Filed pursuant to 424(b)(3)
Registration No. 333-121761

SUPPLEMENT NO. 2
DATED AUGUST 11, 2006
TO THE PROSPECTUS DATED JULY 24, 2006
OF THINK PARTNERSHIP INC.

This Supplement No. 2 updates, modifies or supercedes certain information contained in the prospectus sections described below, and must be read in conjunction with our prospectus.  In addition, on August 10, 2006, we filed with the Securities and Exchange Commission our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006.  This Quarterly Report (excluding the exhibits thereto) is attached as Annex A to this Supplement No. 2.

Risk Factors

The “Risk Factors” section, which begins page 6 of the prospectus, is hereby amended by deleting in its entirety the following risk factor:

We have agreed, and may agree in the future, to pay additional amounts in connection with acquisitions. As part of the agreements to acquire certain of our operating subsidiaries, we agreed to pay the stockholders of these entities additional consideration, or contingent payments, if the financial performance of these respective entities satisfies certain financial hurdles. As of July 10, 2006, the cash portion of these potential contingent payments totaled approximately $41.4 million. There is no assurance that we will have cash available to pay these amounts if these financial hurdles are satisfied. Thus, we may have to borrow additional monies or sell additional equity to raise the needed funds, all of which may have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

Business

The “Business” section, which begins on page 16 of the prospectus, is amended by adding the following at the end of the section headed “Recent Developments”

Restructuring of Earnout Payments

On August 10, 2006 we amended prior acquisition and merger agreements with the former owners and current management of six of our subsidiaries, including PrimaryAds, Inc., Litmus Media Inc., iLead Media, Inc., Web Diversity Ltd., KowaBunga! Marketing, Inc. and Ozona Online Network, Inc.  As a result of these amendments, the earn-outs that may be payable to the former shareholders of these entities are now based on the performance of Think Partnership as a whole, rather than their respective units, and paid 100% in company stock, rather than in cash and company stock.   The new terms, which extend over the three years ending June 30, 2009, involve us meeting a minimum annual EBITDA goal of $12.6 million in the first year and increasing to a maximum target of $27.8 million in the 3rd year.  This EBITDA goal includes all of the operations of Think Partnership except for our Morex Marketing subsidiary.

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ANNEX A

QUARTERLY REPORT ON FORM 10-Q
FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 2006

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

 

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

 

For the quarterly period ended    June 30, 2006

 

OR

 

o                                 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from            to

 

For Quarter Ended          Commission File Number  001-32442

 

Think Partnership Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

Registrant’s telephone number, including area code    (727) 324-0046

 

 

 

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

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

Yes x     No o

Check whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act:

 

Check whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

Yes o     No x

As of August 2, 2006, 53,043,695 shares of common stock, $0.001 par value, were outstanding.

 

 

THINK PARTNERSHIP INC. AND SUBSIDIARIES

Table of Contents

PART I.  FINANCIAL INFORMATION
Item 1.		Financial Statements.
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 3.		Quantitative and Qualitative Disclosures About Market Risk.
Item 4.		Controls and Procedures.
Part II.  OTHER INFORMATION
Item 1.		Legal Proceedings.
Item 1A.		Risk Factors.
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3.		Defaults Upon Senior Securities.
Item 4.		Submission of Matters to a Vote of Security Holders.
Item 5.		Other Information.
Item 6.		Exhibits.
SIGNATURES

 

 

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PART I.   FINANCIAL INFORMATION

Item 1.                                     Financial Statements.

THINK PARTNERSHIP INC.
CONSOLIDATED BALANCE SHEET
June 30, 2006 and December 31, 2005

 

		June 30, 2006			December 31, 2005
Assets
Current Assets
Cash and Cash Equivalents		$	2,854,891		$	2,609,114
Restricted Cash		804,284			828,804
Accounts Receivable Net of Allowance for Doubtful Accounts of $125,320 and $33,280		11,424,344			4,223,599
Notes Receivable — Related Party		280,175			280,175
Refundable Corporate Income Taxes		647,613			1,526,968
Deferred Tax Asset		0			205,361
Prepaid Expenses and Other Current Assets		659,905			734,544
Total Current Assets		16,671,212			10,408,565
Property and Equipment, net		3,790,337			3,253,078
Other Assets
Goodwill		78,183,223			32,959,252
Intangible Assets		22,077,117			10,300,248
Other Assets		568,190			573,176
Total Other Assets		100,828,530			43,832,676
Total Assets		$	121,290,079		$	57,494,319

 

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Liabilities and Shareholders’ Equity
Current Liabilities
Notes Payable —Current Portion		$	1,464,696		$	5,262
Note Payable — Related Party		135,197			429,761
Accounts Payable		7,969,911			3,443,603
Deferred Revenue		2,671,438			2,831,656
Client Prepaid Media Buys		155,509			774,877
Deferred Tax Liability		410,638			0
Embedded Put		1,206,070			0
Accrued Expenses and Other Current Liabilities		1,126,651			1,309,301
Total Current Liabilities		15,140,110			8,794,460
Long-Term Liabilities		15,817,986			10,052,329
Series A Redeemable Preferred — 26,500 shares authorized, issued and outstanding		18,444,896			0
Shareholders’ Equity
Preferred Stock, $.001 par value:
Authorized Shares — 5,000,000 — none issued or outstanding		0			0
Common Stock, $.001 par value:
Authorized Shares — 200,000,000
Issued Shares —52,413,695 as of June 30 and 38,222,030 as of December 31
Outstanding Shares —49,913,695 as of June 30 and 35,722,030 as of December 31		52,413			38,222
Additional Paid in Capital		77,482,182			42,375,320
Accumulated Deficit		(5,511,963		)	(3,320,016		)
Accumulated Other Comprehensive Income		404,455			94,004
Treasury Stock		(540,000		)	(540,000		)
Total Shareholders’ Equity		71,887,087			38,647,530
Total Liabilities and Shareholders’ Equity		$	121,290,079		$	57,494,319

 

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

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THINK PARTNERSHIP INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Six and Three Months Ended June 30, 2006 and 2005

 

