    305,804**Other
      assets:**Intangible
      assets, net
    
    
    **103,982**
    
    
    111,289Prepaid
      expenses, long-term
    
    
    **134,670**
    
    
    147,000Deferred
      tax asset, long-term
    
    
    **18,034**
    
    
    19,817**Total
      other assets**
    
    
    **256,686**
    
    
    278,106**Total
      assets**
    
    
    **21,947,010**
    
    
    8,907,183







See
accompanying notes to the unaudited consolidated financial
statements.





2





GuruNet
Corporation (Formerly Atomica Corporation)


and
Subsidiary


(A
Development Stage Enterprise)





**Consolidated
Balance Sheets**


****
 ****




****
    
    
    **March
      31**
    
    
    **December
      31****2005**
    
    
    **2004**$
    
    
    $****
    
    
    **(Unaudited)**
    
    
    **(Audited**)****


**Liabilities
      and stockholders' equity****Current
      liabilities:**Accounts
      payable
    
    
    **359,266**
    
    
    172,029Accrued
      expenses
    
    
    **433,815**
    
    
    422,465Accrued
      compensation
    
    
    **246,805**
    
    
    259,872Deferred
      revenues, short-term
    
    
    **113,659**
    
    
    150,147**Total
      current liabilities**
    
    
    **1,153,545**
    
    
    1,004,513**Long-term
      liabilities:**Liability
      in respect of employee severance obligations
    
    
    **560,651**
    
    
    531,224Deferred
      tax liability, long-term
    
    
    **104,666**
    
    
    94,965Deferred
      revenues, long-term
    
    
    **438,377**
    
    
    452,359**Total
      long-term liabilities**
    
    
    **1,103,694**
    
    
    1,078,548**Commitments
      and contingencies****Stockholders'
      equity:**Preferred
      stock: $0.01 par value; 1,000,000 shares authorized and 0 shares issued as
      ofMarch
      31, 2005 and December 31, 2004
    
    
    **—**
    
    
    —Common
      stock; $0.001 par value; 30,000,000 shares authorized as of March 31, 2005
      andDecember
      31, 2004; 6,945,292 and 4,920,551 shares issued and outstanding as
      ofMarch
      31, 2005 and December 31, 2004, respectively
    
    
    **6,946**
    
    
    4,921Additional
      paid-in capital
    
    
    **61,988,788**
    
    
    47,488,072Deferred
      compensation
    
    
    **(177,504**
    **)**
    
    (45,146
    )Accumulated
      other comprehensive loss
    
    
    **(27,418**
    **)**
    
    (27,608
    )Deficit
      accumulated during development stage
    
    
    **(42,101,041**
    **)**
    
    (40,596,117
    )**Total
      stockholders' equity**
    
    
    **19,689,771**
    
    
    6,824,122**Total
      liabilities and stockholders' equity**
    
    
    **21,947,010**
    
    
    8,907,183







See
accompanying notes to the unaudited consolidated financial
statements.





3





GuruNet
Corporation (Formerly Atomica Corporation)


and
Subsidiary


(A
Development Stage Enterprise)





**Consolidated
Statements of Operations**





**Cumulative
      from****December
      22, 1998****Three
      months ended March 31**
    
    **(inception)
      through****2005**
    
    **2004**
    
    **March
      31, 2005******
    
    ****
    **$, except
      share data**
    
    ****
    **$,
      except share data**
    
    ****
    **$,
      except share data****(Unaudited)**
    
    
    **(Unaudited**)****
    ****
    
    **(Unaudited**)****





**Revenue**
    
    
    **175,633**
    
    
    19,631
    
    
    1,597,430Cost
      of revenues
    
    
    **208,543**
    
    
    156,527
    
    
    3,760,311**Gross
      margin**
    
    
    **(32,910**
    **)**
    
    (136,896
    )
    
    (2,162,881
    )**Operating
      expenses**Research
      and development
    
    
    **330,469**
    
    
    263,788
    
    
    18,909,579Sales
      and marketing(1)
    
    
    **361,460**
    
    
    318,929
    
    
    9,942,502General
      and administrative(2)
    
    
    **851,615**
    
    
    212,407
    
    
    8,366,400Loss
      in connection with shut-down of operations
    
    
    —
    
    
    —
    
    
    1,048,446**Total
      operating expenses**
    
    
    **1,543,544**
    
    
    795,124
    
    
    38,266,927**Operating
      loss**
    
    
    **(1,576,454**
    **)**
    
    (932,020
    )
    
    (40,429,808
    )Interest
      income (expense), net
    
    
    **85,907**
    
    
    (737,034
    )
    
    (2,488,958
    )Gain
      on extinguishment of debt
    
    
    **—**
    
    
    —
    
    
    1,493,445Other
      income (expense), net
    
    
    **282**
    
    
    4,322
    
    
    (585,913
    )**Loss
      before income taxes**
    
    
    **(1,490,265**
    **)**
    
    (1,664,732
    )
    
    (42,011,234
    )Income
      taxes
    
    
    **(14,659**
    **)**
    
    (27,980
    )
    
    (89,807
    )**Net
      loss**
    
    
    **(1,504,924**
    **)**
    
    (1,692,712
    )
    
    (42,101,041
    )**Basic
      and diluted net loss per common share**
    
    
    **(0.25**
    **)**
    
    (1.33
    )
    
    (25.35
    )**Weighted
      average shares used in computing****basic
      and diluted net loss per common share**
    
    
    **6,043,796**
    
    
    1,271,075
    
    
    1,661,035




(1)
Includes $107,255 and $5,236 of stock based compensation in the three months
ended March 31, 2005 and 2004, respectively.


(2)
Includes $277,366 and $11,522 of stock based compensation in the three months
ended March 31, 2005 and 2004, respectively.





See
accompanying notes to the unaudited consolidated financial
statements.




4


GuruNet
Corporation (Formerly Atomica Corporation)


and
Subsidiary


(A
Development Stage Enterprise)


**Consolidated
Statements of Cash Flows**


****


**Cumulative
      from December 22, 1998****(inception)
      through****Three
      months ended March 31**
    
    **March
      31,****2005**
    
    
    **2004**
    
    
    **2005**$
    
    
    $
    
    ****
    ****$********
    
    
    **(Unaudited)**
    
    
    **(Unaudited**)****
    ****
    
    **(Unaudited**)****
    ****





**Cash
      flows from operating activities:****Net
      loss**
    
    
    **(1,504,924**
    **)**
    
    (1,692,712
    )
    
    (42,101,041
    )**Adjustments
      to reconcile net loss to net cash used in operating
      activities:**Depreciation
      and amortization
    
    
    **40,559**
    
    
    37,916
    
    
    2,252,614Loss
      on sale and write off of property and equipment in connection with
      shut-down ofoperations
    
    
    **—**
    
    
    —
    
    
    780,475Other
      loss on sale and write off of property and equipment
    
    
    **—**
    
    
    —
    
    
    549,802Settlement
      of obligations for other than cash
    
    
    **—**
    
    
    —
    
    
    225,589Increase
      (decrease) in liability in respect of employee severance obligations,
      net
    
    
    **9,541**
    
    
    (7,121
    )
    
    78,030Deferred
      income taxes
    
    
    **11,484**
    
    
    27,980
    
    
    86,632Stock
      issued for domain name
    
    
    **—**
    
    
    —
    
    
    1,500Issuance
      of common stock, stock options and warrants to non-employees for services
      rendered
    
    
    **375,901**
    
    
    9,087
    
    
    598,505Revaluation
      of options issued to non-employees for services rendered
    
    
    **—**
    
    
    —
    
    
    (42,789
    )Amortization
      of deferred compensation
    
    
    **9,994**
    
    
    8,780
    
    
    125,203Accrued
      interest on promissory notes
    
    
    **—**
    
    
    65,155
    
    
    —Amortization
      of deferred charges relating to convertible promissory
    notes
    
    
    **—**
    
    
    126,958
    
    
    889,983Amortization
      of discounts on promissory notes
    
    
    **—**
    
    
    547,502
    
    
    1,577,373Exchange
      rate differences
    
    
    **78**
    
    
    (7,324
    )
    
