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WhiteSmoke, Inc.
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S-1
May 12, 5:18 PM ET
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WhiteSmoke, Inc. S-1
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351
Registration No. 333-
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
WHITESMOKE, INC.
Kehilat Saloniki 11, 2nd Floor Tel Aviv, Israel, 69513 011-972-3-637-6800
Hilla Ovil Brenner Chief Executive Officer Kehilat Saloniki 11, 2nd Floor Tel Aviv, Israel, 69513 +972-3-637-6800
CALCULATION OF REGISTRATION FEE
WhiteSmoke, Inc.
Shares of Common Stock
TABLE OF CONTENTS
PROSPECTUS SUMMARY
Overview of Our Business
Industry Background
The WhiteSmoke Solution
Our Business Strategies
Risks
Recent Developments
January Convertible Loan Offering
Our Corporate Information
THE OFFERING
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
RISK FACTORS
Risks Related to Our Business and Industry
We may not be able to continue as a going concern.
We have a limited operating history and we have not historically been profitable.
We may need additional financing in the future, which we may be unable to obtain.
A decline in demand for English writing technologies, for language learning solutions in general, or any change in the education market, could cause our revenue to decline. Moreover, the market for English language writing and learning solutions, which we consider to be our primary market, is relatively new, and we cannot assure you that it will mature in the manner we expect.
If the revenue model on which the toolbar distribution business is based changes materially, it could adversely affect our revenues, which are dependent on that business model.
Intense competition in our industry may hinder our ability to generate revenue and may diminish our margins.
If we do not continue to innovate and provide software solutions that are useful to our customers, we may not remain competitive, and our revenue and operating results could suffer.
Many of our expenses are fixed and are based, in significant part, on our expectations of our future revenue and are incurred prior to the sale of our software. Therefore, any significant decline in revenue for any period could have an immediate negative impact on our margins, net income and financial results for the period.
Failure to comply with obligations to our subsidiary’s largest creditor could lead to the sale of material assets.
A substantial part of our revenues arise from licenses sold by our affiliate networks, distributors and resellers. Should any of these channels be harmed, our revenues would decrease.
We have one principal monetization partner which accounts for a significant portion of our revenue. Should our relationship with that partner or our other monetization partners be harmed, our revenues would be adversely affected.
We have limited control over the sales by affiliates through which we make a significant portion of our sales. As a result, we could be defamed or our reputation harmed by the actions of these third parties, in which case our business could be materially adversely affected.
We depend on search engines and other online sources to attract visitors to our websites. Optimizing the inclusion of WhiteSmoke in search results depends to a large extent upon the content posted by our dedicated marketing, copywriting and Search Engine Optimization, or SEO teams, as well as articles and posts authored by our customers. Should we be unable to maintain our inclusion in search results or manage our online reputation, our business may be harmed.
Our business may be adversely affected by malicious third-party software.
If any of our software contains defects or errors or if new product releases or services are delayed, our reputation could be harmed, resulting in significant costs to us and impairing our ability to sell our solutions.
Our expansion into new mobile device-based services may not succeed, which could harm our business, financial results and reputation.
Failure to maintain the availability of the systems, networks, databases and software required to operate and deliver our internet-based software could damage our reputation and cause us to lose revenue, especially as we grow and must accommodate increased systems traffic and technology advances or changing business requirements.
Refunds and chargebacks could exceed our estimates, which would diminish our reported revenue.
We may have ongoing obligations to customers who purchased our software under our prior form of license.
Our possession and use of personal information presents risks that could harm our business. Unauthorized disclosure or manipulation of such data, whether through breach of our network security or otherwise, could damage our reputation and expose us to expenses associated with responding to breach, fines for violations of applicable data security laws, regulations and industry standard, costly litigation and administrative action.
We are exposed to risks associated with credit card payment fraud and credit card processing, which could cause us to lose revenue.
Any significant interruptions in the operations of our call center could cause us to lose sales and disrupt our ability to process orders and deliver our solutions in a timely manner.
Our business depends on a strong brand and reputation, and if we are not able to maintain and enhance our brand or reputation or if there is negative publicity against us, our business and operating results may be harmed.