		Six Months Ended						Three Months Ended
		2006			2005			2006			2005
Net Revenue		$	31,352,031		$	19,487,285		$	19,301,638		$	10,314,806
Cost of Revenue		11,361,382			6,765,676			8,007,502			3,539,602
Gross Profit		19,990,649			12,721,609			11,294,136			6,775,204
Operating Expenses
Selling, General and Administrative		19,157,428			11,288,834			10,100,860			6,020,587
Amortization of Purchased Intangibles		1,424,432			563,550			868,933			385,204
(Loss)Income from Operations		(591,211		)	869,224			324,343			369,413
Other Income(Expenses)
Interest Income		4,274			77,242			3,414			22,592
Interest Expense		(435,951		)	(34,495		)	(193,570		)	(23,407		)
Other Income, Net		(7,150		)	4,500			(9,092		)	4,500
(Loss)Income before Income Tax (Benefit) Expense		(1,030,038		)	916,471			125,095			373,098
Income Tax (Benefit) Expense		(394,298		)	352,969			52,195			148,154
Net (Loss) Income		(635,740		)	563,502			72,900			224,944
Other Comprehensive Income
Unrealized Gain on Securities		63,944			88,315			19,354			88,315
Foreign Currency Adjustment		246,507			0			296,077			0
Comprehensive (Loss)Income		$	(325,289	)	$	651,816		$	388,331		$	313,259
Net (Loss) Income Per Share
Basic		$	(0.05	)	$	0.02		$	(0.03	)	$	0.01
Fully Diluted		$	(0.05	)	$	0.01		$	(0.03	)	$	0.01
Weighted Average Shares(Basic)		43,423,722			32,999,634			46,776,865			33,323,369
Weighted Average Shares(Fully Diluted)		43,423,722			39,005,859			46,776,865			39,068,603

 

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

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THINK PARTNERSHIP INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
Six Months Ended June 30, 2006

 

		Common Shares		Common Stock			Additional Paid In Capital			Accumulated Deficit			Accumulated Other Comprehensive Income			Treasury Stock			Total Shareholders’ Equity
Balance at January 1, 2006		35,722,030		$	38,222		$	42,375,320		$	(3,320,016	)	$	94,004		$	(540,000	)	$	38,647,530
Exercise of Stock Options		264,200		264			62,408												62,672
Purchase Transactions, Net of issuance costs		13,927,465		13,927			28,778,913												28,792,840
Warrants and beneficial conversion feature associated with reedemable preferred stock placement							5,964,501												5,964,501
Other Comprehensive Income													40,686						40,686
Foreign Currency Adjustment													269,765						269,765
Stock Based Compensation Expense (FAS123R)							301,040												301,040
Dividends on redeemable preferred										(625,694		)							(625,694		)
Accretion of redeemable preferred										(930,513		)							(930,513		)
Net Loss, June 30, 2006										(635,740		)							(635,740		)
Balance at June 30, 2006		49,913,695		$	52,413		$	77,482,182		$	(5,511,963	)	$	404,455		$	(540,000	)	$	71,887,087

 

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

 

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THINK PARTNERSHIP INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2006 and 2005

 

		2006			2005
Operating Activities
Net (Loss)Income		$	(635,740	)	$	563,502
Adjustments to reconcile Net (Loss)Income to net cash provided by (used in) operating activities:
Depreciation and Amortization		2,600,654			826,705
Provision for Doubtful Accounts		231,967			377,196
Deferred Taxes		(518,910		)	270,676
Stock Based Compensation		301,040			0
Other		31,004			0
Change in operating assets and liabilities:
Restricted Cash		567,643			(146,917		)
Accounts Receivable		(1,175,443		)	(3,357,214		)
Prepaid Expenses and Other Assets		(99,110		)	(1,307,240		)
Refundable Corporate Income Taxes		879,355			0
Accounts Payable		140,121			1,783,547
Deferred Revenue		(895,225		)	1,003,788
Other Accrued Expenses and Current Liabilities		(1,668,265		)	(287,949		)
Net cash used in operating activities		(240,909		)	(273,906		)
Investing Activities
Purchases of property and equipment		(696,321		)	(988,757		)
Acquisition of Companies, net of cash acquired		(26,099,296		)	(15,027,348		)
Other Investing Activities		(908,718		)	(121,146		)
Net cash used in investing activities		(27,704,335		)	(16,137,251		)
Financing Activities
Principal Payments Made on Installment Notes Payable		(1,380,997		)	(450,913		)
Proceeds from Installment Notes		2,500,000			0
Net Proceeds from Line of Credit		3,289,063			1,480,000
Proceeds from Equity Transactions, net of issuance costs		23,216,344			18,475
Embedded Put		1,181,150			0
Dividends on redeemable preferred		(625,694		)	0
Net cash provided by financing activities		28,179,866			1,047,562
Effect of exchange rate changes on cash and cash equivalents		11,154			0
Net Change — cash and cash equivalents		245,777			(15,363,595		)
Cash and cash equivalents balance, January 1		2,609,114			17,160,520
Cash and cash equivalents balance, June 30		$	2,854,891		$	1,796,925
Supplemental Information
Interest Paid		$	435,951		$	34,595
Income Taxes (Refunded) Paid		$	(762,243	)	$	1,140,678

 

NonCash Investing and Financing Activities

On January 14, 2005, the Company purchased the stock of MarketSmart Advertising, Inc., Right Stuff, Inc. d/b/a Bright Idea Studio and CheckUp Marketing, Inc. (the “MarketSmart Companies”).  $3,000,000 of the purchase price was paid in shares of the Company’s common stock along with options valued at $150,000. The Company received net intangible assets of $6,528,041 and net tangible liabilities of ($191,671).

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On February 21, 2005, the Company purchased the stock of the Personals Plus, Inc.  $2,262,500 of the purchase price was paid in shares of the Company’s common stock along with options valued at $67,800.  The Company received net intangible assets of $5,059,455 and net tangible liabilities of ($390,071).

On February 21, 2005, the Company purchased the stock of the Ozona Online Networks, Inc. $400,000 of the purchase price was paid in shares of the Company’s common stock along with options valued at $67,800.  The Company received net intangible assets of $924,932 and net tangible liabilities of ($134,639).

On March 11, 2005, the Company purchased the stock of the Kowabunga! Marketing, Inc. $750,000 of the purchase price was paid in shares of the Company’s common stock. The Company received net intangible assets of $1,599,990 and net tangible liabilities of ($312,816).

On April 22, 2005, the Company purchased the stock of the PrimaryAds, Inc. The Company received net intangible assets of $11,091,132 and net tangible liabilities of ($818,802).

On January 20, 2006, the Company purchased the members’ interests of Morex Marketing Group, LLC.  $12.05 million of the purchase price was paid in shares of the Company’s common stock along with options valued at $75,600. The Company received net intangible assets of $21,308,996 and net tangible assets of $477,772.

On April 5, 2006, the Company purchased stock of Litmus Media, Inc.  $6.5 million of the purchase price was paid in shares of the Company’s common stock along with options valued at $79,297. The Company received net intangible assets of $14,126,696 and net tangible liabilities of $734,272.