    11,824**Changes
      in operating assets and liabilities:**Increase
      in accounts receivable and other current assets
    
    
    **(54,414**
    **)**
    
    (111,054
    )
    
    (330,677
    )Decrease
      (increase) in long-term prepaid expenses
    
    
    **12,330**
    
    
    —
    
    
    (134,670
    )Increase
      in accounts payable
    
    
    **187,237**
    
    
    126,845
    
    
    359,266(Decrease)
      increase in accrued expenses and other current liabilities
    
    
    **(1,717**
    **)**
    
    31,884
    
    
    692,304(Decrease)
      increase in short-term deferred revenues
    
    
    **(36,488**
    **)**
    
    29,553
    
    
    113,659(Decrease)
      increase in long-term deferred revenues
    
    
    **(13,982**
    **)**
    
    —
    
    
    438,377**Net
      cash used in operating activities**
    
    
    **(964,401**
    **)**
    
    (806,551
    )
    
    (33,828,041
    )**Cash
      flows from investing activities:**Capital
      expenditures
    
    
    **(50,139**
    **)**
    
    (2,736
    )
    
    (4,163,040
    )Proceeds
      from sales of property and equipment
    
    
    
    
    
    —
    
    
    54,415Purchase
      of intangible assets
    
    
    **—**
    
    
    (80,200
    )
    
    (119,936
    )Decrease
      (increase) in long-term deposits
    
    
    **(25,189**
    **)**
    
    3,415
    
    
    (185,626
    )Purchases
      of investment securities
    
    
    **(13,250,000**
    **)**
    
    —
    
    
    (19,100,000
    )Proceeds
      from sales of investment securities
    
    
    **2,250,000**
    
    
    —
    
    
    2,250,000Other
    
    
    **190**
    
    
    —
    
    
    —**Net
      cash used in investing activities**
    
    
    **(11,075,138**
    **)**
    
    (79,521
    )
    
    (21,264,187
    )**Cash
      flows from financing activities:**Repayment
      of loan
    
    
    **—**
    
    
    —
    
    
    (20,000
    )Proceeds
      from loan
    
    
    **—**
    
    
    —
    
    
    6,500Proceeds
      from issuance of convertible preferred stock, net of $130,697 issuance
      costs
    
    
    **—**
    
    
    —
    
    
    32,669,303Proceeds
      from issuance of common stock, net of issuance costs
    
    
    **—**
    
    
    (290,732
    )
    
    10,843,790Proceeds
      from issuance of promissory notes, net of issuance costs
    
    
    **—**
    
    
    4,278,490
    
    
    4,323,373Repayment
      of convertible promissory notes
    
    
    **—**
    
    
    —
    
    
    (3,160,000
    )Exercise
      of common stock options and warrants, net of $338,162 issuance
      costs
    
    
    **13,524,962**
    
    
    —
    
    
    13,525,962**Net
      cash provided by financing activities**
    
    
    **13,524,962**
    
    
    3,987,758
    
    
    58,188,928Effect
      of exchange rate changes on cash and cash equivalents
    
    
    **(78**
    **)**
    
    7,324
    
    
    (45,940
    )**Net
      increase in cash and cash equivalents**
    
    
    **1,485,345**
    
    
    3,109,010
    
    
    3,050,760Cash
      and cash equivalents at beginning of period
    
    
    **1,565,415**
    
    
    123,752
    
    
    —**Cash
      and cash equivalents at end of period**
    
    
    **3,050,760**
    
    
    3,232,762
    
    
    3,050,760




See
accompanying notes to the (unaudited) consolidated
financial statements.







5





GuruNet
Corporation (Formerly Atomica Corporation)


and
Subsidiary


(A
Development Stage Enterprise)


**Consolidated
Statements of Cash Flows (cont’d)**





**Cumulative
      from December 22, 1998****(inception)
      through****Three
      months ended March 31**
    
    **March
      31,****2005**
    
    
    **2004**
    
    
    **2005**$
    
    
    $
    
    ****
    ****$********
    
    
    **(Unaudited)**
    
    
    **(Unaudited**)****
    ****
    
    **(Unaudited**)****


**Supplemental
      disclosures of cash flow information:**Income
      taxes paid
    
    
    **3,175**
    
    
    1,804
    
    
    94,766**Non-cash
      investing and financing activities:**Stock
      issued for domain name
    
    
    **—**
    
    
    —
    
    
    1,500Issuance
      of common stock in lieu of loan repayments
    
    
    **—**
    
    
    —
    
    
    6,500Common
      stock issued in exchange for notes receivable
    
    
    **—**
    
    
    —
    
    
    1,842,900Repurchase
      of stockholders’ common stock and cancellation of notes
      receivable
    
    
    **—**
    
    
    —
    
    
    (1,842,900
    )Amortization
      of deferred charges relating to warrants
    
    
    **—**
    
    
    147,080
    
    
    147,080Discount
      on convertible promissory notes
    
    
    **—**
    
    
    —
    
    
    1,577,373Conversion
      of convertible promissory notes into common stock
    
    
    **—**
    
    
    —
    
    
    1,840,000Issuance
      costs related to the converted promissory notes
    
    
    **—**
    
    
    —
    
    
    134,255







See
accompanying notes to the (unaudited) consolidated
financial statements.





6
 
 GuruNet
Corporation (Formerly Atomica Corporation)
 and
Subsidiary
 (A
Development Stage Enterprise)


Notes to the Unaudited Consolidated Financial
Statements as of March 31, 2005





**Note
1** **- Business**





GuruNet
Corporation (“the Parent”), formerly Atomica Corporation (a Development Stage
Enterprise), was founded as a Texas
corporation on December 22, 1998, and reorganized as a Delaware corporation in
April 1999 . On
December 27, 1998 the Parent formed a subsidiary (“the Subsidiary”) based in
Israel, primarily for the purpose of providing research and development services
to the Parent. GuruNet Corporation and the Subsidiary are collectively referred
to as “the Company”. The
Company develops, markets and sells technology that intelligently and
automatically integrates and retrieves information from disparate sources and
delivers the result in a single consolidated view.





Prior to
2003, the Company focused primarily on enterprise systems for corporate
customers and large organizations. Beginning in 2003, the Company’s primary
product has been its consumer product, which, in 2003 and 2004, was sold to
subscribers who paid the Company on a lifetime or annual basis. In January 2005,
the Company introduced a free-to-customer product, containing practically all
the content that it used to sell via subscriptions and ceased selling
subscriptions to individual consumers. The Company plans to generate advertising
revenue from the free-to-customer product. Notwithstanding, customers who
purchased subscriptions prior to January 2005 will continue to be fully
supported through the subscription periods.





As the
Company has not yet earned significant revenue from its operations, it considers
itself a development stage enterprise, as defined under Statement of Financial
Accounting Standards No. 7, *“Accounting
and Reporting by Development Stage Enterprises”* .





The
accompanying unaudited consolidated financial statements were prepared in
accordance with the instructions for Form 10-QSB 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 that are, in the opinion of management,
of a normal recurring nature and are necessary for a fair presentation of the
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-KSB for the year ended December 31, 200 4 . The
results of operations for the period ended March 31, 2005 are not necessarily
indicative of the results that may be expected for the entire fiscal year or any
other period





**Note
2 - Revenue Recognition**





The
Company generates advertising revenues through pay-per-click keyword
advertising. When a user searches sponsored keywords, an advertiser’s Website is
displayed in a premium position and identified as a sponsored result to the
search. Generally, the Company does not contract directly with advertisers, but
rather, obtains those advertisers through the efforts of a third party that
locates advertisers seeking to display sponsored links in our product. 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 on the accompanying statement of operations in the period in which such
advertising services were provided.





The
Company continues to recognize revenues generated from subscriptions that were
sold in prior years since such subscribers will continue to be fully supported
through the subscription periods (see Note 1).