We may not be able to obtain patents or other intellectual property rights necessary to protect our proprietary technology and business.
Third parties may claim we infringe on their intellectual property rights, forcing us to expend substantial resources in resulting litigation, the outcome of which would be uncertain. Any unfavorable outcome of such litigation could have a material adverse effect on our business, financial condition and results of operations.
We must monitor and protect our internet domain names to preserve their value. We may be unable to prevent third parties from acquiring domain names that are similar to, infringe on or otherwise decrease the value of our trademarks.
Our use of open source software may provide third parties with rights to our proprietary software and information.
If we fail to keep up with rapid changes in technologies and Internet-enabled devices, our business may be adversely affected.
The loss of management, development, sales or other key personnel or the failure to attract and retain highly qualified personnel could compromise our ability to pursue our growth strategy.
Our future growth and profitability will depend in large part upon the effectiveness and efficiency of our marketing expenditures.
If we fail to manage our growth effectively, our business, financial condition and results of operations could be materially adversely affected.
The unsuccessful integration of any businesses in future acquisitions could result in operating difficulties, dilution and other harmful consequences on our results of operations.
We depend on discretionary consumer spending in the consumer segment of our business. Continued adverse trends in general economic conditions, including online shopping patterns or consumer confidence, may compromise our ability to generate revenue.
Our expansion into international markets, meaning those outside the United States, may not succeed and imposes special risks.
The obligations associated with being a public company will require significant resources and management attention.
Our ability to use net operating losses to offset future taxable income may be subject to certain limitations.
Risks Related to Operating in Israel
We anticipate being subject to fluctuations in currency exchange rates because we expect a substantial portion of our revenues will be generated in United States dollars and Euros, while a significant portion of our expenses will be incurred in New Israeli Shekels.
Our company and our shareholders may have exposure to greater than expected tax liabilities.
If there are significant shifts in the political, economic and military conditions in Israel and its neighbors, it could have a material adverse effect on our business relationships and profitability.
Our operations could be disrupted as a result of the obligation of certain of our personnel residing in Israel to perform military service.
We may not be able to enforce covenants not-to-compete under current Israeli law.
It may be difficult to enforce a U.S. judgment against us, our directors and officers and the Israeli experts named in this prospectus outside the United States, or to assert U.S. securities laws claims outside of the United States.
Risks Related to this Offering and Ownership of Our Common Stock
The market price of our common stock may be volatile, which could result in substantial losses for you.
An active trading market for our common stock may not develop, and you may not be able to sell your common stock at or above the initial public offering price.
You will incur immediate and substantial dilution as a result of this offering.
Future sales of our common stock, or the perception that such sales may occur, could depress our common stock price.
Provisions in our Amended and Restated Certificate of Incorporation and Bylaws and Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.
We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
We may apply the proceeds of this offering to uses that do not improve our operating results or increase the value of your investment.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
USE OF PROCEEDS
DIVIDEND POLICY
CAPITALIZATION
DILUTION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Revenues
Costs and Expenses
Cost of Revenues
Operating Expenses
Financial Expenses, net
Taxes on income (tax benefit)
Critical Accounting Policies and Estimates
Revenue recognition
Accounting for Stock-based Compensation
Convertible loans
Liability in Respect of Warrants and embedded derivatives
Taxes on income (tax benefit)
Impact of recently issued accounting standards:
Twelve Months Ended December 31, 2010 Compared with Twelve Months Ended December 31, 2009
Revenues
Cost of Revenues
Gross Profit
Research and Development Expenses
Selling and Marketing Expenses, Net
General and Administrative Expenses
Operating Loss
Financial Expenses, Net
Taxes on Income (Tax Benefit)
Net Loss
Impact of Exchange Rate Fluctuations on Results of Operations, Liabilities and Assets
Governmental and Fiscal Policies which May Affect Our Business
Liquidity and Capital Resources
BUSINESS
Overview
Industry Background
Key drivers of demand in the electronic editing and English learning markets.
Limitations of Traditional Online and Computer-Based Methods for English Language Editing.