On April 27, 2006, the Company purchased the stock of WebDiversity, Ltd.  $1.0 million of the purchase price was paid in shares of the Company’s common stock along with options valued at $55,800. The Company received net intangible assets of $2,147,178 and net tangible assets of $95,753.

On May 23, 2006, the Company purchased the stock of iLead Media, Inc.  $9.2 million of the purchase price was paid in shares of the Company’s common stock along with options valued at $90,450. The Company received net intangible assets of $19,954,300 and net tangible liabilities of $1,244,990.

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

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Think Partnership Inc.
Footnotes to Consolidated Financial Statements
June 30, 2006 and 2005

Basis of Presentation

The consolidated statements include the accounts of the Company and its subsidiaries.  All inter-company accounts and transactions have been eliminated in consolidation.

The accompanying condensed consolidated financial statements are unaudited.  These financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such SEC rules and regulations; nevertheless, the Company believes that the disclosures are adequate to make the information presented not misleading.  These financial statements and the notes hereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2005, which was filed March 31, 2006. In the opinion of the Company’s management, the condensed consolidated financial statements for the unaudited interim periods presented include all adjustments, including normal recurring adjustments necessary to fairly present the results of such interim periods and the financial position as of the end of said period.  The results of operations for the interim period are not necessarily indicative of the results for the full year.

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses in the reporting period. The Company regularly evaluates estimates and assumptions related to allowances for doubtful accounts, goodwill and purchased intangible asset valuations and deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and on various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  The actual results experienced by the Company may differ materially and adversely from management’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

Redeemable Preferred Stock and Warrants

On April 5, 2006, the Company completed the sale of 26,500 shares of $1,000 stated value Series A Convertible Preferred Stock (liquidation preference $33.1 million) and warrants to purchase 5.3 million shares of the Company’s common stock for gross proceeds of $26.5 million ($24.7 million, net of direct financing costs). Pursuant to the Certificate of Designation, Series A Convertible Preferred Stock is convertible into shares of the Company’s common stock at a fixed conversion rate of $2.00 and, if not converted by March 20, 2008, is redeemable for cash of $2.00 per share. Series A Convertible Preferred Stock is also redeemable for cash upon a change in control or certain other events at an amount equal to 110% of the greater of (i) the stated value or (ii) the number of indexed shares at the closing market price on the date of the redemption triggering event. The Series A Convertible Preferred Stock is non-voting and carries a 10% cumulative dividend feature, reduced to 6% upon the registration of the underlying shares, which were registered on August 1, 2006. Detachable warrants issued in connection with the Series A Convertible Preferred Stock financing arrangement have a strike price of $2.50 and a term of five-years. Common shares indexed to the Series A Convertible Preferred Stock and warrants are subject to the conditions of a freestanding registration rights agreement that provides for monthly liquidating damages of 1.0% (not to exceed an aggregate of 10.0%) for non-filing, non-effectiveness and loss of effectiveness.

The Company has evaluated all freestanding instruments and embedded features embodied in the Series A Convertible Preferred Stock financing arrangement in accordance with current accounting standards for complex financing transactions. The following points illustrate the key considerations in the Company’s evaluation:

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·                  The terms and features of the Series A Convertible Preferred Stock resulted in the Company’s conclusion that the instrument was more akin to a debt security than an equity security. Therefore, embedded features that met the definition of derivative financial features were evaluated for their clear and close relationship with a debt instrument. Significant features included conversion features; contingent redemption (put) features and interest features. While conversion features, such as those included in the Series A Convertible Preferred Stock, are generally not clearly and closely related to debt instruments, the Company was afforded the “Conventional Convertible” exemption from derivative accounting. While put features and interest features are generally considered clearly and closely related to debt instruments, the Company determined that terms of the redemption put feature, in fact, resulted in its treatment as a derivative financial feature, subject to bifurcation from the hybrid instrument.

·                  The terms and features of the freestanding warrants and registration rights were evaluated under the guidance for equity classification set forth in EITF 00-19, Accounting for Derivative Financial Instruments Indexed to a Company’s Own Stock and EITF 05-04, The Effect of a Liquidating Damages Clause on a Freestanding Financial Instrument Subject to EITF 00-19. For purposes of this evaluation, the Company elected to consider the warrants and registration rights on a combined basis (View C; EITF 05-04). As a result, the Company concluded that the combined arrangement did not rise to an uneconomic settlement. In addition, all other indicators of equity provided in EITF 00-19 were present. Therefore, the warrants were afforded equity classification.

The proceeds from the Series A Convertible Preferred Stock financing arrangement were allocated to the Series A Convertible Preferred Stock ($22.3 million) and warrants ($4.2 million) on a relative fair value basis. Following this allocation, approximately $1.2 million was allocated from the Series A Convertible Preferred Stock to the fair value of the put option referred to above. The Company used the following valuation techniques to value the instruments:

·                  Series A Convertible Preferred Stock was valued as a forward contract, enhanced by a conversion option. The forward element of the aggregate value was determined using the present value of cash flows. The conversion option component was valued using the Flexible Monte Carlo technique, since that technique embodies all assumptions necessary for the fair value of bifurcated features that are associated with debt instruments (credit risk, interest risk and exercise behaviors).

·                  Warrants were valued using the Black-Scholes-Merton valuation technique, since that technique embodies all assumptions necessary for the fair value of warrants (expected volatility, expected term, and risk-free interest).

·                  The put feature was valued using the present value of cash flows arising from multiple, probability-weighted outcomes. Management used its best estimate in developing probability scenarios. Fair value adjustments to the put feature will result in charges or credits to income in future periods. Such adjustments will arise from (i) changes in estimates underlying the probability-weighted model and (ii) the recognition of the time value (amortization component). The Company recorded a fair value adjustment of ($24,920) during the period from inception of the financing to June 30, 2006.

As a result of the aforementioned allocations, the Series A Convertible Preferred Stock contained a beneficial conversion feature amounting to approximately $1.7 million. A beneficial conversion feature arises when the effective conversion price (remaining allocated proceeds divided by the number of indexed shares) is lower than the trading market price, using an intrinsic approach, on the effective date of the transaction. The beneficial conversion feature was classified as a component of equity.

Due to the contingent cash redemption features, the Series A Convertible Preferred Stock is required to be recorded outside of stockholders’ equity. The carrying value of Series A Convertible Preferred Stock will be accreted to its redemption value over the remaining redemption period through periodic charges to retained earnings using the effective method. Preferred stock dividends and accretions, which are reported as a reduction of net income for purposes of earnings per share, amounted to approximately $1.6 million.