7


GuruNet
Corporation (Formerly Atomica Corporation)
 and
Subsidiary
 (A
Development Stage Enterprise)
  Notes to the Unaudited Consolidated Financial
Statements as of March 31, 2005


**Note
3 - Accounting for Stock-Based Compensation**





As
allowed by Statement of Financial Accounting Standards (SFAS) No. 123, *“Accounting
for Stock-based Compensation”* (SFAS
No. 123), the Company utilizes the intrinsic-value method of accounting
prescribed by the Accounting Principles Board (APB) Opinion No. 25, *“Accounting
for Stock Issued to Employees”* (“APB
25”), and related interpretations, to account for stock option plans for
employees and directors. Compensation
cost for stock options, if any, would be measured as the excess of the estimated
market price of the Company’s stock at the date of grant over the amount an
employee must pay to acquire the stock.





The fair
value of options and warrants granted to non-employees, is measured according to
the Black-Scholes option-pricing model with the following weighted average
assumptions: no dividend yield; risk-free interest rates of 1.69% to 3.85%;
volatility between 46.54% and 74.75%; and an expected life between one and ten
years.





The
Company has adopted the disclosure requirements of SFAS No. 123 and SFAS No.
148, *“* *Accounting
for Stock-Based Compensation—Transition and Disclosure”* , for
awards to its directors and employees. For
disclosure purposes only, the fair value of options granted to employees and
directors prior to May 12, 2004, the date of the Company’s first filing with the
U.S. Securities and Exchange Commission, in connection with its initial public
offering (the “IPO”), was estimated on the date of grant using the minimum-value
method with the following weighted average assumptions: no dividend yield;
risk-free interest rates of 2.18% to 6.59%; and an expected life of three to
five years. The fair value of options granted to employees and directors
subsequent to May 12, 2004, are measured, for disclosure purposes only,
according to the Black-Scholes option-pricing model with the following weighted
average assumptions: no dividend yield; risk-free interest rates of 3.29% to
4.18%; volatility between 53.66% and 66.76%; and an expected life of four
years.





The
following illustrates the effect on net loss and net loss per share, if the
Company had applied the fair value methods of SFAS No.
123 for
accounting purposes:





**Three
      months ended March 31**
    
    **Cumulative
      from inception through March 31,****2005**
    
    
    **2004**
    
    
    **2005**$
    
    
    $
    
    ****
    ****$********
    
    
    **(Unaudited)**
    
    
    **(Unaudited**)****
    ****
    
    **(Unaudited**)****
    ****





Net
      loss, as reported
    
    
    **(1,504,924**
    **)**
    
    (1,692,712
    )
    
    (42,101,041
    )Add:Stock-based
      compensation expense to employees and directorsincluded
      in reported net loss, net of related tax effects
    
    
    **9,918**
    
    
    8,704
    
    
    50,295Deduct:Stock-based
      compensation expense to employees and directorsdetermined
      under fair value based method for all awards, net of relatedtax
      effects
    
    
    **(72,886**
    **)**
    
    (12,855
    )
    
    (298,603
    )Pro-forma
      net loss
    
    
    **(1,567,892**
    **)**
    
    (1,696,863
    )
    
    (42,349,349
    )Net
      loss per common share, basic and diluted:As
      reported
    
    
    **(0.25**
    **)**
    
    (1.33
    )
    
    (25.35
    )Pro-forma
    
    
    **(0.26**
    **)**
    
    (1.33
    )
    
    (25.50
    )





8


GuruNet
Corporation (Formerly Atomica Corporation)
 and
Subsidiary
 (A
Development Stage Enterprise)
  Notes to the Unaudited Consolidated Financial
Statements as of March 31, 2005


**Note
3 - Accounting for Stock-Based Compensation (cont’d)**





In
December 2004, the Financial Accounting Standards Board issued SFAS No. 123
(revised 2004), “Share-Based Payment” (SFAS No. 123R). This Statement is a
revision of SFAS No. 123, and it establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. This Statement eliminates the option to use APB 25’s intrinsic value
method of accounting that was provided in SFAS No. 123 as originally issued and
it instead requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award. That cost will be recognized over the period during
which an employee is required to provide service in exchange for the award,
which is usually the vesting period. No compensation cost is recognized for
equity instruments for which employees do not render the requisite service.
Pursuant to SFAS No. 123R, the Company will apply its provisions beginning the
first quarter of 2006. SFAS 123R provides two alternative adoption methods. The
first method is a modified prospective method whereby a company would recognize
share-based employee costs from the beginning of the fiscal period in which the
recognition provisions are first applied as if the fair-value-based accounting
method had been used to account for all employee awards granted, modified, or
settled after the effective date and to any awards that were not fully vested as
of the effective date. Measurement and attribution of compensation cost for
awards that are unvested as of the effective date of SFAS 123R would be based on
the same estimate of the grant-date fair value and the same attribution method
used previously under SFAS No. 123. The second adoption method is a modified
retrospective transition method whereby a company would recognize employee
compensation cost for periods presented prior to the adoption of SFAS 123R in
accordance with the original provisions of SFAS 123, that is, an entity would
recognize employee compensation costs in the amounts reported in the pro forma
disclosures provided in accordance with SFAS 123. A company would not be
permitted to make any changes to those amounts upon adoption of SFAS 123R unless
those changes represent a correction of an error. The Company is currently
considering which of the two methods it will adopt, and the effect that the
adoption of SFAS 123R will have on its financial statements.





9
 
 GuruNet
Corporation (Formerly Atomica Corporation)
 and
Subsidiary
 (A
Development Stage Enterprise)
  Notes to the Unaudited Consolidated Financial
Statements as of March 31, 2005


**Note
4 - Stockholders’ Equity**





**(a)**  **Common
Stock**





On March
13, 2005, the Company issued 7,800 shares of common stock to an investor
relations firm, pursuant to a one-year agreement that began on December 13,
2004. The fair value of the shares, of $151,086, will be amortized to general
and administrative expenses over the life of the service period.





**(b)**  **Stock
Warrants**





During
2004, in connection with the issuance of Convertible Promissory Notes in January
and February of 2004, the Company issued warrants to acquire an aggregate of
2,067,316 shares of Common Stock (the “Bridge Warrants”), at an exercise price
of $7.20 per share, with the exception of 265,837 bridge warrants exercisable at
$3.75 per share.





During
the first quarter of 2005, 69,432 of the Bridge Warrants were exercised. As a
result, the Company issued an aggregate of 69,432 shares of its common stock,
$0.001 par value, for a total consideration of approximately $500,000.





Additionally,
on February 4, 2005 the Company entered into an agreement (the "Warrants
Agreement"), with certain holders of Bridge Warrants, pursuant to which such
holders exercised an aggregate of 1,871,783 Bridge Warrants at the stated
exercise price thereof. As a result, the Company issued an aggregate of
1,871,783 shares of its common stock, for aggregate gross consideration of
$12,559,700. Under the terms of the Warrants Agreement, in order to provide
incentive to the warrant holders to exercise their Bridge Warrants, for every
share of common stock purchased by the holders through the exercise of Bridge
Warrants, the Company issued to the warrant holders new warrants, dated February
4, 2005, to purchase such number of shares of common stock equal to 55% of the
number of shares of common stock underlying their respective Bridge Warrants
(the "New Warrants"). As a result, the Company issued 1,029,488 of New Warrants
at an exercise price of $17.27 per share. The New Warrants are immediately
exercisable and expire on February 4, 2010.





On
January 20, 2005, the Company entered into an agreement with an investment
banking firm, which was also one of the underwriters of the Company’s IPO, to
provide general financial advisory and investment banking services for $5,000
per month, and for a minimum term of six months. Further, upon signing of the
contract, the underwriter received fully vested warrants to acquire 100,000
shares of Common Stock at an exercise price of $11.00. The fair value of the
warrants, of $577,440, will be amortized to general and administrative expenses
over the life of the minimum service period.