The need for a high-quality, trusted solution.
Our Solutions and Services — The WhiteSmoke Platform
Our Proprietary Technology
Our Competitive Strengths
Our Strategy
Our Solutions
Research and Development
Sales, Marketing and Distribution
Material Relationships
Pearson Education
Zugo Limited
Kreos Capital III Limited
Competition
Intellectual Property
Government Funding
Government Regulation
Employees
Facilities
Legal Proceedings
Corporate Information
MANAGEMENT
Executive Officers and Directors
Board Composition
Board Committees
Code of Ethics
Equity Incentive Plans
2003 Stock Option Plan.
2006 Share Option Plan.
2011 Stock Incentive Plan.
EXECUTIVE COMPENSATION
Employment Agreements
Tax Deductibility
Executive and Director Compensation Tables
SUMMARY COMPENSATION TABLE
Employment Agreements
GRANTS OF PLAN-BASED AWARDS
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Pension Plans and Deferred Compensation
DIRECTOR COMPENSATION
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
January 2011 Convertible Loan
2009 and 2010 Convertible Loans
Management Services Agreement
Stockholder Loans
PRINCIPAL STOCKHOLDERS
DESCRIPTION OF CAPITAL STOCK
General
Common Stock
Preferred Stock
Certain Waivers and Terminations by Existing Stockholders
Anti-Takeover Effects of Delaware Law
Requirements for Advance Notification of Stockholder Nominations and Proposals
Limits on Written Consents
Limits on Special Meetings
Election and Removal of Directors
Amendments to Our Governing Documents
Listing
Transfer Agent and Registrar
SHARES ELIGIBLE FOR FUTURE SALE
Rule 144
Rule 701
Registration Rights
Stock Options and Warrants
Lock-up Agreements
MATERIAL U.S. FEDERAL INCOME AND ESTATE TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF COMMON STOCK
General
Dividends
Gain on Disposition of Common Stock
Information Reporting and Backup Withholding Requirements
Recent Legislation Relating to Foreign Accounts
Federal Estate Tax
MATERIAL ISRAELI INCOME AND CAPITAL GAIN TAX CONSIDERATIONS FOR ISRAELI HOLDERS OF COMMON STOCK
Israeli Tax Considerations
General
Dividends
Gain on Disposition of Common Stock
UNDERWRITING
Overallotment Option
Lock-ups
Stabilization
Other Terms
Offer restrictions outside the United States
Australia
China
European Economic Area — Belgium, Germany, Luxembourg and Netherlands
France
Ireland
Israel
Italy
Japan
Portugal
Sweden
Switzerland
United Arab Emirates
United Kingdom
LEGAL MATTERS
EXPERTS
ENFORCEABILITY OF CIVIL LIABILITIES
WHERE YOU CAN FIND MORE INFORMATION
WHITESMOKE INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS
INDEX
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
WHITESMOKE INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS U.S. dollars in thousands (except share and per share data)
WHITESMOKE INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS U.S. dollars in thousands (except share and per share data)
WHITESMOKE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS U.S. dollars in thousands (except share and per share data)
WHITESMOKE INC. AND SUBSIDIARIES STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT U.S. dollars in thousands (except share data)
WHITESMOKE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS U.S. dollars in thousands
WHITESMOKE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS U.S. dollars in thousands
WHITESMOKE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
NOTE 1: GENERAL
WHITESMOKE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
NOTE 1: GENERAL – (continued)
WHITESMOKE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
NOTE 1: GENERAL – (continued)
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation:
Use of estimates:
Foreign currency translation:
Principles of consolidation:
Cash and cash equivalents:
Long term deposits:
Restricted cash:
WHITESMOKE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES – (continued)
Property and equipment:
Impairment of long-lived assets:
Revenue recognition:
WHITESMOKE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES – (continued)
Income taxes:
Research and development expenses:
Advertising costs:
Accrued severance pay:
WHITESMOKE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES – (continued)