Stock-based compensation plans

Prior to January 1, 2006, the Company accounted for employee stock-based awards under the intrinsic value method, which followed the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock

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Issued to Employees, and related Interpretations. Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standard No. 123R, “Share-Based Payment” (“SFAS 123R”). SFAS 123R requires measurement of compensation cost for employee stock-based awards based upon fair value over the requisite service period for awards expected to vest. Furthermore, under SFAS 123R, liability based awards are recorded at fair value through their settlement date.

Equity incentive plans and change in accounting policy

Pursuant to the provisions of SFAS 123R, the Company applied the modified-prospective transition method. Under this method, the fair value provision of SFAS 123R is applied to new employee share-based payment awards granted or awards modified, repurchased or cancelled after December 31, 2005. Measurement and attribution of compensation cost for unvested awards at December 31, 2005, granted prior to the adoption of SFAS 123R, are recognized based upon the provisions of SFAS No. 123, Accounting for Stock-Based Compensation(“SFAS 123”), after adjustment for estimated forfeitures. Accordingly, SFAS 123R no longer permits pro-forma disclosure for income statement periods after December 31, 2005 and compensation expense will be recognized for all share-based payments based on grant-date fair value.

The fair value of restricted stock units and the fair value of stock options are determined using the Black-Scholes valuation model, which is consistent with the valuation techniques previously utilized for options in the footnote disclosures required under SFAS No. 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure. The Company recorded stock-based compensation expense for equity incentive plans of $301,040 and $138,506 for the six and three months ended June 30, 2006, respectively. Had SFAS 123R been effective for the comparative periods, stock-based compensation expense for equity incentive plans of $584,253 and $216,516 would have been recorded for the six and three months ended June 30, 2005, respectively.

Revenue Recognition for acquisitions during the period

Marketing Services Segment

Morex Marketing Group

Revenue is recognized when the names lists are delivered to the customer.

Catamount Group

Substantially all of the Company’s revenue is recorded at the net amount of its gross billings less pass-through expenses charged to a customer. In most cases, the amount that is billed to customers exceeds the amount of revenue that is earned and reflected in our financial statements, because of various pass-through expenses. In compliance with EITF Issue No.99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, the Company assesses whether it or a third-party supplier is the primary obligor. The Company has evaluated the terms of its customer agreements and considered other key indicators such as latitude in establishing price, discretion in supplier selection and credit risk to the vendor as part of this assessment. Accordingly, the Company generally records revenue net of pass-through charges.

The Company currently has three types of sales transactions:

·     Full use sale: The customer is billed for all name list databases that are delivered regardless of how many names are accepted by the customer. The Company recognizes revenue at the time of delivery of the names.

·     Net minimum plus sale: The customer is required to accept and pay for a minimum number of names delivered by the Company. The Company recognizes revenue at the time of delivery of the names to the extent of the minimum number of names the customer must accept. The Company will recognize additional revenue upon acceptance of names, beyond the minimum, by the customer.

·     Net accepted sale: The customer takes delivery of a certain number of names and will only be obligated to pay for the number of names it accepts. The Company recognizes revenue when the customer notifies the Company of the number of names accepted.

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Litmus Media, Inc. and Web Diversity, Ltd.

In accordance with Emerging Issues Task Force Issue 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent” (“EITF 99-19”), the company records as revenue the gross amount received from advertisers and the amount paid to the publishers placing the advertisements as cost of sales.

Litmus generates additional revenue from company owned and affiliate networks are based on a “per click” basis and is recognized once the action is taken.

iLead Media, Inc.

The Company recognizes revenue from online membership sales only after the member’s credit card is charged successfully and the service date of making membership benefits available has taken place.   For lead sales, the Company’s revenue recognition varies depending on the arrangement with the purchaser. Where the arrangement provides for delivery only, revenue is recognized when the lead information is provided to the purchaser.  Where the arrangement provides for compensation based on sales generated by the purchaser from the lead, the Company recognizes revenue in the period that the purchasing company makes a sale that was derived from the lead.  For product sales, the company recognizes revenue when the member’s credit card is successfully charged and the goods shipped.

Property and Equipment

Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are expensed using the straight-line method over each asset’s estimated remaining useful life, ranging from four to seven years. Depreciation of leasehold improvements is computed using the shorter of the lease term or the economic life using the straight line method.  The carrying value of property and equipment at June 30, 2006 was:

 

 

Goodwill and Purchased Intangible Assets

Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), the Company tests goodwill for impairment at the reporting unit level (operating segment or one level below an operating segment) annually or more frequently if the Company believes indicators of impairment exist. The performance of the test involves a two-step process.  The first step of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying value, including goodwill.  The Company generally determines the fair value of its reporting units using the income approach methodology of valuation that includes the discounted cash flow method as well as other generally accepted valuation methodologies.  If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the Company performs the second step of the goodwill impairment test to determine the amount of impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill.

The Company amortizes intangible assets with definite useful lives, which result from acquisitions accounted for under the purchase method of accounting, using the straight-line method over their estimated useful lives.

 

10

 

Stock-based compensation plans

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (R), “Share-Based Payment”, and began recognizing compensation expense in its Consolidated Statements of Operations as a selling, general, and administrative expense, for its stock option grants based on the fair value of the awards.  Prior to January 1, 2006, the Company accounted for stock option grants under the recognition and measurement provisions of APB Opinion 25, “Accounting for Stock Issued to Employees”, and related Interpretations, as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation”.  No stock-based compensation expense was reflected in net income prior to adopting SFAS 123 (R) as all options were granted at an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. SFAS 123 (R) was adopted using the modified prospective transition method.  Under this transition method, compensation cost recognized in the periods after adoption includes:  (i) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, and (ii) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123 (R).  Results from prior periods have not been restated.  As a result of adopting SFAS 123 (R), the Company’s income before income taxes for the six months and three months ended June 30, 2006 are $301,040 and $138,506 lower, respectively, than if it had continued to account for share-based compensation under APB 25.  The Company’s net income for the six and three months ended June 30, 2006 are $186,645 and $85,874 lower, respectively, than if it had continued to account for share-based compensation under APB 25.

Prior to the adoption of SFAS 123 (R), the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Condensed Consolidated Statement of Cash Flows. SFAS 123 (R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options to be classified as financing cash flows.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to options granted under the Company’s stock option plans for all periods presented.  For purposes of this pro forma disclosure, the value to the options is estimated using a Black-Scholes-Merton option pricing model and amortized to expense over the options’ vesting periods.