10
 
 GuruNet
Corporation (Formerly Atomica Corporation)
 and
Subsidiary
 (A
Development Stage Enterprise)
  Notes to the Unaudited Consolidated Financial
Statements as of March 31, 2005
 
 **Note
4 - Stockholders’ Equity (cont’d)**





**(c)**  **Stock
Options**





During
the first quarter of 2005, 75,726 of the Company’s outstanding stock options
were exercised, for a total consideration of approximately $804,000. As a
result, the Company issued an aggregate of 75,726 shares of its common
stock.





On March
5, 2005, the Company entered into an agreement with a consulting firm for the
provision of strategic planning services. In connection therewith, the Company
granted 20,000 stock options of which 3,333 stock options were fully vested,
with the remaining 16,667 stock options vesting in equal monthly installments
over the ten month period of the agreement. As a result, the Company recorded
$106,901 of marketing expenses, which represents the fair value of the vested
stock options as of March 31, 2005. The fair value of the unvested portion as of
March 31, 2005, amounts to approximately $183,000 and will be revalued during
the subsequent reporting periods. The agreement also provides for ten monthly
payments of $5,000 and may be terminated by either party upon thirty days
notice. In the case of termination by the Company, the greater of (i) one-half
of all options which are unvested at the end of the 30-day notice period, or
(ii) 5,000 options, will vest immediately upon the end of the notice period,
however, monthly payments will cease.





On March
15, 2005, the Company granted 200,000 stock options to one of its officers. The
options will vest 25% upon the first anniversary date of the option grant, with
the remainder vesting in equal monthly installments over the 36 months
thereafter. In the event of a change of control, as defined in the officer’s
employment agreement, these options will be forfeited and the officer shall
receive 50,000 shares of the Company’s common stock.





All stock
options that were granted in the first quarter of 2005, were granted under the
Company’s 2004 Stock Option Plan.





**(d)**  **Other
Comprehensive Income (Loss)**





In
January 2005, the Company reversed previously recorded unrealized loss on
securities.





11


GuruNet
Corporation (Formerly Atomica Corporation)
 and
Subsidiary
 (A
Development Stage Enterprise)
  Notes to the Unaudited Consolidated Financial
Statements as of March 31, 2005


**Note
5 - Commitments and Contingencies**





(a)  Future
minimum lease payments under non-cancelable operating leases for office space
and cars, as of March 31, 2005 are as follows:




**$****Year
      ending December 31**2005
    
    
    202,1662006
    
    
    78,5782007
    
    
    42,1532008
    
    
    773323,670





Rental
expense for operating leases for the three month ended March 31, 2005 and 2004
was approximately $60,000 and $38,000, respectively.





(b)  As
security for future rental commitments the Subsidiary provided a bank guarantee
in the amount of approximately $113,000.





(c)  All of
the Subsidiary’s obligations to its bank, including the bank guarantee that such
bank made to the Subsidiary’s landlord, are secured by a lien on all of the
Subsidiary’s deposits at such bank. As of March 31, 2005, deposits at such bank
amounted to $383,494, including a long-term deposit of $126,720.





(d)  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 investor relations arrangements. During
the first quarter of 2005 , the
Company entered into agreements with three consulting firms for the provision of
services in the areas of public relations, strategic planning and investment
banking. The agreements, which are for periods between six months and one year,
are for an aggregate cash amount of $210,000. In connection with the aforesaid
agreements, the Company also agreed to grant warrants
to acquire 100,000 shares of common stock and
20,000 stock options (see Note 4).





(e) In
December 2002, the Company implemented a reorganization (the "December 2002
Reorganization") which substantially reduced the Company’s expenditures. The
December 2002 Reorganization included staff reductions of fifteen persons,
or approximately 52% of the Company's work force, including senior management,
professional services, sales and marketing, research and development and
administrative staff. The December 2002 Reorganization also included the
shutdown of the Company’s California office and resulted in a loss on the
disposal of fixed assets. In total, the Company incurred a loss of approximately
$1,048,000 in connection with the December 2002 Reorganization, of which
$780,000 related to the disposal of fixed assets, and $265,000 related to an
accrual for salaries,
benefits and office and equipment lease obligations that the Company recorded as of
December 31, 2002. Of the amount accrued, $218,000 was paid during 2003, $22,000
was paid during 2004, $5,000 was paid during the first quarter of 2005 and
$20,000, which relates to a lease obligation for equipment no longer in use,
remains outstanding as of March 31, 2005.




12
 
 GuruNet
Corporation (Formerly Atomica Corporation)
 and
Subsidiary
 (A
Development Stage Enterprise)
  Notes to the Unaudited Consolidated Financial
Statements as of March 31, 2005


**Note
6 - Subsequent Events**





(a)
    As
      a part of the Warrants Agreement as discussed in Note 4, the Company had
      agreed to file a registration statement with the U.S. Securities and
      Exchange Commission (the ”SEC”) by no later than April 6, 2005, to
      register for resale the shares of common stock underlying the new warrants
      (the "Registration Statement") and to have the Registration Statement
      effective by no later than May 5, 2005. On April 6, the Company filed the
      Registration Statement with the SEC, which became effective on April 21,
      2005. In the Registration Statement, the Company also registered 111,016
      shares, warrants and stock options that had previously not been
      registered.





(b)
    In
      April 2005, the Company entered into an operating lease for office space
      in New York City. The term of the lease commences on May 1, 2005 and ends
      on June 30, 2010. Under the terms of the lease, the Company shall have the
      right to cancel the lease commencing May 1, 2008, upon 90 days prior
      written notice to the Landlord. The monthly rental due under the lease
      begins at $5,500, after a two months free rent period, and steps up at
      various stages throughout the lease, up to $6,223. The Company will
      recognize the rent expense for this lease on a straight-line basis over
      the minimum lease term. In addition to the base rent, the Company will be
      responsible for certain costs and charges specified in the lease,
      including real estate taxes and utility charges.





13




ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION





*The
following discussion of our financial condition and results of operations should
be read in conjunction with the financial statements and the notes to those
statements included elsewhere in this filing. This discussion includes
forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from those anticipated in these forward-looking
statements.*




**General**




We
possess technology that helps integrate and retrieve online information from
disparate sources and delivers the result in a single consolidated browser view.
Our answer engine delivers snapshot, multi-faceted definitions and explanations
from attributable reference sources about numerous topics in our database. We
seek to differentiate ourselves by providing our users with relevant reference
information that enhances results achieved through traditional search engines.
Most search engines respond to an Internet user’s query with a long list of
links to more Websites that in some way relate to the query term. Our answer
engine automatically displays relevant, narrative responses to a user’s query
without requiring the user to review a list of hyperlinks sequentially. Our
answer engine also directly displays information in various formats such as
charts, graphs and maps.




**Our
Business Model**




On
January 3, 2005, the Company announced the release of Answers.com, a website
that had been launched in August 2004 in beta version. The Company also released
the "1-Click Answers" software, allowing users to click anywhere on the screen
for instant facts about a word or phrase. 1-Click Answers allows users working
in any application such as e-mail, spreadsheet, word processing, database or
other program or application to “alt-click” on a word or phrase within a
document, access our online library and display information about that word or
phrase in a pop-up window. While Web users enjoy our integrated reference
information, our Web-based product does not provide the “alt-click” command, and
context analysis that we include in our software. Our revenue model for these
products is based on advertising revenue. When a user searches sponsored
keywords, a link to an advertiser’s Website is displayed in a premium position
and identified as a sponsored result to the search. In contrast to GuruNet, the
product we actively marketed prior to January 2005, we do not generate revenues
from selling subscriptions to Answers.com.