Accounting for stock-based compensation:
Fair value of financial instruments:
WHITESMOKE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES – (continued)
WHITESMOKE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES – (continued)
Fair value option:
Convertible loan:
WHITESMOKE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES – (continued)
Derivative instruments:
Concentration of credit risks:
Royalty Government grants:
Loss per share data:
WHITESMOKE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES – (continued)
Pro forma basic and diluted loss per share (unaudited):
Pro forma shareholders’ deficit (unaudited):
Impact of recently issued accounting standards:
WHITESMOKE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES – (continued)
NOTE 3: PREPAID EXPENSES AND OTHER ASSETS
NOTE 4: PROPERTY AND EQUIPMENT, NET
WHITESMOKE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
NOTE 5: OTHER INTANGIBLE ASSETS
NOTE 6: EMPLOYEES ACCRUALS AND OTHER ACCRUED EXPENSES
NOTE 7: LONG-TERM LOANS
WHITESMOKE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
NOTE 7: LONG-TERM LOANS – (continued)
WHITESMOKE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
NOTE 7: LONG-TERM LOANS – (continued)
WHITESMOKE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
NOTE 7: LONG-TERM LOANS – (continued)
NOTE 8: CONVERTIBLE LOAN
WHITESMOKE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
NOTE 8: CONVERTIBLE LOAN – (continued)
WHITESMOKE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
NOTE 8: CONVERTIBLE LOAN – (continued)
WHITESMOKE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
NOTE 8: CONVERTIBLE LOAN – (continued)
NOTE 9: COMMITMENTS AND CONTINGENCIES
WHITESMOKE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
NOTE 9: COMMITMENTS AND CONTINGENCIES – (continued)
NOTE 10: STOCKHOLDERS’ EQUITY
WHITESMOKE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
NOTE 10: STOCKHOLDERS’ EQUITY – (continued)
WHITESMOKE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
NOTE 10: STOCKHOLDERS’ EQUITY – (continued)
WHITESMOKE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
NOTE 10: STOCKHOLDERS’ EQUITY – (continued)
2003 Stock Option Plan
2006 Director Stock Option Plan
WHITESMOKE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
NOTE 10: STOCKHOLDERS’ EQUITY – (continued)
WHITESMOKE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
NOTE 10: STOCKHOLDERS’ EQUITY – (continued)
WHITESMOKE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
NOTE 10: STOCKHOLDERS’ EQUITY – (continued)
WHITESMOKE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
NOTE 10: STOCKHOLDERS’ EQUITY – (continued)
NOTE 11: TAXES ON INCOME
WHITESMOKE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
NOTE 11: TAXES ON INCOME – (continued)
WHITESMOKE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
NOTE 11: TAXES ON INCOME – (continued)
WHITESMOKE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
NOTE 11: TAXES ON INCOME – (continued)
NOTE 12: RELATED PARTIES
WHITESMOKE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
NOTE 13: FINANCIAL EXPENSES, NET
NOTE 14: SUBSEQUENT EVENTS
WHITESMOKE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS U.S. dollars in thousands (except share and per share data)
NOTE 14: SUBSEQUENT EVENTS – (continued)
WhiteSmoke, Inc.
Common Stock
PROSPECTUS
EXPLANATORY NOTE
[Alternate Page for Selling Securityholder Prospectus]
SUBJECT TO COMPLETION, DATED _________________, 2011
PROSPECTUS
WhiteSmoke, Inc.
Shares of Common Stock
The date of this prospectus is , 2011.
[Alternate Page for Selling Securityholder Prospectus]
USE OF PROCEEDS
[Alternate Page for Selling Securityholder Prospectus]
SELLING SECURITYHOLDERS
[Alternate Page for Selling Securityholder Prospectus]
PLAN OF DISTRIBUTION
[Alternate Page for Selling Securityholder Prospectus]
WHERE YOU CAN FIND MORE INFORMATION
WhiteSmoke, Inc.
Common Stock
, 2011
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Item 14. Indemnification of Directors and Officers.
Item 15. Recent Sales of Unregistered Securities.
Item 16. Exhibits and Financial Statement Schedules.
Item 17. Undertakings
SIGNATURES
EXHIBIT INDEX
Contents
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