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		Six Months Ended						Three Months Ended
		June 30						June 30
		2006			2005			2006			2005
Net (Loss) Income Reported		$	(635,740	)	$	563,502		$	72,900		$	224,944
Add:
Total stock-based compensation expense included in reported net income, net of related tax effects		301,040			0			138,506			0
Deduct:
Total stock-based compensation expense determined under a fair value based method, net of related tax effects		(301,040		)	(344,709		)	(138,506		)	(127,744		)
SFAS No. 123 R pro forma net (loss) income		$	(635,740	)	218,793			$	72,900		$	97,200
Pro forma (loss)earnings per common share
Basic		$	(0.05	)	$	0.01		($0.03		)	$	0.00
Fully Diluted		$	(0.05	)	$	0.01		($0.03		)	$	0.00
(Loss) Earning per common share, as reported
Basic		$	(0.05	)	$	0.02		($0.03		)	$	0.01
Fully Diluted		$	(0.05	)	$	0.01		($0.03		)	$	0.01

 

At June 30, 2006, the aggregate intrinsic value of all outstanding options was $5,185,446 with a weighted average remaining contractual term of 6.51 years, of which 3,844,958 of the outstanding options are currently exercisable with an aggregate intrinsic value of $5,185,446, a weighted average exercise price of $0.63 and a weighted average remaining contractual term of 6.06 years.  The total intrinsic value of options exercised during the quarter ended June 30, 2006 was $329,680.  The total compensation cost at June 30, 2006 related to non-vested awards not yet recognized was $758,130 with an average expense recognition period of 1.55 years.

The Company estimates the fair value of all stock option awards as of the grant date by applying the Black-Scholes-Merton option pricing model.  The use of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense and include the expected life of the option, stock price volatility, risk-free interest rate, dividend yield, exercise price, and forfeiture rate.  Under SFAS 123 (R), forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period.  The forfeiture rate, which is estimated at a weighted average of 9.25 percent of unvested options outstanding, is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.  Under SFAS 123 and APB 25, the Company elected to account for forfeitures when awards were actually forfeited and reflect the forfeitures as a cumulative adjustment to the pro forma expense.

In accordance with SFAS 123 (R), the fair values of options granted prior to adoption and determined for purposes of disclosure under SFAS 123 have not been changed.  The fair value of options granted prior to adoption of SFAS 123 (R), of which a portion is unvested, was estimated assuming the following weighted averages:  expected life of three years, dividend yield of 0.0 percent for grants in 2005 and 2004 (no dividend payments), risk-free interest rate of 4.48 percent, and expected volatility of 85.2 percent. Expected volatility is based on the historical volatility of the Company’s common stock over the period commensurate with or longer than the expected life of the options.

Contingent Consideration

In connection with certain of the Company’s acquisitions, if certain future internal performance goals are later satisfied, the aggregate consideration for the respective acquisition will be increased.  Any additional consideration paid will be allocated to goodwill and stock-based compensation expense. The measurement, recognition and allocation of contingent consideration are accounted for using the following principles:

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Measurement and Recognition

In accordance with SFAS No. 141, Business Combinations (“SFAS 141”) contingent consideration is recorded when a contingency is satisfied and additional consideration is issued or becomes issuable. The Company records the additional consideration issued or issuable in connection with the relevant acquisition when a specified internal performance goal is met.

Amount Allocated to Goodwill

In accordance with EITF Issue No. 95-8, Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination (“EITF 95-8”) and FIN 44, the portion of additional consideration issuable to holders of unrestricted (i.e., not subject to risk of forfeiture) common stock and fully vested options as of the acquisition date is recorded as additional purchase price, as the consideration is unrelated to continuing employment with the Company. Such portion is allocated to goodwill.

Amount Allocated to Stock-Based Compensation Expense

In accordance with EITF 95-8, the value associated with additional consideration related to stock or options that vest between the acquisition date and the date at which the  contingency  is satisfied is recorded as an immediate charge to stock-based  compensation  expense at the time of vesting  because the consideration is related to continuing employment with the Company.

Net Income (Loss) Per Common Share.

Net income (Loss) per share (basic) is calculated by dividing net income by the weighted average number of shares of common stock outstanding during the year. Net income (Loss) per share (diluted) is calculated by adjusting outstanding shares, assuming any dilutive effects of options and warrants using the treasury stock method.

		Six months ended June 30						Three months ended June 30
		2006			2005			2006			2005
Basic
Average common shares outstanding		43,423,722			32,999,634			46,776,865			33,323,369
Net (Loss) Income		$	(635,740	)	$	563,502		$	72,900		$	224,944
Dividends on redeemable preferred		(625,694		)	0			(625,694		)	0
Accretion of redeemable preferred		(930,513		)	0			(930,513		)	0
Net (Loss) Income allocable to common shareholders		$	(2,191,947	)	$	563,502		$	(1,483,307	)	$	224,944
Net (Loss) Income Per Common Share		$	(0.05	)	$	0.02		$	(0.03	)	$	0.01
Fully Diluted
Average common shares outstanding		43,423,722			32,999,634			46,776,865			33,323,369
Stock Options and other contingently issuable shares		11,112,343			6,006,225			17,227,362			5,745,234
Antidilutive stock options and contingently issuable shares		(11,112,343		)	0			(17,227,362		)	0
Average common shares outstanding assuming dilution		43,423,722			39,005,859			46,776,865			39,068,603
Net (Loss) Income Per Common Share		$	(0.05	)	$	0.02		$	(0.03	)	$	0.01

 

 

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Impact of New Accounting Standards Recent Accounting Pronouncements

SFAS No. 123 (Revised 2004), Share-Based Payment, issued in December 2004, is a revision of FASB Statement 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. The Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123 (Revised 2004) 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 (with limited exceptions) with the cost recognized over the period during which an employee is required to provide service in exchange for the award. This statement is effective as of the beginning of the first interim or annual reporting period of the Company’s first fiscal year that begins on or after December 15, 2005 and the Company adopted the standard in the first quarter of fiscal 2006.

On March 29, 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107 (SAB107) regarding the Staff’s interpretation of SFAS 123(R). This interpretation expresses the views of the Staff regarding the interaction between SFAS 123(R) and certain SEC rules and regulations and provides the Staff’s views regarding the valuation of share-based payment arrangements by public companies. In particular, this SAB provides guidance related to share-based payment transactions with non-employees, the transition from nonpublic to public entity status, valuation methods, the accounting for certain redeemable financial instruments issued under share-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, first-time adoption of SFAS 123(R) in an interim period, capitalization of compensation cost related to share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS 123(R), the modification of employee share options prior to adoption of SFAS 123(R) and disclosures in Management’s Discussion and Analysis subsequent to adoption of SFAS 123(R). The Company adopted SAB 107 in connection with its adoption of SFAS 123(R).