Prior to
January 2005, we sold subscriptions to our answer engine product, GuruNet. Prior
to December 2003, we sold lifetime subscriptions to GuruNet, generally for
$40.00. In December 2003, we decided to alter our pricing model and moved to an
annual subscription model, generally, $30.00 per year. In conjunction with
selling subscriptions, we also offered free access to dictionary, thesaurus,
encyclopedia and other basic reference information through our products. Under
our business model during those years, our ability to generate revenues was
dependent upon our ability to increase the number of subscribers and increase
the number of users who used our basic free product. Usage of our basic free
product was our means of encouraging users to upgrade to our subscription
product and increase our subscription revenue. Although we earned some
advertising revenue in 2004, from advertising in our subscription and free
products, such amounts were not significant. Our business model at the time
strongly encouraged subscriptions, and thus we limited the amount of content
available in our free product. This approach did not facilitate the amount of
traffic we needed to earn significant amounts of revenue from advertising.
Further, the aforesaid business model required us to maintain an infrastructure
for billing and subscriptions, and we met resistance from customers to pay for
“information freely accessible on the Internet”. A desire to gain more
expansive, ubiquitous growth led to our current implementation, in January 2005,
of a free-to-customer product, Answers.com and "1-Click Answers" software,
containing practically all the content that we used to sell via subscriptions.




In
conjunction with the release of Answers.com, GuruNet.com began functioning
primarily as a corporate website. We are no longer offering new subscriptions to
GuruNet or offering downloads of GuruNet software to users who do not have
existing subscriptions. Notwithstanding, users who purchased GuruNet
subscriptions prior to January 3, 2005, will continue to be fully supported
through their subscription periods, and can access GuruNet services through
GuruNet software or at GuruNet.com.




***Other
Recent Events***




In
addition to the change in our business model in the first quarter of 2005 noted
above, the following events have recently transpired:




·
    In
      February 2005 we entered into an agreement (the "Warrant Reload
      Agreement") with certain holders of warrants that were issued by us in
      2004, in connection with a bridge financing, pursuant to which such
      holders exercised an aggregate of 1,871,783 Bridge Warrants. As a result,
      we raised approximately $12,225,000, net of costs relating to the
      exercise. Under the terms of the Warrant Reload Agreement, in order to
      provide incentive to the holders to exercise their Bridge Warrants, we
      issued 1,029,488 new five year warrants to purchase such number of shares
      of common stock (equal to 55% of the number of shares of common stock
      underlying their respective bridge warrants) at an exercise price of
      $17.27 per share.




14




·
    On
      February 28, 2005, we began using Google's contextual AdSense advertising
      on our Answers.com information pages, as well as integrating monetized
      Google search into our Answers.com product.






·
    In
      March 2005, we entered into an agreement to create a co-branded Website,
      which will display reference content from Answers.com and search results
      and contextual advertising from Accoona Corporation, owners of the Accoona
      Search Engine, Accoona.com. We are currently in the implementation phase
      of this endeavor.






·
    In
      March 2005, we launched a beta mobile version of our product, accessible
      at.
      This new version enables users to view Answers.com's quick, concise facts
      on their mobile devices, including the TreoTM,
      the BlackBerryTM,
      Windows-CETM-based devices and browser-based
telephones.






·
    On
      April 29, 2005, we entered into a lease agreement to lease office space in
      New York City. The space will serve as our U.S. headquarters. The term of
      the lease shall begin on May 1, 2005 and end on June 30, 2010, however, we
      are entitled to cancel the lease commencing May 1, 2008. The rent during
      the first year of the lease, after the two-month free rent period, is
      approximately $66,000 per annum and will increase gradually over the
      term.






·
    In
      May 2005, we entered intoan
      agreement with Shopping.com, Inc., a subsidiary of Shopping.com Ltd. to
      offer Answers.com users integrated product information and price
      comparisons. Under the agreement, Answers.com will display content from
      Shopping.com as a supplement to its content library. The content will
      include user reviews and the ability to compare prices from multiple
      vendors. Shopping.com will share revenues - earned through click-throughs
      to vendors - with Answers.com.






·
    Average
      daily queries for Answers.com and GuruNet, as measured by the company's
      internal statistical tools, grew throughout the first quarter of 2005 and
      in the subsequent period. Average daily queries during January, February,
      March and April of 2005 were approximately 220,000, 1,150,000, 1,550,000
      and 1,790,000, respectively.




***Revenues***




Revenues
in the first quarter of 2005 were $175,633 compared to $19,631 during the same
period in 2004, an increase of $156,002. Revenues in the first quarter of 2005
resulted from advertising revenues of approximately $107,000, recognition of
previously deferred subscription license revenue of approximately $50,000,
revenue from partners with whom we market co-branded products of approximately
$14,000 and other revenue of $5,000. In contrast, revenues in the first quarter
of 2004 resulted from recognition of subscription license revenue of
approximately $14,000, maintenance contracts on our corporate enterprise
software of approximately $5,000 and advertising revenue of approximately
$500.




As noted
earlier, on January 3, 2005, we announced the release of Answers.com, the
primary revenue model of which is advertising. In contrast, prior to January 3,
2005, our primary source of revenue was selling subscriptions to the GuruNet
product, the forerunner to Answers.com. The launch of Answers.com, from a
revenue perspective, was a multi-tiered process. From launch date until the
middle of January, we ran public service announcements on Answers.com and did
not display any advertising. In the middle of January we began using and testing
various advertising network providers. We reached an important milestone on
February 28, 2005, when we began using Google's contextual AdSense advertising
on our Answers.com information pages, as well as integrating Google search, with
paid search advertising into Answers.com. As a result of the multi-tiered
launch, our January and February 2005 advertising revenues were approximately
$16,000, while March 2005 advertising revenue was approximately
$91,000.




***Cost
of Revenues***




Cost of
revenues in the first quarter of 2005 was $208,543 compared to $ 156,527 during
the same period in 2004, an increase of $52,016 or 33%. The net increase is
primarily attributable to the addition of staff that manage the production
operations and web-hosting infrastructure that supports the Answers.com website,
and fees we pay to Google for the web search results they provide us within the
Answers.com website.




Cost of
revenues is comprised of fees to third party providers of content, web search
and web hosting services, and production operations and customer support
salaries, benefits and overhead costs.




15


******


***Gross
Margin***




Gross
margin in the first quarter of 2005 was $(32,910) compared to $(136,896) during
the same period in 2004, a decrease in the negative margin of $103,896. The
decrease was due to increased revenues, offset somewhat by increased cost of
revenues, as discussed above.




***Research
and Development Expenses***




Research
and development expenses in the first quarter of 2005 were $330,469 compared to
$263,788 during the same period in 2004, an increase of $66,681 or 25%. The
increase is due primarily to compensation-related expense increases as our
research and development team grew in order to develop and test newer versions
of our products, and due to raises in salaries. The salaries, benefits and
overhead costs of personnel, conducting research and development of software and
Internet products comprise research and development expenses.




***Sales
and Marketing Expenses***




Sales and
marketing expenses in the first quarter of 2005 were $361,460 compared to
$318,929 during the same period in 2004, an increase of $42,531 or 13%. The net
increase is due to a number of factors. In the first quarter of 2005, we hired a
strategic consultant who has assisted us in formulating our product and
marketing strategy. In connection therewith, we recorded approximately $27,000
of cash fees and expenses, and $107,000 of stock based compensation. In
contrast, in the first quarter of 2004, we incurred approximately $122,000 in
consulting costs relating to the redesign of our website and marketing strategy.
Our public relations related costs rose by approximately $40,000, in the first
quarter of 2005, as compared to the same quarter in 2004, however, advertising
and promotion expenses of approximately $50,000 in the first quarter of 2005,
were not significantly higher than the first quarter in 2004. The aforementioned
increases were offset to a certain degree, by decreases in employee
compensation, because we did not hire our chief revenue officer until the end of
the first quarter of 2005. In contrast, in the first quarter of 2004, we
employed a V.P. Business Development throughout the quarter.




Salaries,
benefits and overhead costs of personnel, marketing consulting, public relations
services and advertising costs, comprise sales and marketing expenses.




***General
and Administrative Expenses***




General
and administrative expenses in the first quarter of 2005 were $851,615 compared
to $212,407 during the same period in 2004, an increase of $639,208 or 300%. The
increase is comprised of many individual line expenses, as follows.