In May 2005, FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle.  The statement provides guidance for determining whether retrospective application of a change in accounting principle is impracticable.  The statement also addresses the reporting of a correction of error by restating previously issued financial statements.  SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 14, 2005.  The Company adopted SFAS No. 154 in the first quarter of 2006.

In February 2006, the FASB issued FASB Statement No. 155, which is an amendment of FASB Statements No. 133 and 140.  This Statement; (a) permits fair value re-measurement for any  hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation,  (b) clarifies which interest-only strip and principal-only strip are not subject to the requirements of Statement 133, (c) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, (d) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, (e) amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.  This Statement is effective for financial statements for fiscal years beginning after September 15, 2006.  Earlier adoption of this Statement is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued any financial statements for that fiscal year.  The Company has not determined the impact, if any, that the adoption of this statement will have on its consolidated financial position or results of operations. 

In June 2006, the Emerging Issues Task Force (EITF) issued Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation)” (“EITF 06-3”).  EITF 06-3 is effective for fiscal years beginning after December 15, 2006.  The Company has not determined the impact, if any, that the adoption of this EITF will have on its consolidated financial position or results of operations.

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Intangible Assets and Goodwill

Since 2004, the Company has entered into fourteen purchase agreements in which it allocated a total of $102.9 million of the purchase price to intangible assets.  The following is a schedule of the Company’s intangible assets, by segment, as of June 30, 2006:

Marketing Services Segment

										Net
				Initial			Accumulated			Carrying
		Term		Value			Amortization			Value
Employment Agreements		4 Years		$	1,560,854		$	306,381		$	1,254,473
Customer Relations		5-8 Years		9,190,000			1,146,848			8,043,152
Supplier Relations		3 Years		32,000			1,778			30,222
Software Tools		5 Years		175,000			72,917			102,083
Database-Names ****		1-2 Years		2,712,923			600,979			2,111,944
Trademarks		Indefinite		1,821,235			0			1,821,235
Goodwill				46,824,833			0			46,824,833
Totals				$	62,316,845		$	2,128,903		$	60,187,942

 

Technology Services Segment

										Net
				Initial			Accumulated			Carrying
		Term		Value			Amortization			Value
Employment Agreements		3-4 Years		$	850,011		$	210,391		$	639,620
Website Code and Development		5 Years		4,240,000			323,105			3,916,895
Customer Relations		5 Years		400,000			18,889			381,111
Tradenames		Indefinite		390,000			0			390000
Goodwill				10,771,757			0			10,771,757
Totals				$	16,651,768		$	552,385		$	16,099,383

 

Consumer Services Segment

										Net
				Initial			Accumulated			Carrying
		Term		Value			Amortization			Value
Employment Agreements		3-4 Years		$	181,294		$	39,274		$	142,020
Customer Relations		6 months to 5 Years		494,000			174,708			319,292
Website Code		5 Years		2,161,462			516,371			1,645,091
Client Lists		7 Years		416,000			98,738			317,262
Vendor Relations		3 Years		82,000			26,194			55,806
Reference Materials		4 Years		571,000			136,802			434,198
Tradenames		Indefinite		472,713			0			472,713
Goodwill				20,586,633			0			20,586,633
Totals				$	24,965,102		$	992,087		$	23,973,015

 

COMPANY TOTALS

**** Amortization of Database Names included in cost of sales.

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The Company’s amortization expense over the next five years is as follows:

 

Long Term Liabilities

The long term liabilities consisted of the following as of June 30, 2006:

 

Wachovia Line of Credit

On January 19, 2006, the Company entered into a loan agreement with Wachovia Bank, National Association (“Wachovia”). Pursuant to the loan agreement, on January 20, 2006, the Company borrowed $15 million from Wachovia, evidenced by a revolving credit promissory note (the “Revolving Credit Note”), and $2.5 million, evidenced by a term promissory note (the “Term Note”). The Company’s obligations under the Loan Agreement and the Notes are secured by a first priority lien, in favor of Wachovia, on all of the assets of the Company, including the stock of each of the Company’s operating subsidiaries and are subject to certain financial covenants. Further, each of the Company’s operating subsidiaries (each a “Guarantor”) has guaranteed the performance of the Company’s obligations under the Loan Agreement and the Notes and the guaranty is secured by a first priority lien on each Guarantor’s assets. Interest on the unpaid principal balance of the Revolving Credit Note accrues at the LIBOR Market Index Rate plus 2.10% as such rate may change from day to day. Amounts due under the Revolving Credit Note are payable in consecutive monthly payments of accrued interest only until maturity at which time all principal and any accrued but unpaid interest is due and payable. The Revolving Credit Note matures on January 19, 2009. Interest on the unpaid principal balance of the Term Note accrues at the LIBOR Market Index Rate plus 2.15% as such rate may change from day to day. Amounts due under the Term Note are payable in 12 consecutive monthly payments of equal principal in the amount of $208,333 plus accrued interest with the final payment due on January 19, 2007, the Term Note’s maturity.

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Acquisitions

On January 20, 2006, the Company acquired 100% of the membership interests of Morex Marketing Group, LLC, a New York limited liability company (“Morex”), an online marketing company specializing in gathering expectant parents as well as new parents names and presenting them with baby related offers based in New York. As consideration for the acquisition, the Company paid to the members of Morex, an aggregate of $9,438,778 in cash and issued to them an aggregate of 5,527,606 shares of common stock, valued at $2.18 per share. Further, the members of Morex may receive earnout payments (each, an “earnout payment”) to be paid in 2006, 2007, 2008 and 2009. Each year’s earnout payment shall be equal to the excess over between (A) four times the aggregate earnings of Morex for the previous calendar year and (B) the aggregate amount of merger consideration previously paid by the Company (including any earnout payments); provided, however, in no event shall the total aggregate merger consideration (including the earnout payments) payable to the members of Morex exceed $50 million. Each earnout payment, to the extent earned, will be paid 50% in cash and 50% in shares of the Company’s common stock valued at the average of the closing prices for shares of the Company’s common stock on the last day on which such shares were traded for each quarter of the calendar year on which the particular earnout payment is based, provided that, in the Company’s sole discretion, the Company may pay to the members in cash any earnout payment that is otherwise required to be paid in shares of common stock (“earnout stock”), if the delivery of shares of the common stock would cause the total merger consideration paid by the Company in the form of common stock to exceed 7,674,305 shares. In addition, the Company issued to each the members of Morex that entered into employment agreements at the closing, warrants to purchase an aggregate of 35,000 shares of Company common stock at $3.50 per share.  The Company entered into this transaction to expand its capabilities in its Marketing Services segment by adding lead generation and list management enterprises.

On April 5, 2006, the Company acquired 100% of the voting common stock of Litmus Media, Inc. Based in Kansas City, Missouri, Litmus has built click fraud protected advertising distribution technologies for the performance-based advertising, search marketing, and e-retailing industries. As consideration for the acquisition, the Company paid to the shareholders of Litmus an aggregate of $6,500,000 in cash, and issued an aggregate 3,250,000 shares of the Company’s common stock valued at $2.00 per share. In addition, the Company issued to certain shareholders of Litmus warrants to purchase an aggregate of 90,000 shares of the Company’s common stock, and established a pool of warrants to purchase up to 40,000 shares of the Company’s common stock to be issued to certain employees of Litmus. Further, the shareholders of Litmus may receive aggregate earnout payments of up to $19,950,000 based on the aggregate pre-tax earnings of Litmus for the first 12 calendar quarters following the closing. To the extent earned, up to $10,500,000 of the earnout payment will be paid in shares of the Company’s common stock valued at the average closing price per share of the last 30 trading days of the calendar quarter preceding the earnout payment and up to $9,450,000 will be paid in cash. In addition, in the event the shareholders of Litmus are entitled to any earnout payments, the Company agreed to capitalize a bonus pool for the pre-acquisition employees of Litmus in an amount not to exceed $1,050,000.  The company entered into this transaction to expand its technological holdings.

On April 27, 2006, the Company acquired 100% of the voting common stock of Web Diversity Ltd, a United Kingdom company in the business of paid search management and organic search. As consideration for the acquisition, the Company paid to the sole shareholder of Web Diversity $1 million in cash and issued to him 500,000 shares of the Company’s common stock, valued at $2.00 per share. The Company placed all of the shares of common stock in escrow as security for the shareholder’s obligation to return a portion of the stock consideration in the event that Web Diversity’s audited pre-tax earnings for any four consecutive calendar quarters during the 12 calendar quarter period beginning on July 1, 2006 and ending June 30, 2009 is less than $1 million. Further, the shareholder of Web Diversity may receive a cash earnout payment of up to $2 million based on pre-tax earnings of Web Diversity during the 12 calendar quarter period beginning on July 1, 2006. The Company granted to the shareholder of Web Diversity certain registration rights with respect to the shares of the Company’s common stock issued in connection with the acquisition. In addition, the Company issued to the shareholder warrants to purchase an aggregate of up to 90,000 shares of the Company’s common stock.  The company entered into this agreement to expand its search engine optimization and pay per click opportunities in Europe and Asia.

On May 23, 2006, the Company acquired 100% of the voting common stock of iLead Media, Inc., a Utah corporation (“iLead”). iLead is engaged in the business of online sales lead generation.  The Company paid to the shareholders of iLead, an aggregate of $9,206,720 in cash and issued to them an aggregate of 4,649,859 shares of the Company’s common stock valued at $1.98 per share. Further, the shareholders of iLead may receive earnout payments of up to $18 million in the aggregate based on the aggregate pre-tax earnings of iLead for the first 12

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calendar quarters following the closing. To the extent earned, up to $9 million of the earnout payment will be paid in shares of the Company’s common stock valued at the average closing price per share for the last five trading days of the first twelve calendar quarters; and up to $9 million will be paid in cash, as such amount may be reduced by the bonus pool amount described herein. To the extent earned, the Company agreed to contribute to iLead cash in an amount equal to 5% of the earnout payment which will be used to fund a bonus pool for the pre-acquisition employees of iLead. Any amounts contributed to the bonus pool will serve to reduce the amount of the cash portion of the earnout payment on a dollar-for-dollar basis. Additionally, the Company issued to the shareholders of iLead warrants to purchase an aggregate of up to 135,000 shares of the Company’s common stock. The shareholders will also be entitled to an additional cash payment of $250,000 if, at any time during the five month period after the closing, iLead’s unrestricted cash exceeds certain targets and at the same time its accounts receivable and cash exceed its liabilities by at least $1.00.  The Company entered into this agreement to expand its lead generation capabilities.

The results of operations for the above acquisitions are included from the date of acquisition in the consolidated financial statements of the Company.

The Company calculated the fair value of the tangible and intangible assets acquired to allocate the purchase price in accordance with SFAS 141. Based upon that calculation, the purchase price for the acquisition was allocated as follows:

		Net Assets			Goodwill and
		(Liabilities)			Purchased			Deferred Tax			Total
		Assumed			Intangibles			Liabilities			Consideration
Morex Marketing Group, LLC		$	477,772		$	21,308,996		0			$	21,786,768
Litmus Media, Inc.		$	958,097		$	14,126,696		$	(1,692,369	)	$	13,392,424
Web Diversity, Ltd.		$	142,552		$	2,147,178		$	(46,799	)	$	2,242,931
iLead Media, Inc.		$	386,885		$	19,954,300		$	(1,631,875	)	$	18,709,310

 

The Company is in the process of valuing certain intangible assets related to these acquisitions and thus the allocation of the purchase price has not been completed.

Accounting for Contingent Consideration

In connection with its prior acquisitions, the merger consideration may be increased as the former shareholders of each entity are entitled to earn payments in cash or stock contingent upon the satisfaction of certain future internal performance goals set forth in the applicable merger agreement.  Future consideration which may be earned by the former shareholders of each entity will be treated as additional purchase price and allocated to goodwill.  The respective maximum amounts of such future consideration which may be earned by the former shareholders of the acquired entities are as follows:

		Maximum			Maximum
		Future			Future			Maximum
		Cash			Stock			Earnout
		Consideration			Consideration			Consideration
Acquired Entity
WebCapades		$	500,000		$	—		$	500,000
Ozline		200,000			—			200,000
PPI		450,000			—			450,000
KowaBunga!		2,250,000			2,700,000			4,950,000
PrimaryAds		3,000,000			13,000,000			16,000,000
Real Estate School Online		250,000			250,000			500,000
Vintacom Holdings, Inc.		****
Morex Marketing Group LLC		14,256,019			14,256,019			28,512,038
Litmus Media, Inc.		9,450,000			10,500,000			19,950,000
WebDiversity, Ltd.		2,000,000			—			2,000,000
iLead Media, Inc.		9,000,000			9,000,000			18,000,000
Totals		$	41,356,019		$	49,706,019		$	91,062,038

 

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As of June 30, 2006, none of the above amounts have been accrued as they have not been earned.

In addition, the former shareholders of the above acquisitions were granted a total of 900,000 options which if and when vested will be charged to stock based compensation expense (see stock-based compensation).