On
January 20, 2005, we entered into an agreement with an investment banking firm,
which also acted as one of the underwriters of our IPO, to provide general
financial advisory and investment banking services for $5,000 per month, and for
a minimum term of six months. Further, upon signing of the contract, the
underwriter received fully vested warrants to acquire 100,000 shares of common
stock at an exercise price of $11.00. As a result of this agreement, we recorded
approximately $25,000 of cash compensation and $225,000 in stock compensation,
which represents the amortization of the fair value of the warrants on the date
of their issuance, over the minimum term of the agreement.




In
December 2004, we entered into an agreement with an investor relations firm
pursuant to which they are to receive $100,000 over a one-year period for
providing us with investor relations services. Additionally, pursuant to the
agreement, in March 2005, we issued 7,800 shares of common stock to such firm.
As a result of this agreement, we recorded approximately $24,000 of cash
compensation and $44,000 in stock-based compensation, which represents the
amortization of the fair value of the stock on the date of their issuance, over
the expected life of the agreement, through December 2005.




The
remaining increase stems primarily from increases in legal and accounting costs
of approximately $185,000; increases in the number of personnel, and salaries of
personnel, which resulted in an increase, in aggregate, of approximately
$40,000; increases in director fees and expenses of approximately $40,000; and
increases in our insurance costs of approximately $30,000. The increases in the
line expenses that comprise General and Administrative Expenses, including those
mentioned previously, are mostly related, directly or indirectly, to the
increased costs associated with being a public company.




General
and administrative expenses consist primarily of salaries, benefits and overhead
costs for executive and administrative personnel, insurance, fees for
professional services, including investment relations, consulting, legal, and
accounting fees, travel costs, investment banking fees, and other general
corporate expenses. Expenses include cash-based payments and non-cash
stock-based compensation. Overhead costs are comprised primarily by rent,
utilities and depreciation.




16




***Interest
Income (Expense), Net***




Interest
income (expense), net in the first quarter of 2005 was $85,907, compared to
($737,034) during the same period in 2004, representing a net increase in
interest income (decrease of expense) of $822,941. Interest income, net, in 2005
is comprised primarily of interest income earned from cash and cash equivalents
and investment securities. Interest expense, net, in the first quarter of 2004
is comprised primarily of $675,000 of amortization of note discounts and
deferred charges relating to convertible promissory notes, which were issued in
January and February of 2004. The remainder consisted of 8% interest on the face
of the those notes, approximating $65,000, less interest income of approximately
$3,000




***Other
Income, Net***




Other
income, net, in the first quarter of 2005 was $282 as compared to $4,322 during
the same period in 2004, a decrease of $4,040. During the first quarter of 2005,
other income is comprised primarily of foreign currency exchange net gains.
Other income in the first quarter of 2004 was comprised of foreign exchange
gains of approximately $7,000, net of approximately $3,000 relating to the
write-off of withholding taxes that we did not expect to realize.




***Income
Tax Expense***




Our
effective tax rate differs from the statutory federal rate due to differences
between income and expense recognition prescribed by the United States and
Israeli tax laws and Generally Accepted Accounting Principles. We utilize
different methods and useful lives for depreciating property and equipment. The
recording of certain provisions results in expense for financial reporting but
the amount is not deductible for income tax purposes until actually paid. Our
deferred tax assets are mostly offset by a valuation allowance because
realization depends on generating future taxable income, which, in our
estimation, is not more likely to transpire, than to not transpire.




We had
net operating loss carryforwards for federal and state income tax purposes of
approximately $37 million at March 31, 2005 and $27.5 million at March 31, 2004.
The federal net operating losses will expire if not utilized on various dates
from 2019 through 2025. The state net operating losses will expire if not
utilized on various dates from 2009 through 2013. Our Israeli subsidiary has
capital loss carryforwards of approximately $604,000 that can be applied to
future capital gains for an unlimited period of time under current tax rules.




The Tax
Reform Act of 1986 imposed substantial restrictions on the utilization of net
operating losses and tax credits in the event of an ownership change of a
corporation. Thus, in accordance with Internal Revenue Code, Section 382, our
recent Initial Public Offering and other ownership changes that have transpired,
will significantly limit our ability to utilize net operating losses and credit
carryforwards.




Our
subsidiary had income in 2004 and 2003, resulting from its cost plus agreement
with the parent company, whereby it charges us for research and development
services it provides to us, plus 12.5%. However, the subsidiary is an “approved
enterprise” under Israeli law, which means that income arising from the
subsidiary’s approved activities is subject to zero tax under the “alternative
benefit” path for a period of ten years. In the event of distribution by the
subsidiary of a cash dividend out of retained earnings which were tax exempt due
to the “approved enterprise” status, 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 distribution received.




As of
March 31, 2005, we accrued approximately $87,000, net, to reflect the estimated
taxes that our subsidiary would have to pay if it distributed its accumulated
earnings to us. Should the subsidiary derive income from sources other than the
approved enterprise during the relevant period of benefits, this income will be
taxable at the tax rate in effect at that time (currently 34%, gradually being
reduced to 30% in 2005-2008). Through March 31, 2005, our Israeli subsidiary
received tax benefits of approximately $730,000.




***Net
Loss***




Our net
loss decreased to $1,504,924 in the first quarter of 2005 from $1,692,712 in the
same period in 2004, a decrease of $187,788, or 11%, as a result of the changes
in our revenues, cost of sales and expenses as described above.




**Critical
Accounting Estimates**




While our
significant accounting policies are more fully described in the notes to our
audited consolidated financial statements for the year ended December 31, 2004,
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.




17


***Revenue
Recognition***




In 2003,
we sold lifetime subscriptions to our consumer product and did not recognize
revenue from those sales since the obligation to continue serving such content
had no defined termination date and adequate history to estimate the life of the
customer relationship was not available. Cash received from such lifetime
licenses is reflected as long-term deferred revenues on the accompanying balance
sheets. Beginning December 2003 and throughout 2004, we generally, sold
consumers one-year subscriptions to GuruNet. We recognize the amounts we
received from those subscriptions over the life of the related subscription.
Beginning April 2004, certain users who purchased lifetime subscriptions in 2003
exchanged their lifetime subscriptions for free two-year subscriptions to a
newer, enhanced version of the GuruNet product. The cash previously received
from such users is being recognized as revenues over the new two-year
subscription. Beginning January 2005, we no longer offer subscriptions to our
consumer products and/or websites. Rather, our consumer business model is now an
advertising-only model. Notwithstanding, we have not terminated fixed-term and
lifetime subscriptions to GuruNet that we previously sold. This means that those
users will continue to receive content and will not have to upgrade their
software. The software they downloaded in conjunction with their subscription
will be supported. Our accounting treatment relating to those subscriptions has
not changed, since we continue to honor those subscriptions.




***Accounting
for Stock-based Compensation*** **




In
January 2003, the Financial
Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (“SFAS”) No. 148, *“Accounting
for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB
Statement No. 123”* (“SFAS
148”), which provides alternative methods of transition for a voluntary change
to a fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of Statement
of Financial Accounting Standards No. 123 *“Accounting
for Stock-based Compensation”*  ("SFAS
123"), to
require prominent disclosures in annual financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. We account for stock-based compensation for employees
under APB 25, and elect the disclosure-only alternative under SFAS 123,
providing the enhanced disclosures as required by SFAS 148.




We record
deferred stock-based compensation expense for stock options granted to employees
and directors if the market value of the stock at the date of grant exceeds the
exercise price of the option. We recognize expenses as we amortize the deferred
stock-based compensation amounts over the related vesting periods. The market
value of our stock, so long as we were a private company, was determined by us
based on a number of factors including comparisons to private equity investments
in us. These valuations are inherently highly uncertain and subjective. If we
had made different assumptions, our deferred stock-based compensation amount,
our stock-based compensation expense, our net loss and our net loss per share
could have been significantly different.




The fair
value of stock warrants and stock options granted to non-employees are measured
throughout the vesting period as they are earned, at which time we recognize a
charge to stock-based compensation. The fair value is determined using the
Black-Scholes option-pricing model, which considers the exercise price relative
to the market value of the underlying stock, the expected stock price
volatility, the risk-free interest rate and the dividend yield, and an estimate
of the life of the warrant or option. As discussed above, the market value of
the underlying stock was based on assumptions of matters that are inherently
highly uncertain and subjective. Since, prior to our IPO there had been no
public market for our stock, our assumptions about stock price volatility are
based on the volatility rates of comparable publicly held companies. These rates
may or may not reflect our stock price volatility following the offering. If we
had made different assumptions about the fair value of our stock or stock price
volatility, or our estimate of the time stock warrants and stock options will be
outstanding before they are ultimately exercised, the related stock based
compensation expense, our net loss and our net loss per share amounts could have
been significantly different.




For
example, in the first quarter of 2005, we estimated that the fair value of
100,000 common stock warrants that our investment banker received in connection
with an agreement pursuant to which it provides us with general financial
advisory and investment banking services, to be $577,000. Such amount is being
amortized over the minimum life of the agreement, which is six months. One of
the assumptions driving the fair value of the warrants was the estimate of the
date the warrants will be exercised. As required, we assumed the warrants will
be exercised on the last day before they expire, which is five years after the
date the warrants were issued. If, for example, we had assumed that the warrants
would be exercised one year after their issuance, their value, and the charge,
would have been approximately $146,000, rather than $577,000.




We are
required in the preparation of the disclosures required under SFAS 148 to make
certain estimates when ascribing a value to employee stock options granted
during the year. These estimates include, but are not limited to, an estimate of
the average time option grants will be outstanding before they are ultimately
exercised and converted into common stock. These estimates are integral to the
valuing of these option grants. Any changes in these estimates may have a
material effect on the value ascribed to these option grants. This would in turn
affect the amortization used in the disclosures we make under SFAS 148, which
could be material. For disclosure purposes only, the fair value of options
granted in the past to employees was estimated on the date of grant using the
minimum-value method with the following weighted average assumptions: no
dividend yield; risk-free interest rates of 2.18% to 6.59%; and an expected life
of three to five years. The fair value of options granted to employees
subsequent to May 12, 2004, the date of our first filing with the U.S.
Securities and Exchange Commission in connection with our IPO is measured, for
disclosure purposes only, according to the Black-Scholes option-pricing model, with the
following weighted average assumptions: no dividend yield; risk-free interest
rates of 3.29% to 4.18%; volatility between 53.66% and 66.76%,  and an
expected life of four years. If we
had made different assumptions than those noted above, the related disclosures
under SFAS 148 could have been significantly different.




18




Finally , the
FASB recently enacted Statement of Financial Accounting Standards 123-revised
2004 ("SFAS 123R"), *"Share-Based
Payment"* which
replaces SFAS 123. The impact of SFAS 123R on future periods is discussed in the
section of this Management’s Discussion & Analysis titled “Recent Accounting
Pronouncements”.




***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 likely, we must establish a valuation allowance. To the extent
we establish a valuation allowance or increase this allowance in a period, we
must include an expense within the tax item in the statement of operations.
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. We have fully offset our
US deferred tax asset with a valuation allowance. Our lack of earnings history
and the uncertainty surrounding our ability to generate taxable income prior to
the expiration of such deferred tax assets were the primary factors considered
by management in establishing the valuation allowance. Deferred tax assets and
liabilities in the financial statements result from the tax amounts that would
result if our Israeli subsidiary distributed its retained earnings to us. This
subsidiary is entitled to a tax holiday, as described above, yet continues to
generate taxable income in respect of services provided to us, and therefore
were the subsidiary to distribute its retained earning to us, we believe that
the deferred tax asset relating to the Israeli subsidiary would be realized. In
the event that our subsidiary’s products would not generate such taxable income,
we would need to write off the deferred tax asset as an expense in the statement
of operations. It should be noted that as the income is derived from us, it is
eliminated upon consolidation.




***Foreign
Currency Translation*** **




Beginning
February 2004, our Israeli subsidiary began paying substantially all of its
salaries linked to the U.S. dollar(“USD”), rather than the New Israeli Shekel
(“NIS”). Based on this change, and in conjunction with all other relevant
factors, our management has determined that the subsidiary’s functional
currency, beginning the first quarter of 2004, is the USD. SFAS 52, *“Foreign
Currency Translation”,* Appendix
A, paragraph 42, cites economic factors that, among others, should be considered
when determining functional currency. We determined that the cash flow, sales
price and expense factors for our subsidiary, which prior to 2004 all indicated
functional currency in foreign currency, have changed in 2004 to indicate the
functional currency is the USD.




Our
subsidiary’s revenue is derived based on a cost plus methodology. Prior to 2004,
salary expense, its primary expense, was determined in the foreign currency
resulting in income and expenses being based on foreign currency. However, in
2004, a triggering event occurred that, in our opinion, warranted a change of
the functional currency of our subsidiary to that of our currency, USD. Salary
expense, the primary expense of our subsidiary, began to be denominated in USD.
This led to a change with respect to the currency of the cash flow, sales price
and expense economic factors and resulted in a determination that our
subsidiary’s functional currency had changed to that of our functional currency.




Had we
determined that our subsidiary’s functional currency was different than what was
actually used, we believe that the effect of such determination would not have
had a material impact on our financial statements.




**Recently
Issued Accounting Pronouncements**




In March
2004, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No.
03-01, “ *The
Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments* ” (“EITF
03-1”). EITF 03-1 provides guidance on other-than-temporary impairment models
for marketable debt and equity securities accounted for under SFAS No. 115,
“ *Accounting
for Certain Investments in Debt and Equity Securities* ” (“SFAS
No. 115”), and non-marketable equity securities accounted for under the cost
method. The EITF developed a basic three-step model to evaluate whether an
investment is other-than-temporarily impaired. On September 30, 2004, the FASB
issued FSP 03-1-1, *“Effective
Date of Paragraphs 10-20 of EITF Issue 03-1, ’The Meaning of
Other-Than-Temporary Impairment and its Application to Certain
Investments’,”* delaying
the effective date for the recognition and measurement guidance of EITF 03-1, as
contained in paragraphs 10-20, until certain implementation issues are addressed
and a final FSP providing implementation guidance is issued. Until new guidance
is issued, companies must continue to comply with the disclosure requirements of
EITF 03-1 and all relevant measurement and recognition requirements in other
accounting literature. We do not expect the adoption of EITF 03-1 to have a
material effect on our financial statements.




In
December 2004, the FASB issued SFAS No. 153, *"Exchanges
of Nonmonetary Assets - an amendment to APB No. 29"* . This
Statement amends Opinion No. 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception
for exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange.
Adoption of this statement is not expected to have a material impact on our
results of operations and financial condition .




19




In
December 2004, the FASB issued SFAS 123R, which requires the measurement of all
employee share-based payments to employees, including grants of employee stock
options, using a fair-value-based method and the recording of such expense in
our consolidated statements of income. The accounting provisions of SFAS 123R
are effective for us for reporting periods beginning after December 15, 2005. We
are required to adopt SFAS 123R in the first quarter of fiscal 2006. The pro
forma disclosures previously permitted under SFAS 123 no longer will be an
alternative to financial statement recognition. See Note 3 in our Notes to the
unaudited Consolidated Financial Statements for the pro forma net loss and net
loss per share amounts, as if we had used a fair-value-based method similar to
the methods required under SFAS 123R to measure compensation expense for
employee stock incentive awards. Although we have not yet determined the method
of adoption and whether the adoption of SFAS 123R will result in amounts that
are similar to the current pro forma disclosures under SFAS 123, we are
evaluating the requirements under SFAS 123R and the impact their adoption will
have on our consolidated statements of operations and net income (loss) per
share.




**Liquidity
and Capital Resources**




***General***




From our
inception through March 31, 2005, our operations have been funded almost
entirely through the proceeds we received from issuance of four series of
convertible preferred stock between 1999 and the end of 2001, convertible
promissory notes in the first quarter of 2004 and our IPO in last quarter of
2004. The amounts raised were used primarily to fund research and development,
sales and marketing, business development and general and administrative costs.