**** The shareholders of Vintacom may receive an aggregate earnout payment equal to the excess over (A) four times the average quarterly pre-tax earnings of Vintacom for the first twelve full calendar quarters following the closing, and (B) $1.1 million U.S.  The earnout payment, to the extent earned, will be paid 50% in cash and 50% in shares of Company common stock

Subsequent Events

On July 24, 2006, the Company’s Registration Statement on Form SB-2 was declared effective by the Securities and Exchange Commission.  The Registration Statement relates to the offer and sale of up to 23,625,301 shares of the Company’s common stock, all of which may be sold from time to time by the selling shareholders described therein. Of the shares being offered thereby, 5,309,049 shares relate to shares issuable on the exercise of warrants and the remaining 18,316,252 shares relate to shares presently owned by the selling shareholders described therein.

On August 1, 2006, the Company’s Registration Statement on Form S-3 was declared effective by the Securities and Exchange Commission.  The Registration Statement relates to the offer and sale of up to 53,281,511 shares of the Company’s common stock, $0.001 par value, all of which may be sold from time to time by the selling shareholders described therein.  Of the shares being offered, 6,625,000 shares are issuable on the exercise of warrants covering 125% of the number of shares of common stock issuable upon exercise of the warrants purchased in connection with the Company’s placement of Series A convertible preferred stock, 13,250,000 shares are issuable upon conversion of Series A convertible preferred stock, 20,880,611 shares are issuable if earnout conditions are satisfied pursuant to the terms of agreements governing the Company’s prior purchases of certain of the Company’s subsidiaries.  The remaining 12,525,900 shares are presently owned by the selling shareholders described therein.

On August 3, 2006, the Company entered into an employment agreement with Mr. Mitchell pursuant to which Mr. Mitchell will continue to serve as the Company’s president and chief executive officer.  The employment agreement supercedes and replaces Mr. Mitchell’s August 19, 2004 employment agreement, as amended on August 19, 2005.  Further, in connection with entering into the employment agreement, on August 3, 2006, the Company (i) agreed to pay to Mr. Mitchell a $150,000 signing bonus in immediately available funds and (ii) issued to Mr. Mitchell options to purchase 400,000 shares of the Company’s common stock, at an exercise price of $2.19 per share with one-third of the options vesting on each of the first, second and third year anniversaries of the date of issuance.

The employment agreement provides for (i) a five year term with automatic one-year renewals beginning on the fourth year anniversary of the agreement, unless at least sixty days prior to such anniversary, either party notifies the other of its intent not to renew; (ii) base salary equal to $485,000 per annum during the term of the agreement; (iii) a $10,000 per year allowance for a car, additional insurance or other benefits as determined by Mr. Mitchell; (iv) an annual cash bonus as determined by the Company’s board of directors, provided that during the term of the agreement,  Mr. Mitchell’s annual salary, when combined with the annual cash bonus must be higher than the annual salary and annual cash bonus paid to any other employee of ours during the such period; (v) a non-competition and non-solicitation covenant during the term of the employment agreement and for a period of six months thereafter; (vi) other benefits that are generally available to the Company’s executive management; and (vii) termination of the employment agreement (A) by Mr. Mitchell at any time upon not less than ninety-day prior written notice to us, (B) by the Company for “cause” or the disability of Mr. Mitchell, (B) automatically upon the death of Mr. Mitchell, or (C) by Mr. Mitchell for “good reason”.

Pro Forma Financial Information (Unaudited)

The pro forma results are not indicative of the results of operations had the acquisition taken place at the beginning of the year (or future results of the combined companies).

These pro forma statements of operations include the activities of all acquisitions as if they had occurred on January 1, 2005.

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		Six Months Ended						Six Months Ended
		June 30, 2006						June 30, 2005
					Pro Forma						Pro Forma
		Historical			Combined			Historical			Combined
Revenues		$	31,352,031		$	43,843,675		$	19,487,285		$	41,036,902
Net (Loss) Income		$	(635,740	)	$	(57,558	)	$	563,502		$	5,499,520
Net (Loss) Income Per Common Share
Basic		$	(0.05	)	$	(0.03	)	$	0.02		$	0.07
Fully Diluted		$	(0.05	)	$	(0.03	)	$	0.01		$	0.07

 

		Three Months Ended						Three Months Ended
		June 30, 2006						June 30, 2005
					Pro Forma						Pro Forma
		Historical			Combined			Historical			Combined
Revenues		$	19,301,638		$	22,643,446		$	10,314,806		$	19,924,925
Net Income		$	72,900		$	346,521		$	224,944		$	3,111,846
Net (Loss) Income Per Common Share
Basic		$	(0.03	)	$	(0.02	)	$	0.01		$	0.04
Fully Diluted		$	(0.03	)	$	(0.02	)	$	0.01		$	0.04

 

Segment Analysis

The Company’s operations are divided into operating segments using individual products or services or groups of related products and services. During the fourth quarter of 2005, the Company consolidated certain subsidiaries containing similar products, services and customer classes into three segments. All prior periods have been adjusted for the new presentation. The chief executive officer of each Company’s subsidiaries reports to the chief executive officer of the Company, who makes decisions about performance assessment and resource allocation for all segments.  The Company had three operating segments as of June 30, 2006 and 2005: technology services, marketing services and consumer services.  The Company evaluates the performance of each segment using pre-tax income or loss from continuing operations.

Listed below is a presentation of sales, operating profit and total assets for all reportable segments.  The “corporate” category in the “Pre Tax Profit From Continuing Operations” table consists of expenses not allocated to other segments including corporate legal and accounting expenses, corporate salaries and corporate travel expenses.  The “corporate” category in the “Total Assets By Industry Segment” table consists of assets that the Company owns that are not otherwise allocated to a particular segment.

NET SALES BY INDUSTRY SEGMENT

		Six months ended June 30										Three months ended June 30
		2006					2005					2006					2005
Revenue
Marketing Services		$	19,110,498		61	%	$	14,703,093		75	%	$	11,751,664		61	%	$	7,551,081		73	%
Technology Services		5,618,743			18	%	1,088,937			6	%	4,556,151			24	%	895,701			9	%
Consumer Services		6,918,854			22	%	3,804,891			20	%	3,125,640			16	%	1,934,947			19	%
Corporate and Elimination		(296,064		)	(1	)%	(109,636		)	(1	)%	(131,818		)	(1	)%	(66,923		)	(1	)%
Total Revenue		$	31,352,031		100	%	$	19,487,285		100	%	$	19,301,638		100	%	$	10,314,806		100	%

 

 

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