In
February 2005 the Company entered into an agreement with certain holders of
warrants that were issued by the Company in 2004 in connection with a bridge
financing, pursuant to which such holders exercised an aggregate of 1,871,783
Bridge Warrants. As a result, the Company raised approximately $12,225,000, net
of costs relating to the exercise. Further, in 2005, to date, we raised
additional amounts, in excess of $1 million, from other exercises of options and
warrants.




As of
March 31, 2005, we had $21,947,010 of assets consisting of $3,050,760 in cash
and cash equivalents, $16,850,000 in investment securities, $791,759 in other
current assets and the remaining balance in property and equipment and other
long-term assets. Total liabilities as of March 31, 2005, reflect current
liabilities of $1,153,545, consisting primary of accounts payable and accrued
expenses and compensation, and long-term liabilities of $1,103,694, which are
comprised primarily of liabilities in respect of employee severance obligations
and deferred revenues, long-term.




Cash
flows for the three months ended March 31, 2005 and 2004 were as
follows:




**March 31,
      2005**
    
    **March 31,
      2004**Net
      cash used in operating activities
    
    $
    (964,401
    )
    $
    (806,551
    )Net
      cash used in investing activities
    
    $
    (11,075,138
    )
    $
    (79,521
    )Net
      cash provided by financing activities
    
    $
    13,524,962
    
    $
    3,987,758




Despite a
net loss of $1,504,924 in the first quarter of 2005, our net cash used in
operations was $964,401. The primary reasons for the large difference is that
$386,000 of our operating expenses were the result of non-cash, stock-based
compensation, and various changes in our operating assets and liabilities. In
the first quarter of 2004, despite a net loss of $1,692,712, our net cash used
in operations was $806,551. This was due to many factors, the most significant
of which is non-cash, amortization of promissory note discounts, of
$547,502.




Cash used
in investing activities of $11,075,138, in the first quarter of 2005 is
attributable primarily to purchases of investment securities of $13,250,000,
less the proceeds, of $2,250,000, from the sale of investment securities.
Investment securities consist of investments in auction rate, investment grade,
corporate and municipal debt instruments, and auction rate preferred shares of
closed-end investment funds that invest in long-term fixed income securities,
with auction reset periods of 28 days, classified as available-for-sale
securities and stated at fair value. Cash used in investing activities of
$79,521 in the first quarter of 2004 is mainly due to the purchase of the
Answers.com domain name for $80,200.




20




Cash flow
from financing activities during the first quarter of 2005 was comprised of the
net proceeds, of approximately $12,225,000 from the exercise of warrants via the
Warrant Reload Agreement, with the remainder resulting from other exercises of
stock warrants and stock options. Cash flow from financing activities during the
first quarter of 2004 was comprised primarily of the net proceeds relating to
the $5.0 million of bridge notes issued in January and February 2004.




***Current
and Future Financing Needs***




We have
incurred negative cash flow from operations since our inception. We have spent,
and expect to continue to spend, substantial amounts in connection with
implementing our business strategy. We raised approximately $10,786,000, net of
underwriting fees and offering expenses, through our IPO and the exercise of the
over-allotment option in the last quarter of 2004. After repaying the portion of
the bridge notes that did not convert to common shares, of $3,160,000,
approximately $7.6 million remained. In February 2005 we entered into the
Warrant Reload Agreement with certain holders of warrants that were issued by us
in 2004 in connection with the bridge financing, pursuant to which such holders
exercised an aggregate of 1,871,783 Bridge Warrants. As a result, we raised
approximately $12,225,000, net of costs relating to the exercise. Further, in
the first quarter of 2005, we raised additional amounts, in excess of $1
million, from other exercises of options and warrants. Based on our current
plans, we believe that the net proceeds of the aforementioned IPO and the
exercise of the over-allotment option, and of the Warrant Reload Agreement, will
be sufficient to enable us to meet our planned operating needs for the next
twelve months and to fund possible future acquisitions. Notwithstanding, we may
decide to raise funds in the future, via public or private sales of our shares
or debt and/or other sources, to finance acquisitions and growth.




**Off-Balance
Sheet Arrangements**




We have
not entered into any transactions with unconsolidated entities in which we have
financial guarantees, subordinated retained interests, derivative instruments or
other contingent arrangements that expose us to material continuing risks,
contingent liabilities or any other obligations under a variable interest in an
unconsolidated entity that provides us with financing, liquidity, market risk or
credit risk support.




ITEM 3.
CONTROLS AND PROCEDURES





Based on
their evaluations as of the end of the period covered in this report, our
principal executive officer and principal financial officer have concluded that
our disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15(d)-15(e)) are effective to ensure that information required to
be disclosed by us in reports that we file or submit under the Securities
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the SEC.




We
believe that a controls system, no matter how well designed and operated, is
based in part upon certain assumptions about the likelihood of future events,
and therefore can only provide, reasonable, not absolute, assurance that the
objectives of the controls system are met, and no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within a company have been detected.




In
addition, we have reviewed our internal controls over financial reporting and
have made no changes during the quarter ended March 31, 2005, that our
certifying officers concluded materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.




**PART
II. OTHER INFORMATION**





ITEM 1.
LEGAL PROCEEDINGS





We are
not currently involved in any legal proceedings. However, from time to time we
may be subject to legal proceedings and claims in the ordinary course of
business.





ITEM 2.
CHANGES IN SECURITIES





Not
applicable




ITEM 3.
DEFAULTS UPON SENIOR SECURITIES





Not
applicable.





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





Not
applicable.





21


ITEM 5.
OTHER INFORMATION





Not
applicable. ****




ITEM 6.
EXHIBITS





31.1
    Certification
      of Principal Executive Officer required under Rule 13a-14(a) or Rule
      15d-14(a) of the Securities and Exchange Act of 1934, as
      amended.





31.2
    Certification
      of Principal Financial Officer required under Rule 13a-14(a) or Rule
      15d-14(a) of the Securities and Exchange Act of 1934, as
      amended.





32.1*
    Certification
      of Principal Executive Officer required under Rule 13a-14(a) or Rule
      15d-14(a) of the Securities and Exchange Act of 1934, as amended, and 18
      U.S.C. Section 1350.





32.2*
    Certification
      of Principal Financial Officer required under Rule 13a-14(a) or Rule
      15d-14(a) of the Securities and Exchange Act of 1934, as amended, and 18
      U.S.C. Section 1350.








*
    The
      certifications attached as Exhibits 32.1 and 32.2 accompany this
      Quarterly Report on Form 10-QSB pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002 and shall not be deemed "filed" by GuruNet
      Corporation for purposes of Section 18 of the Securities Exchange Act
      of 1934, as amended.








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.





GURUNET CORPORATIONDate: May 11, 2005
    
    /s/ Robert S.
  RosenscheinRobert S. RosenscheinChief Executive Officer(Principal Executive Officer)/s/
  Steven SteinbergSteven  SteinbergChief Financial Officer(Principal Financial and Accounting
      Officer)







22




EXHIBIT
INDEX




31.1
    Certification
      of Principal Executive Officer required under Rule 13a-14(a) or Rule
      15d-14(a) of the Securities and Exchange Act of 1934, as
      amended.





31.2
    Certification
      of Principal Financial Officer required under Rule 13a-14(a) or Rule
      15d-14(a) of the Securities and Exchange Act of 1934, as
      amended.





32.1*
    Certification
      of Principal Executive Officer required under Rule 13a-14(a) or Rule
      15d-14(a) of the Securities and Exchange Act of 1934, as amended, and 18
      U.S.C. Section 1350.





32.2*
    Certification
      of Principal Financial Officer required under Rule 13a-14(a) or Rule
      15d-14(a) of the Securities and Exchange Act of 1934, as amended, and 18
      U.S.C. Section 1350.








*
    The
      certifications attached as Exhibits 32.1 and 32.2 accompany this
      Quarterly Report on Form 10-QSB pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002 and shall not be deemed "filed" by GuruNet
      Corporation for purposes of Section 18 of the Securities Exchange Act
      of 1934, as amended.





23